Engineering Growth

A focused business approach, a strong parentage and a wide range of products make Ingersoll-Rand India one of the blue-chip portfolio choices in the engineering sector.

The adage `One swallow does not a summer make' can be applied to a lot of situations, but not to the engineering goods sector where one large order can change fortunes drastically. The case of Ingersoll-Rand India (IRIL) comes into sharp focus on this point. A single order from ONGC will result in a 20 per cent jump in sales for 1997-98. With more business generated by the other business lines, the future is bright for the company.

 

The agenda for growth is set in the parent company's annual report 1996 which talks about the goal of improving earnings by about 15 to 20 per cent every year, compounded over the five years ending December 1998. The parent company has achieved a compounded growth in earnings of 28 per cent in the first three years of this period. Ingersoll's performance, however, has not been up to the mark in this regard with its compounded earnings growth in the three years ended 1996-97 at only around 11 per cent.

This has been reflected in the price of the stock too which from about Rs 650 in January 1994 has been steadily declining to about Rs 300 in mid-April 1997. Since the announcement of its 1996-97 results, the share price has rebounded to its current level of about Rs 400. The share is in the no-delivery stage at present which will end on the NSE on July 8 and the unusual price rise seen in the last week is partly due to this.

The parent

Before looking at the Indian operations, an interesting and imperative exercise is to look at the parent company's operations and its global strategy. The US based Ingersoll-Rand Company ended 1996 with a net sales of $ 6.7 billion and a total assets position of of $ 5.6 billion. It operates about 100 plants and employs nearly 42,000 people in more than 40 countries. With a 74 cent equity stake in the Indian subsidiary, the latest technology and products are made available to make it highly competitive.

A strong research base leads to constant improvements in existing products and addition of new products. Ingersoll-Rand follows a strategy of growing by acquisitions and its acquisition of the Clark Equipment Company in June 1995 was a significant event.

It has also used the joint venture route to enter new business areas and the Dresser-Rand and Ingersoll-Dresser Pump Company are examples of this.

These acquisitions lead to additions to the Indian company's product profile too which means sources of income other than the traditional ones. The Bobcat range of skid steer loaders is already being sold in India

The Indian company

IRIL has a diverse product portfolio (see table: Product profile). Details of product wise sales are not provided in the annual report. The compressors' business is the major contributor to its turnover. It makes a wide range of air and gas compressors. The company has a dominant presence in the large and medium compressor market. Though air compressors showed a slackening in growth, the gas compressor segment showed healthy growth.

In centrifugal compressors, the higher end has continued to grow well. The company imported technology in 1996 for stationary rotary air compressor and extra high pressure air compressor for water well drills. Compressors find use in almost all assembly, processing or manufacturing plant, but fertilisers, chemicals, petrochemicals and refineries are some of the major customers. The Rs 137 crore order from ONGC is an example of how a single order can change the face of the operations. With about half the order being invoiced in this year, the total turnover will rise by 20 per cent from just this order.

Process pumps is also a recent addition to the portfolio. These are high value pumps which have a wide range of applications in a range of industries and markets. This segment has just begun to contribute to sales, but will be a significant segment in the years to come.

IRIL is one of the leading suppliers of construction and mining equipment supplying machinery like rock drilling, feeder crusher and vibratory compactors. Though the company has a significant presence here, the Government being a major customer has meant that orders have not picked up significantly. With orders from these segments expected to flow in placing when the infrastructure segment takes off, it will be one of the major beneficiaries.

Melroe's Bobcat range of skid-steer loaders has been introduced in India and it has contributed about Rs 2.3 crore to the 1996-97 turnover. These loaders have a wide range of applications and come with more than 30 attachments to perform a variety of tasks. They can be used in road planing, material handling and demolition and farm related activities. It can be used to replace manual labour, increase efficiency and reduce costs in the long run. A new concept in the country, it will have to be marketed aggressively. Apart from this, the company also indents products from the vast global stable of products and this income is also expected to grow. IRIL has capex plans of about Rs 15 crore per annum over the next few years which will be financed through internal accruals.

Valuation

One worrying factor last year was IRIL's proposed investment in Wadco Tools, a Delhi based manufacturer of pneumatic power tools. Says Merwan Gandhi, executive vice-president, IRIL, "Since the expected returns from the investment were inadequate, the proposal was not viable." The parent company has now directly invested in the joint venture.

Sourcing of castings which is a key input has been a problem as suppliers prefer selling to auto manufacturers which is a relatively higher volume business. To overcome this problem, it has acquired the assets of a foundry near its existing plant in Gujarat with a capacity of 50 tonnes per month. A Rs 8 crore fabrication shop has also been completed at the construction and mining equipment plant at Bangalore.

Exports in 1996-97 have been flat as growth slackened and were at the 1995-96 levels of Rs 55 crore. IRIL is the sole sourcing base for some of the lower end compressors. It exports air compressors to China and gas compressors to the Asian and the Far Eastern markets like Taiwan, Korea and Sri Lanka.

Says M. Shrinath, assistant vice-president, Insight Asset Management, "The premium to the market seems justified after so many years even though it is higher than the peer companies." His organisation is projecting a 28 per cent earnings growth up to the year 2000. It has a strong order book position of Rs 350 crore as at end 1996-97. Also spares and components income which account for about 35 to 40 per cent of sales should also grow steadily.

Considering all the above factors, it does not seem an altogether impossible task. Since the scrip is in the no-delivery period the present volatility is suspect and may not sustained after this ends in July. At a discounting of 40 times 1996-97 earnings, it is looking expensive. However, for the long term investor, the current price too is attractive, the price is likely to dip after the end of the no-delivery period and the scrip can be bought then.