KRN Heat Exchanger looks well placed in cooling solutions market

The stock of KRN Heat Exchanger and Refrigeration, which offers commercial air conditioning (AC) solutions, has gained 60% since October 30 when it declared the second quarter result, taking the total return since its listing on October 3 to three times. The stellar performance owes to the expected strong growth aided by the company's plan to increase the existing capacity by six times over the next three quarters. This is likely to help in tapping new customers in the domestic and overseas markets.

KRN caters to original equipment manufacturers (OEMs) operating in various segments including residential and commercial ACs, data centre cooling, railway and automotive cooling, defence ACs, and water and beverage coolers. It offers products such as condenser coils, evaporator units, fluid and steam coils to marque clients including Daikin India, Schneider Electric, Blue Star, Kirloskar Chillers and others. Exports form around 15% of the revenue. UAE, USA, and Italy are the major export markets.

It earned nearly 98% of the revenue from the commercial segment in FY24 while room ACs formed the rest. This augurs well for the company since the market for commercial AC solutions is growing at a faster annual rate of around 20% compared with 8% growth for room ACs.

The company raised Rs 342 crore in September through a fresh issue of shares in an IPO. Of this, Rs 242 crore will be utilised to expand capacity in Neemrana, Rajasthan. This is expected to help in catering the needs of railway electric engines, and compressor and refrigerator companies across Europe and the US. The 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 25% tax on companies that were established before October 01, 2019. It will also receive benefits under 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 the operating margin once the facility is commissioned. In the six months to September 2024, KRN Heat’s operating margin before depreciation and amortisation (EBITDA) improved to 20.3% from 19.3% in the year-ago period.

The company is also keen to reduce client concentration. At present, the top 10 clients contribute 80% to revenue. Daikin, its largest client, formed over 33% of its top line. Apart from the traditional user sectors, data center is the emerging segment contributing 7% to revenue in FY24. The company plans to target the overseas market to expand the data center revenue once the new capacity is commissioned.

For the first six months of FY25, KRn’s revenue grew by 16.4% to Rs186.9 crore while net profit rose by 24.6% to Rs242.8 crore. The stock’s forward price-earnings multiple has risen to 90 from 35 at the time of the IPO. Though it is lower than the forward P/E multiples of 128 and 171 for cooling solutions provider Amber Enterprises and EPACK Durable, the sharp increase in KRN’s valuation in a short period may limit the upside in the short term.