Ingersoll Rand: Hold/Buy on declines

Recommendation: Hold/Buy on declines

Anup Menon

AFTER touching a high of Rs 418 in early January, Ingersoll Rand (IRIL) has fallen back to its present level of Rs 139.

The current market price discounts the latest annualised earnings per share around 13 times. The stock has been steadily losing value over the last few months. But has it bottomed out? One of the problems faced by the company could be that funds are flowing into New Economy stocks, which may hinder a positive rerating.

The other major issue would be the company's ability to improve its financial performance in the next few quarters. Existing investors can stay with the scrip, while fresh investments can be considered at declines to the current market price with a long-term investment horizon.

Financial performance: The earnings performance for the quarter ended September was not all that impressive. Revenues have dropped marginally by around 1.24 per cent to Rs 75.94 crore, compared to the similar period last year. In the same time-frame, operating margins dropped sharply _ from around 17.19 per cent to 6.12 per cent. Post-tax earnings declined from Rs 11.11 crore to Rs 8.48 crore.

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Ingersoll Rand (India) is a subsidiary of Ingersoll Rand (US). The company manufactures a wide range of compressors, including reciprocating, screw and centrifugal compressors. The products find application in a range of industries, including core sectors such as oil, construction and engineering among others. The company has access to technology as the American parent has a 74 per cent share in the equity.

Prospects: Despite the shaky financials, the company's prospects look bright. One of the key drivers of valuation would be economic growth. Since the products of the company service the core sector, performance is linked to the level of growth in the broad economy. Though consensus reports say economic growth is slowing down, given the magnitude, which is around 6 per cent, the performance is not likely to be affected, though growth rate may show flat trends.

The company has been able to ward off competition from both the organised and unorganised segments. Its customer base includes public sector giants, such as ONGC and IPCL, among others. As ONGC has received oil exploration rights based on New Exploration Licensing Policy (NELP), orders are likely to flow in.

Another important factor having a bearing an influence on the performance of the company will be its ability to get regular orders from its customers. Since they operate in a very limited market, the absence of repeat orders could have a negative impact on the earnings profile. However, this may not happen in near future.

The depreciation of the rupee may positively impact on performance. In 2000, the company had a net foreign exchange inflow of around Rs 74.71 crore, indicating that export earnings are more than enough to cover requirements on account of raw material import.

Apart from the main product, another revenue source, especially in a lean period, is the sale of spares. When there is a slowdown in the broad economy, companies tend to put their capital investments on hold. Under such circumstances, demand for spares is likely to be high. During the 1998 slowdown, IGIL managed to mitigate the negative impact by sales of spare parts and services.

The other critical factor would be the market perception on the company's valuation. If it improves, and the financials show signs of turning around, Ingersoll Rand may turn be a profitable investment.