KRN Heat Exchanger Expands Operations, Eyes Bus AC Market for Growth

KRN Heat Exchanger & Refrigeration Ltd. is making significant strides in its growth strategy, with its expanded capacity at the Neemrana facility now operational and a new venture into the bus air-conditioning segment. The company is optimistic about leveraging these developments to drive substantial revenue and profit increases in the coming years.

Capacity Expansion and New Facility

• The company's ambitious expansion project at its Neemrana facility has successfully become operational.
• CMD Santosh Kumar Yadav stated that the new facility is expected to contribute 20% to 25% of the company's total capacity utilization in the current fiscal year.
• This contribution is projected to rise to around 50% next year, with peak utilization anticipated within the next two to three years.

Entry into Bus Air-Conditioning Segment

• KRN Heat Exchanger has entered the bus air-conditioning market via a business transfer agreement with Spare Refrigeration Systems Pvt. Ltd., a company with 15 years of experience.
• This strategic move provides KRN Heat Exchanger with complete backward integration capabilities for bus air conditioners, including heat exchangers, tubing, sheet metal, and FRP components.
• The Indian bus air-conditioning market is experiencing robust growth, estimated at 20% to 25% annually for both conventional and electric segments, presenting a significant opportunity.
• The company has already commenced billing in this new segment.

Profitability Boosters: Incentives and Cost Savings

• CMD Santosh Kumar Yadav expressed confidence in improving profit margins by 100 to 200 basis points by FY27.
• Key drivers for this improvement include significant government incentives: the Production Linked Incentive (PLI) scheme from the central government (offering 5% in the first year and 4% in the second) and the Rajasthan Investment Promotion Scheme (REAPS) from the state government (offering 1.5% for 10 years).
• Additional cost savings are expected from an installed 8 MW solar power capacity on the company's rooftops.
• Higher profit margins from export sales and the new bus air-conditioning business are also anticipated.

Global Market Ambitions: Export Strategy

• Exports are a critical focus, with KRN Heat Exchanger aiming to derive 50% of its total revenue from overseas markets.
• The company plans to shift its primary export focus from the UAE to North America and Canada, indicating a strategic pivot towards higher-value markets.

Financial Performance and Outlook

• The company reported strong financial results for the September quarter, with profits rising from Rs 17 crore to Rs 27 crore, and maintaining margins at 20%.
• However, Yadav cautioned that margins might remain flat in the current fiscal year due to depreciation costs and limited initial incentives.
• He reassured investors that margins are expected to increase significantly in the next fiscal year, driven by the full impact of incentives and enhanced productivity.

Market Analyst View

• Dolat Capital has initiated a 'Buy' rating on KRN Heat Exchanger shares, citing inexpensive valuations and a strong supernormal growth outlook.

Impact

• This expansion and diversification are expected to significantly boost KRN Heat Exchanger's revenue streams and profitability.
• Increased capacity and entry into a high-growth segment like bus ACs could lead to enhanced market share and investor confidence.
• Government incentives and export focus are strategic moves to drive long-term financial health and shareholder value.
• Impact Rating: 8/10

Difficult Terms Explained

• Capacity Expansion: Increasing the production capability of a manufacturing facility.
• Operational: Ready for use and actively functioning.
• CMD (Chairman and Managing Director): The highest-ranking executive in a company, responsible for managing operations and board strategy.
• Business Transfer Agreement: A legal contract where one company transfers a specific business undertaking to another company.
• Backward Integration: A strategy where a company gains control over its suppliers or the production of inputs for its products.
• Heat Exchangers: Devices designed to efficiently transfer heat from one medium to another.
• FRP (Fiber-Reinforced Plastic): A composite material made of a polymer reinforced by fibers, offering strength and durability.
• Basis Points (bps): A unit of measure used in finance to describe the smallest change in interest rates or other percentages. 100 basis points equal 1 percent.
• PLI Scheme (Production Linked Incentive): A government scheme to boost domestic manufacturing by providing incentives on incremental sales of products manufactured in India.
• REAPS (Rajasthan Investment Promotion Scheme): A state-level incentive scheme by the Government of Rajasthan to encourage industrial investment.
• Solar Power: Electricity generated from sunlight using photovoltaic panels.
• Depreciation: The decrease in the value of an asset over time.