Expansion plans, government incentives to help KRN Heat

ET Intelligence Group: The stock of KRN Heat Exchanger and Refrigeration, which supplies heat exchangers for commercial air conditioning (AC), has surged 76% since announcing its second quarter results from October 30, its highest total return since its listing on October 3. . to three and a half times. The stellar performance remains due to expected strong growth, aided by the company’s plan to increase existing capacity six-fold over the next three quarters. This is likely to help tap new customers in domestic and foreign markets.

KRN caters to Original Equipment Manufacturers (OEMs) operating in various segments including residential and commercial AC, data center cooling, railway and automotive cooling, defense AC and water and beverage coolers. It offers products like condenser coils, evaporator units, liquid and steam coils to marquee clients including Daikin India, Schneider Electric, Blue Star, Kirloskar Chillers and others. Exports account for 15% of revenue. UAE, USA and Italy are the main export markets.

It derived around 98% of its revenue from the commercial segment in FY24 while room AC constituted the rest. This bodes well for the company as the market for commercial AC solutions is growing at a faster annual rate of around 20% compared to 8% growth for room AC.

The company had raised ₹342 crore through a fresh issue of shares in an IPO in September. Of this, ₹ 242 crore will be used for capacity expansion at Neemrana in Rajasthan. This is expected to help meet the needs of railway electric locomotive and compressor and refrigerator companies across Europe and the US.

Additional capacity will be set up under the newly formed subsidiary, which will attract 15% income tax rate under Section 115/BAB, which is lower than the 25% tax on companies incorporated before October 01, 2019.

It will also get benefits under the Rajasthan Investment Promotion Scheme such as exemption on electricity duty and land tax for seven years, and 5% interest subsidy on loans. This is likely to support operating margins once the facility is commissioned. In the six months to September 2024, KRN Heat’s operating margin before depreciation and amortization (Ebitda) increased to 20.3% from 19.3% in the year-ago period.

The company is also keen to reduce customer concentration. Currently, the top 10 customers contribute 80% of the revenue. Daikin, its largest client, formed more than 33% of its top line. Apart from the traditional user segments, data center is an emerging segment which contributed 7% to the revenue in FY24. The company plans to target the overseas market to expand data center revenues once the new capacity is operational.

For the first six months of FY25, KRN’s revenue grew 16.4% to ₹186.9 crore while net profit rose 24.6% to ₹242.8 crore. The stock’s forward price-earnings multiple has risen to 102 from 35 at the time of IPO. Although it is lower than the forward P/E multiples of 137 and 201 for cooling solutions provider Amber Enterprises and EPACK Durable, a sharp rise in KRN’s valuation in the short term could limit upside in the short term.