n Strong growth in engines business to continue : We believe that sustainability of demand from the Agri sector for mid and small sized engines and a equally good demand scenario for higher end engines from the Powergen, Industrial, construction, telecom and marine application space, would mean that KOEL is likely to record a healthy 24% CAGR topline growth in its core business over the next 3 years (FY07A-10E). KOEL offers a very strong portfolio of products of engines and power gensets of various categories and commands good market share in engines and power genset market. The company is also expanding its capacities to by investing Rs.5bn in Kagal, Maharashtra. Additionally we estimate KOEL’s exports to report growth of 20% yoy and 19% YoY to Rs2100mn and Rs2500mn for FY09E and FY10E respectively.

n EBIDTA margins to improve as product mix gets richer : We estimate that going ahead the medium and large engines contribution to KOEL’s total sales mix would increase and it would lead EBITDA margin expansion. KOEL’s new product launches like Varsha pumpset, power gensets used in growing sectors like telecom, compact engines used in construction machinery are expected to improve the margins going ahead. In addition to the above KOEL aggressively focusing on cost saving areas like material cost, power cost, etc would also help it to report higher margins. Going forward we estimate due to more focus on medium & large engines and cost saving initiatives, KOEL will report higher EBITDA margins to 11% in FY09E and 11.5% in FY10E.

n KOEL is the groups investment entity : KOEL has emerged as the flagship holding company for all the auto related businesses of the Kirloskar group wherein it holds strategic investments in Kirloskar Brothers (11%) Kirloskar Ferrous (37%) Swaraj Engines (16%) Toyota Kirloskar Motors (11%) and Toyota Kirloskar Auto Parts (36%). In the long term these strategic investments are expected to be value accretive for KOEL. As on Mar 2007, KOEL had an investment value of Rs3.8bn on its books (market value of Rs.10bn). Further with group companies like Kirloskar Brothers, Toyota Kirloskar Motors and Toyota Kirloskar Auto Parts all registering impressive growth, these would command higher valuation in the long term and would be directly beneficial to KOEL.


Risks & Concerns
Any significant slowdown in the economy especially the capital goods as well as industrial and powergen space in the domestic market could impact KOEL’s earnings negatively. Slowdown/delay in expansion plans could impact our earnings estimates negatively.