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From the low markets that we witnessed in March 2009, the Sensex is up by 52 per cent and the scrips across the board too have caught up with the valuations. But there are still a few counters that despite the buoyant market sentiment have still remained laggards although they possess good fundamental strength. Hence it makes sense to hunt for such scrips as the probability of these scrips catching up with the valuations and giving better returns is high. And our hunt for such scrips led us to the Bangalore-based Kirloskar Electric Company (KEC).

Right from being a loss-making company since FY99 to restructuring itself and turning into a profit-making unit in FY05, KEC has seen it all. But since the turnaround the company hasn’t looked back and has consistently built on its performance year after year. KEC is one of the leading electrical and power equipment manufacturer. Its business is divided into two segments namely the power generation and the rotating machines group.

The power generation business contributes 51 per cent to the total sales, while the balance revenues come from the rotating machine group. What makes this company an attractive proposition is the consistency in growth it has shown since its turnaround in FY05. Since the turnaround KEC has grown at a four-year CAGR of 35 per cent in the topline and a whopping 148 per cent in its bottomline. If that was not enough with the improvement in profits, the company has also managed to improve its operating margins, which increased by 496 basis points to 6.75 per cent since FY05, which we feel is commendable for a company such as KEC.
Besides, with the briskly growing sales and cost management initiatives undertaken by the company we believe these margins will only improve further. In fact we are already seeing the result of this as the company’s operating margins in Q1FY10 increased by 648 basis points on a YoY basis, while on a sequential basis it was up by 339 basis points. The other thing to note about KEC is that when the rest of India Inc’s sales are growing in single digits, this company has managed to grow against the trend and posted 26 per cent in topline growth in FY09. That apart, it should be noted that the company is a power equipment manufacturer and considering the thrust that the government is putting on the development of power infrastructure, the company will surely stand to benefit. The latest budget has allocated more than Rs 53,000 crore for the power sector in FY10. This creates huge business opportunities for a company such as KEC. That apart, company’s electric motors also find application across various industries such as steel, telecom, sugar, cement, paper and power and with India Inc once again starting to undertake its capex plans it will create further growth opportunities for KEC.
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For Q1FY10, KEC’s topline stood at Rs 199.21 crore (Rs 196.33 crore) while its bottomline almost doubled to Rs 10.09 crore (Rs 5.10 crore). On the valuation front, on a market cap of just Rs 327 crore KEC is available at a market cap to sales of mere 0.33x, while with a trailing EPS of Rs 5.31 it generates PE of just 12x, which we feel is low for a briskly growing company such as KEC. Hence one can buy this scrip with a one year price target of Rs 85.