Monday, January 3, 2011

Kirloskar Industries-Asset rich

Kirloskar Industries is the demerged investment company which resulted from the restructuring in Kirloskar Oil Engines ltd.

Below is a rundown on the key highlights:

Core ( Group company investments ): Kirloskar brothers: 1.89 cr shares
Kirloskar brothers Investments: 5 lakh shares
Kirloskar Ferrous : 6.59 cr shares
Swaraj Engines: 21 lakh shares
Kirloskar Pneumatic: 1.30 lakh shares

Approx current valuation of these investments is around 750 cr.

Since these are core investments and unlikely to be sold in the visible future, we shall use the dividend capitalization method to value the stake held by Kirloskar Industries in them.

Dividend realized from the above investments in 2009-10: 14 cr
Current Risk free rate of return : 9.5%

In order to maintain a sufficient MOS, we shall assume that sustainable yearly dividend from these investments will be 50% ( Rs.7 cr) of the dividend received last year.
Valuation of stake (A) : 73.5 cr

Non core /Liquid investments: MF (liquid/debt) : 250 cr
HDFC(equity shares): 3.10 lakh shares
Cash : 19 cr
Total : 290 cr
In order to maintain MOS, we shall value these at 75% of value
Valuation of stake (B) : 217.5 cr
Real Estate:Kirloskar Industries owns substantial real estate assets in the form of land and buildings in Pune and apartments and offices in Mumbai, Delhi, Bangalore & Jaipur.
For the sake of valuation, we shall not consider the idle land assets and evaluate ONLY that part of the property portfolio which is realizing ongoing rent.

Rent received in 2009-10: 20 cr
To maintain MOS, we shall assume that the company shall not receive any increase in rent going ahead.

Current Risk free rate of return : 9.5%

Valuation : 210 cr

Total valuation : A+B+C = 73.5 + 217.5 + 210 = 500 cr

Current market cap : 376 cr ( share price : Rs.390)

For the sake of valuation, zero value is assigned to the seven windmills that the company owns with an installed capacity of 5.6 MW & installed at a cost of 28.56 cr.

Possible short term triggers:

stake sale in Swaraj Engine to M&M.

At the current market price of Rs.390 per share, Kirloskar Industries, presents an attractive investment opportunity.

 At the time of writing this report, the author /his family have an investment interest in the stock mentioned above. Under no circumstance does the information in this report represent a recommendation to buy or sell the above-mentioned stock.  This report has been prepared and issued on the basis of publicly available information, internally developed data & other sources believed to be reliable. This is just a suggestion solely for information purposes and does not constitute a solicitation to any person to buy or sell a security. While the information contained therein has been obtained from sources believed to be reliable, no responsibility (or liability) is accepted for the accuracy of its contents. Readers using the information contained herein are solely responsible for their actions and are advised to satisfy themselves before making any investments.