(Rs.56, FY10E - P/E 9x)
Demerger of engines and auto component business from the
Company
Kirloskar Oil Engines Ltd (KOEL) has announced the demerger of Engine and Auto
Component business of the Company into Kirloskar Engines India Ltd (KEIL). After
the demerger KOEL would continue to hold investments in its books while KEIL would
represent core engines and auto component business. KOEL after Q3FY09 results
informed that it’s Board of Directors had constituted a Committee of Independent
Directors to examine merits of reorganizing the various businesses and investments
of the company, including by way of restructuring and /or demerger of the Company.
The effective date of demerger has been decided as 1st April 2009.
Existing shareholders to get 3 shares of KEIL for 4 shares in KOEL
KOEL has fixed demerger ratio at 3:4 which means existing shareholders of KOEL to
get 3 shares of KEIL for every 4 shares held in KOEL. The company has not disclosed
the method of valuation for demerger. But we believe it to be mainly based on book
value and potential value of unlisted investments. We believe the valuation has given
due consideration to potential of unlisted companies (Toyota Kirloskar, Toyota Kirloskar
Auto Parts, T G Kirloskar Automotive etc) which is reflected in demerger ratio.
KEIL ‘s equity capital after the demerger would be ~146mn equity shares of Rs.2 each
(~Rs.291mn). KOEL as on 31st March 2008 held book value investments of ~Rs.4.76bn
which includes strategic investments and investments in mutual funds. The current
market value of these investments is ~Rs.1.9bn and including the book value
investments of non-quoted investments and mutual fund investments, the investment
on the books are at Rs.4.93bn.
KOEL’s valuation has not been reflecting the value of investments it holds in the balance
sheet and because of which we believe the company has taken the decision to demerge
core business into separate company, KEIL.
KOEL has emerged as the flagship holding company for all the auto related businesses
of the Kirloskar group. KOEL also holds strategic investment in Kirloskar Brothers,
Kirloskar Ferrous, Swaraj Engines, Toyota Kirloskar Motors and Toyota Kirloskar Auto
Parts. Apart from strategic investments KOEL has invested in certain unquoted group
companies and mutual funds. KOEL’s listed companies and book value of unlisted
valued at Rs.4.93bn.
Further companies like Kirloskar Brothers, Toyota Kirloskar Motors and Toyota Kirloskar
Auto Parts have been registering impressive growth and would command higher
valuation in long term and would be beneficial to KOEL. We believe after the demerger
of engines and auto component business into KEIL, KOEL would reflect true value of
its investments.
Company Background
KOEL incorporated in 1946 is a part of the Pune based Kirloskar group and is headed
by Mr. Atul Kirloskar. KOEL is one of the leaders in manufacturing of Diesel Engines,
Engine Bearings, Engine Valves & Diesel Generating Sets. These engines find
application in agriculture, material handling, mining machinery, construction equipments
and marine and defence applications. KOEL has manufacturing facilities at six locations
- Pune, Ahmednagar, Nasik, Solapur, Kagal and Hospet( with a proposed facility at
Silvassa coming up). During FY08 KOEL earned 93% of its total revenues from engines
(5HP-11000HP), 5% from auto components (Bearings and Valves) and 2% from other
strategic business unit (Fuel Oil Trading). KOEL also exports its engines and auto
components.----L.Kannan
