Even before this rather spectacular growth, the Ingersoll Rand stock enjoyed an above-average discounting. At present, the average market discounting is 28 times for IR, while the discounting for similar stocks is between 10 time for Chicago Pneumatic and 18 times for Atlas Copco.

At the current level of discounting, a very high growth rate, higher incremental returns and better operating efficiencies have already been factored into the stock. By the markets' reasoning, IR should grow by at least 30-40 per cent compounded for the next few years. But in comparison, the company's compounded average rate of growth has been a dismal 15 per cent for thelast ten years. But if the time frame is shortened to five years, the CAGR rises to 17 per cent

The CAGR should continue to improve given that in the current year, revenue growth has already shown signs of keeping up with last year's. The capital employed has grown at a slower pace than the increase in revenues. Over a ten-year period, the CAGR for assets is 13 per cent, while for a five-year period, this rate drops a little to 11 per cent.

Ingersoll Rand is the largest player in the domestic compressor and pumps industry and will be the biggest gainer from the growth in the domestic oil and gas exploration industry, as its performance last year has showm. A number of other companies in diverse areas of the oil and gas exploration business such as HOEC, Hitech Drilling, Oil Country Tubular, and even Great Eastern Shipping have benefitted tremendously from the expansion of the oil- exploration sector.

IR has consistently earned an above-average return on its capital year after year. For 1997-98, itearned a return on capital of 29 per cent and a return on equity of 31.75 per cent. In the previous year, it reported a return on capital of 23 per cent and RoE of 25.5 per cent. But more importantly, the incremental return on capital was 136 per cent, against a 69 per cent incremental return earned in 1996-97. Debt reduction by 79 per cent reduced the capital employed, bringing down the debt-equity ratio to almost nil, against the previous year's debt-equity ratio of 0.25:1, which offers a very strong and flexible financial profile and consequently a higher discounting.

The financial year 1997-98 was good despite the fact that its other income was lower. In the previous year, the revenues from service contracts had a strong influence on profit before tax. These revenues had increased by 50 per cent in the last year and contributed Rs 3.7 (adjusted for taxes) per share in earnings. It was this unprecedented growth in service income for the last year coupled with a lower effective tax rate that enabled anincremental return on capital of 69.3 per cent.

For 1997-98, the jump in incremental return was owing to an improvement in margins and operating efficiencies. Despite its above-average performance in earlier years, in terms of its return on investment, the company could be faulted for a relatively low payout ratio, but this time round, the payout has been stepped up to 41 per cent.