Kennametal India Ltd – An infra bet?

Kennametal India Ltd Rs 3250

Kennametal India Ltd (KIL) is a 75% subsidiary of Kennametal Inc USA and enjoys its parent’s support in R&D, technology and managerial guidance. The company maintains its accounting year from July to June in line with the parent.

KIL primarily operates in two segments – Hard Metal Products (around 85% revenue contribution in FY23) and Machining Solutions (around 15% revenue contribution). Geography wise, KIL is majorly concentrated in India with 83% revenue contribution in FY23 which is positive since India is the fastest growing large economy in the world. China is its major global export destination with around 14% revenue contribution in FY23.

KIL’s products find application in Railways, Aerospace, Mining, EV and Infra. With the Indian govt’s strong focus on railway modernization, metro rollout, and infra, there is reasonable comfort level about industry growth. Aerospace could also witness high growth as Indian companies are increasingly entering the aviation supply chain. In fact, HAL signed an MOU with GE to produce fighter jets for indigenous light combat aircraft in June 2023. This could potentially lead to outsourcing from domestic companies by HAL. KIL being a subsidiary of a US company stands a high chance of benefitting.

KIL’s long term track record has been of moderate growth but its last 3 year (FY 2020 to FY2023) Sales, Ebitda and PAT growth have been 19%, 35% and 34% respectively. Its 3M ended Mar 24 was phenomenal with PBT (before exceptional items) up 77% at 39 cr though topline growth was muted at 6%. Post declaration of Q3 numbers, the stock price took off from Rs 2500 levels to around Rs 3250 at present.

Factors working in favor of KIL are 1) Expected high domestic growth in most of the segments it operates in like Railways, Aerospace, Mining and Infra 2) China which is a major export market has seen its economy languishing in the last couple of years. Now there are indications of its revival which will benefit KIL.

The main areas of concern are 1) It has little control over its margins as its contracts do not have escalation clause. Hence any upward movement of commodity prices can have a negative impact on margins. 2) At FY 2024 estimated EPS of Rs 45, it is trading at PE of 73 which is expensive and can only be justified by continued high growth in profitability.

While there are decent chances that the macro environment will remain favorable for high growth but things can always go sideways due to so many factors including geopolitical risks, Indian election results and company specific factors. Investors with a high risk appetite can consider initiating a position on declines while being fully cognizant of the risks involved.