Stock Review: Ingersoll Rand (India)

 

Ingersoll Rand (India), one of the leading providers of air solution in India and subsidiary of Ingersoll Rand, USA, posted an impressive growth in revenue as well as profits for the year ended March 2011. While the topline increased by 31% year-on-year, the surge in the bottomline was about 45%.

Even as the overall financial performance is impressive, the margins weakened from a rise in the raw materials cost and other expenses. While the cost of raw materials rose by about 35% during the year, other expenses have surged by more than 40%. In fact, the rise in the other expenses is more prominent in the fourth quarter.

Thus, the company has been able to maintain its annual operating margins at about 21.5% while its earnings-per-share (EPS) has improved significantly from . 15 per share at the end of March 2010 to . 21.7 per share for the year ended March 2011. The stock currently trades at . 498 on the BSE, having risen by more than 15% in the past one quarter.

At the current level, it trades at a price earning multiple (P/E) of 23.2, which prima facie does appear to be an expensive valuation, given the size of the company which has a market cap of less than . 1,600 crore. However, the valuation is justified, given the fact that Ingersoll Rand is near-zero debt and cash-rich company with a surplus cash of . 536 crore as on March 31, 2011, which is equivalent to . 170 per share.

The strong cash position, which is the outcome of divestment of various businesses in the past as well as regular cash inflows from operating activities, can be used by the company for expanding its business. How-ever, having divested its most other business and relying heavily on air solution business has increased the competitive risk for the company.

The IRIL's parent company is planning to invest $100 million in India over the next three years to expand the operations of Indian units engaged in climate control and security technologies. This is likely to open new growth avenues for IRIL.