Long-term investments can be considered in the stock of Kirloskar Oil Engines (KOEL), a leading player in the diesel engine business. The stock trades at a price-earnings multiple of 13 times its likely per-share earnings for FY08.
Given the positive demand outlook for engines, coupled with the favourable economic environment and the company's capex plans, we believe the stock has potential to appreciate. Any dips in price may be used as a buying opportunity.
The demand for power generation has been driven by the growth in services sectors such IT, telecom and retail. We believe KOEL is well positioned to capitalise on this growing demand with its proficiency in the engines segment. Moreover, the inability of some of its competitors to meet emission and noise norms set by the Government also augur well.
In the agriculture equipment market, it supplies engines to the tractor OEMs. KOEL also supplies engines to the construction and industrial machinery original equipment manufacturers (OEMs). Hence, expected growth in infrastructure and mining sector should rub-off positively on KOEL. However, in the large engines segment, growth will be largely dependent on the marine engine sales only.
In the auto component segment, KOEL supplies bimetal bearings and engine valves to OEMs. However, a major chunk of its revenue is derived from spare part sales, where it faces stiff competition. Nevertheless, on the revenue front, contributions from both the engine and auto components have registered a double-digit growth. For the half-year ended September 2006, the engines segment grew by 49 per cent in revenues; the auto components division registered a growth of 17 per cent.
Delays in public spending, entry of foreign players, rising raw material costs and an inability to pass on input cost hikes fully to customers would pose downside risks to our recommendation.