Result Update February 26, 2015 Rating matrix Rating Target Target Period Potential Upside : : : : KSB Pumps (KSBPUM) Buy | 810 12-18 months 19% Quarterly blip, long term growth story intact What’s changed? Target EPS FY16E EPS FY17E Rating Unchanged Changed from | 28.9 to | 28.5 Unchanged Unchanged Quarterly performance Revenue EBITDA EBITDA (%) PAT Q4CY14 230.1 17.8 7.7 10.0 Q4CY13 YoY (%) 182.1 26.4 21.7 -18.2 11.9 -421 bps 10.8 -7.6 Q3CY15 QoQ (%) 198.9 15.7 27.0 -34.3 13.6 -587 bps 17.9 -44.2 Key financials | Crore Net Sales EBITDA Net Profit EPS (|) CY13 733 100.8 66.7 19.2 CY14 795.0 101.1 68.4 19.7 CY15E 901.5 144.0 99.3 28.5 CY16E 1,025.5 173.2 122.6 35.2 CY13 35.5 42.3 21.9 4.6 13.0 14.4 CY14 34.6 41.2 21.9 4.2 12.3 12.7 CY15E 23.8 28.4 15.0 3.8 15.9 17.9 CY16E 19.3 23.0 12.0 3.3 17.3 19.7 Valuation summary P/E Target P/E EV / EBITDA P/BV RoNW RoCE Stock data Stock Data Market Capitalization Total Debt (CY14) Cash and Investments (CY14) EV 52 week H/L Equity capital Face value MF Holding (%) FII Holding (%) | 2367.1 Crore | 24.4 Crore | 178.7 Crore | 2212.7 Crore 780 / 235 | 34.8 Crore | 10 14.5 2.6 Price performance Return % Kirloskar Brothers KSB Pumps Roto Pumps Shakti Pumps WPIL 1M (6.1) 12.3 (16.3) (7.2) 1.2 3M (10.8) 19.8 14.1 (2.2) 6.6 6M (25.8) 37.8 47.1 4.4 47.7 | 680 12M 39.6 200.7 312.2 207.2 218.2 Research Analyst Chirag J Shah [email protected] Shashank Kanodia [email protected] ICICI Securities Ltd | Retail Equity Research • KSB Pumps (KSB) reported a mixed set of Q4CY14 numbers. The revenues came in robust with muted EBITDA margins • KSB’s total standalone revenues came in at | 230.1 crore, up 26.4% YoY (pumps sales at | 183.6 crore, valve sales at | 43.5 crore) • Standalone EBITDA in Q4CY14 came in subdued at | 17.8 crore with corresponding EBITDA margins at 7.7%. The margins came in lower on account of higher raw material costs. Raw material costs as percentage of sales were at 53% vis-à-vis normal trend of ~45-48% • Standalone PAT in Q4CY14 stood at | 10.0 crore, down 7.6% YoY. The associated company i.e. MIL Control Valves’ contribution to consolidated PAT for CY14 stood at | 6.6 crore, down 31.0% YoY Indian pump market on strong footing!!! As per industry sources, the global pump market size is pegged at US$47 billion as of 2014 and is expected to reach US$56 billion in 2017, growing at a CAGR of 6.0% in CY14-17E. The Indian pump market size is pegged at ~| 8500 crore as of 2014 wherein a majority of it i.e. ~95% (~| 8000 crore) consists of centrifugal pumps while the remaining i.e. 5% (~| 500 crore) comprises positive displacement pumps. Out of the above; agriculture and building services comprise the major portion (46%) of the market by value i.e. ~| 4000 crore while the industrial sector constitutes the remaining 54% of the market (pegged at ~| 4500 crore). It consists of sectors such as water/sewage treatment, power generation, oil & gas, etc. This segment of the pump market is technologically intensive and hard for SMEs to penetrate. The Indian pump market is expected to grow at a CAGR of 10% in FY14-17E to | 11300 crore in FY17E. Strong parentage, leader in technological intensive pumps market!!! KSB has a strong parentage with KBS AG, providing all R&D support and technical assistance. In India, it commands a market share of ~7% (pump sales of | 603 crore in CY13) out of the total industry size (~| 8500 crore as of FY14). KSB supplies ~35% of its pumps in the standard pumps segment (used for irrigation & building services). It supplies remaining 65% of its pumps (~| 400 crore sales vis-à-vis market size of ~| 4500 crore, market share ~9%) to the industrial segment, which is technology intensive. Going forward, we expect KSB’s pump sales to grow at a CAGR of 15.0% in CY14-16E to | 878 crore in CY16E (| 664 crore in CY14). Valves segment, focus on increasing profitability; not chasing growth Valves constitute ~16% (| 128 crore in CY14) of consolidated sales of KSB. The performance of valves has been a laggard in the past few quarters on account of fierce competition and subdued demand. Going forward, KSB expects to consolidate its position in the valves market with focus on increasing profitability rather than chasing sales growth. Going forward, we expect valves sales to largely remain subdued (CY14-16E sales CAGR at 6%) with CY16E sales at | 144 crore. KSB also owns 49% in MIL Controls with an initial investment of | 6.3 crore. On this it is reaping rich benefits (share of profit at | 6.6 crore in CY14, RoI at ~105%). Likely beneficiary of capex cycle revival; balance sheet strength to grow! KSB is likely to realise operating leverage benefits (margin expansion of 400 bps) in the form of higher demand for its product. This may lead to improvement in RoEs & RoCEs and strong FCF generation of | 95 crore in CY15E & | 115 crore in CY16E, going forward. We have partially revised our estimates for KSB and maintained our BUY rating on the stock valuing the company at 23x P/E (0.7x PEG) on CY16E EPS of | 35.2 with consequent target price of | 810. Variance analysis Standalone Numbers Sales Q4CY14 Q4CY14E Q4CY13 227.2 190.6 179.5 YoY (%) Q3CY15 QoQ (%) 26.6 197.8 14.8 Other Operating Income Total Operating Income 2.9 230.1 1.9 192.6 2.6 182.1 11.5 26.4 1.1 198.9 173.6 15.7 Total Raw Material Expenses 121.6 86.6 88.8 37.0 89.6 35.8 Employee Cost Other operating expense Total Expenditure 32.2 58.5 212.3 29.4 48.1 164.2 25.6 46.0 160.4 25.6 27.3 32.4 31.5 50.8 171.9 2.2 15.3 23.5 17.8 28.4 21.7 -18.2 27.0 -34.3 EBITDA Margin (%) 7.7 14.8 11.9 -421 bps Depreciation Interest 7.1 0.4 7.1 0.1 7.0 0.3 1.9 33.3 6.9 1.3 3.0 -68.0 Non Operating Expenses Other Income PBT Taxes PAT 5.5 15.8 5.8 10.0 4.2 25.4 8.7 16.8 2.4 16.8 6.0 10.8 -6.1 -3.3 -7.6 8.0 26.9 9.0 17.9 -41.4 -35.8 -44.2 Key Metrics Pumps Sales (| crore) Valves Sales (| crore) 184 44 165 26 154 26 19.4 69.1 165 33 11.3 32.7 EBITDA 13.6 -587 bps Comments Topline came in robust and was higher than our estimate Raw material as a percentage of sales came in higher at 53% vis-à-vis its usual trend of 45-48%. Raw material costs may be higher on account of write-down of high cost inventory or increase in traded goods in the quarter Employee costs as a percentage of sales came in at 14% Other expenses remained steady at 25% of sales EBITDA margins came in subdued mainly on account of higher raw material costs Marginal increase in interest costs was on account of an increase in short-term borrowing at the year end (CY2014) Tax rate came in a bit higher 37% Pumps sales came in robust Valves segment performance improved with increasing sales and positive EBIT margins (4.5% in Q4CY14) Source: Company, ICICIdirect.com Research Change in estimates Consolidated (| Crore) Revenues Old 869.3 EBITDA 144.0 144.0 0.0 173.7 173.2 -0.3 16.6 15.8 -76 bps 17.2 16.7 -48 bps 100.7 28.9 99.3 28.5 -1.3 -38 bps 122.5 35.2 122.6 35.2 0.1 0.1 EBITDA Margin (%) PAT EPS (|) CY15E New % Change 911.1 4.8 Old 1,009.6 CY16E New % Change 1,036.0 2.6 Comments Going forward, for CY15E & CY16E, we have revised upwards our sales estimates for both pumps & valves segment on account of robust Q4CY14 sales EBITDA has largely been maintained for CY15E & CY16E We have partially lowered our margins estimates for CY15E & CY16E We have largely maintained our EPS estimates Source: Company, ICICIdirect.com Research Assumptions Pump Sales Valve Sales PAT, MIL Control Valves CY13 603.4 122.3 9.6 CY14 664.1 128.4 6.6 Current CY15E CY16E 763.8 878.3 134.8 144.2 7.9 9.5 Earlier CY15E CY16E 742.2 875.7 116.7 122.5 11.1 12.4 Comments We have revised upward our pumps segment sales We have revised upward our valves segment sales We have revised downward our estimates of MIL Control Valves on account of subdued performance in CY14 Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 2 Company Analysis KSB Pumps, promoted by KSB AG (Germany), was established in 1960 and set up a pump manufacturing facility at Pimpri, Pune (Maharashtra). The company has been at the forefront of importing technology from its parent for delivering cutting edge, high quality products in the domestic market. Globally, KSB AG is one of the largest pump manufacturers with sales in excess of €2.2 billion (~US$2.8 billion) out of the total pump market, which is pegged at US$47 billion as of 2014. In India, KSB supplies pumps and valves to all major industries viz. power, waste water treatment, irrigation (agriculture), chemicals, etc. KSB’s products are used for pumping, transportation and flow control of fluids, which include clean or contaminated water, explosive fluids, corrosive and viscous fluids, slurries and fluid/solid mixtures. In India, KSB has a wide distribution network that includes four zonal offices, 15 branch offices, over 800 authorised dealers, four service stations, 110 authorised service centres and 22 warehouses. Indian pump market on strong footing Global pumps market CAGR over 2014-17E: 6% US$ Billion 60 CAGR over 2014-17E: 6% 56 55 50 47 45 40 2014 2017E Source: Ficci, TSMG, ICICIdirect.com Research | crore The Indian pump market can also be segregated on the basis of end usage. The main sectors in which pumps find application include: agriculture (irrigation), building services, waste water/sewage management and industrial uses (power, oil & gas, metals & mining, etc). Exhibit 1: Indian pumps market segregation (value) Indian pumps market 12000 10000 8000 6000 4000 2000 0 As per industry sources, the global pump market size is pegged at US$47 billion as of 2014 and is expected to reach US$56 billion in 2017, growing at a CAGR of 6.0% in CY14-17E. The Indian pump market size is pegged at ~| 8500 crore as of 2014 wherein a majority of it i.e. ~95% (~| 8000 crore) consists of centrifugal pumps (pumps used for increasing the flow rate) while the remaining i.e. 5% (~| 500 crore) comprises positive displacement pumps (pumps used for maintaining the flow rate). The Indian pump market is expected to grow at a CAGR of 10% in FY14-17E to | 11300 crore in FY17E. CAGR over FY14-17E: 10% 11300 8500 others, | 1105 cr, 13% Metals & Mining, | 340 cr, 4% Agriculture, | 2295 cr, 27% Oil & Gas,| 680 cr, 8% FY14 FY17E Source: Ficci, TSMG, ICICIdirect.com Research Power Generation, | 1020 cr, 12% Water & Wastewater , | 1445 cr, 17% Building Services, | 1615 cr, 19% Source: FICCI, Tata Strategic Management Group, ICICIdirect.com Research Out of the above; agriculture and building services comprise the major portion (46%) of the market by value i.e. ~| 4000 crore. This segment of the pump market is highly fragmented and competitive in nature with a whole lot of small & medium enterprises (SMEs) vying for the market pie. On the other hand, the industrial sector constitutes the remaining 54% of the market, which is pegged at ~| 4500 crore. It consists of sectors such as water/sewage treatment, power generation, oil & gas and metals & mining. This segment of the pump market is technologically intensive and hard for SMEs to penetrate. The leadership of this segment is maintained by companies like KSB and Kirloskar Brothers in the listed space while ITT and Flowserve are key players from the private space. ICICI Securities Ltd | Retail Equity Research Page 3 End user segment demand drivers: Exhibit 2: End user segment outlook S.No Sector 1 Agriculture 2 Market Size: | 2300 cr major players: KSB Pumps, Kirloskar Brothers, Shakti Pumps, CRI Pumps, Grundfos, Flowmore, WPIL, Crompton Greaves Building Services 3 Market Size: | 1600 cr major players: KSB Pumps, Kirloskar Brothers, Shakti Pumps, CRI Pumps, Grundfos, Crompton Greaves Water & Wastewater 4 Market Size: | 1450 cr major players: KSB Pumps, Kirloskar Brothers,Flowmore, WPIL Power Generation 5 Market Size: | 1000 cr major players: KSB Pumps, Kirloskar Brothers, M&P, Flowmore, Flowserve, WPIL, Sulzer, Jyoti Oil & Gas 6 Market Size: | 700 cr major players: Kirloskar Brothers, KSB (outsourced from parent, KSB AG), Flowserve, Sulzer Metals & Mining 7 Usage Irrigation Demand drivers Govt Initiative & Budget Outlay Outlook Irrigation penetration in India stands at ~45% Pradan Mantri Krishi as of 2011. Room for increase in penetration Sinchayee Yojana; propels the demand for pumps. Requirement of government earmarks | more energy efficient pumps to save on power 1000 crore in 2014 & fuel costs - will propel move from Budget; mega project unorganised to organised segment to link rivers Pumping Water to height With increasing urbanisation and demand for housing in cities there exists a good visibility of incremental usage of pumps in pumping water "House for all", special to heights. Depleting ground water in urban emphasis on low cost areas will further augment usage housing Water treatment; Sewage treatment Better sanitation, safe disposal of waste/sewage, clean water for all - propels demand for pumps. Development of 100 smart cities in India will further drive investment in this sector Smart Cities Thrust on augmenting power generation domestically. Increase in usage of washed coal to drive next leg of growth for all pump manufacturers. Augmentation of nuclear power and renewable (solar water pumps) also bodes well Power for all; rural electrification Need for shift to more environmental friendly fuel (euro standards) will propel demand for pumps. New exploration & refinery capacity capex, however, remains limited given subdued outlook for crude prices "Make in India" initiative In the ferrous space, two major mega steel projects expected to go on-stream, which includes Posco Steel project & JSW Steel expansion in its Bellary plant. In the non-ferrous space, majority of the capex has already been done and only some upgradation work is being undertaken "Make in India" initiative Shift of textiles and chemical manufacturing base from China to India will propel the growth of manufacturing of chemicals and textiles, which will consequently create demand for pumps "Make in India" initiative Water Pumping, Heat Transfer, Cooling Heat Transfer, ardent fuel emission control Heat Transfer, Process Engineering Market Size: | 350 cr major players: WPIL Chemicals & others Market Size: | 1100 cr major players: KSB Pumps, Grundfos, M&P, Flowmore, Flowserve, Sulzer, Jyoti Source: ICICIdirect.com Research Given the thrust of the government on augmenting the domestic manufacturing and pumps being an integral part of process manufacturing, we believe that the domestic pumps industry is poised for robust growth, going ahead. ICICI Securities Ltd | Retail Equity Research Page 4 KSB; outperforming its peers; best placed to play capex revival Domestically, in the listed space, there are five companies operating in the pumps segment with sales leadership maintained in the order of Kirloskar Brothers, KSB Pumps, WPIL, Shakti Pumps and Roto Pumps. KSB clearly outperforms its peers on account of higher EBITDA margins, a lean balance sheet (minimal leverage) and working capital discipline (on account of no exposure to the project/EPC business), thereby emerging as the best placed to capture the revival of the capex cycle and an up-tick in economic activity domestically. Exhibit 3: Financials - domestic pump manufacturers/players Kirloskar Brothers 2682.3 0.2% 199.4 7.4 64 KSB 803.7 2.2% 101.1 12.6 68 Debt:Equity ROE ROCE 0.3 6.4 12.1 0.0 12.3 12.7 1.4 22.3 21.0 0.8 18.8 19.0 0.6 20.7 21.7 Net Working Capital (days) Promoter Holding (%) 52 63.3 55 66.4 158 61.1 154 47.8 119 69.7 Gross Block (| crore) Asset Turnover (x) Market Capitalization (| crore) 921 2.9 1604 427 1.9 2367 211 2.4 576 90 3.3 357 41 2.2 187 FY14/CY14 Net Sales (| crore) 3 year CAGR EBITDA (| crore) EBITDA Margin (%) PAT WPIL Shakti Pumps 511.1 292.1 32.5% 29.4% 81.6 43.3 16.0 14.8 30 25 Roto Pumps 89.6 14.6% 18.3 20.4 10 Source: Capitaline, Company, ICICIdirect.com Research Working capital discipline: Strong positive The working capital management of KSB is one of the best in the industry wherein its net working capital days are well below 60 days whereas majority of the industry players have working capital days at ~120 days. In CY13 and CY14, KSB’s net working capital days stood at 42 days and 55 days, respectively. Exhibit 4: Net working capital days (pump players in India) 85 68 190 186 200 55 51 55 55 42 41 net WC days 68 142 150 100 50 44 48 52 68 42 154 129 150 154 158 119 55 CY16E CY15E CY14E CY13 CY12 CY11 CY10 0 CY09 90 80 70 60 50 40 30 20 10 0 CY08 days Net working capital days (KSB India) Source: Company, ICICIdirect.com Research Kirloskar KSB Pumps FY12 Roto Pumps FY13 Shakti WPIL FY14 Source: Capitaline, ICICIdirect.com Research Going forward, we have built in the net working capital days of KSB at 55 days in CY5E and CY16E. The working capital is likely to be controlled for KSB as it has no exposure to the project/EPC business while the management’s focus is on scaling up the product basket. ICICI Securities Ltd | Retail Equity Research Page 5 Valves segment; Calibrated approach - chasing profitability not growth KSB is also one of the leading manufacturers of industrial valves and manufactures a wide range of on/off valves. KSB’s sales from the valve segment have largely been flat over CY08-14 with sales in CY14 at | 128 crore (| 124 crore in CY08). On the profitability front, its EBIT margins are on a declining trend with EBIT margins declining to negative 1.3% in CY14, a sharp drop from the peak EBIT margins realised in CY08 at 25.7%. Despite being a reliable brand in the valves market, the company’s profitability in this segment is subdued due to the enhanced presence of the unorganised segment, thereby resulting in fierce competition. Exhibit 5: KSB valves segmental revenue, EBIT & EBIT (%) (Annual) 146 160 144 30 140 25.7 20 CY15E CY16E -20 CY08 CY09 CY10 Sales Source: Company, ICICIdirect.com Research CY11 122 128 % 15 10.9 10 5 CY12 EBIT 1.6 2 16 0 11.2 CY13 -1.3 CY14 -2 CY14 5.0 5.2 20 CY13 103 85 40 141 13.0 11.1 60 15.8 80 124 122 146 100 128 CY12 25 120 135 32 150 145 140 135 130 125 120 115 110 | crore | crore KSB valves segment sales 0 -5 EBIT % Source: Company, ICICIdirect.com Research Going forward, the company expects to consolidate its position in the valves market with focus on increasing profitability rather than chasing sales growth. Going forward, we expect valves sales growth to remain subdued (CY14-16E Sales CAGR at 6%) with CY16E sales at | 144 crore. MIL Controls: Feather in the cap; small but key player MIL Controls (MIL) is an associate company of KSB (ownership share 49%) and a subsidiary of the parent i.e. KSB AG (ownership share 51%) involved in manufacturing high precision critical industrial control valves in India. These valves find application in thermal & nuclear power plants, exploration & production of oil, gas & oil products (petrochemicals) and chemical industry (process industry), including fertilisers. KSB had made an initial investment worth | 6.3 crore in MIL and is reaping rich returns out of it. MIL’s contribution to KSB’s consolidated PAT in CY14 came in at | 6.6 crore (105% RoI in CY14). We believe MIL, even though small, will remain key and be a feather in KSB’s cap, going forward. Exhibit 6: Financials- MIL Particulars Net Sales EBITDA EBITDA Margin PAT PAT margins (%) Units | crore | crore % | crore % CY09 77.1 22.8 29.6 13.8 17.9 CY10 95.2 29.9 31.4 18.5 19.4 CY12 137.3 36.7 26.8 22.6 16.5 CY13 132.6 35.5 26.8 21.0 15.8 Gross Block Asset Turnover | crore x 26.0 3.0 32.2 3.0 42.0 3.3 66.4 2.0 Equity Debt | crore | crore 41.3 0.0 50.5 0.0 73.0 0.0 81.5 0.0 ROCE ROE % % 51.6 33.3 61.6 40.2 44.7 31.0 39.6 27.1 Source: Capitaline, ICICIdirect.com Research Going forward, we have built in a 20.0% CAGR (CY14-16E) in its PAT contribution to the consolidated numbers of KSB. We have built in KSB’s share of PAT from MIL at | 7.9 crore and | 9.5 crore in CY15E and CY16E. ICICI Securities Ltd | Retail Equity Research Page 6 Consolidated revenues to grow at 13.6% CAGR in CY14-16E We expect KSB to clock modest revenue growth of 13.6% CAGR in CY1416E to | 1026 crore in CY16E (| 795 crore in CY14). In the pumps segment, revenues are expected to grow a CAGR of 15.0% in CY14-16E to | 878 crore in CY16E (| 664 crore in CY14), primarily on the back of a revival in industrial activity domestically. In the valves segment, sales growth is expected to remain subdued (CY14-16E Sales CAGR at 6%) with CY16E sales at | 144 crore Exhibit 7: Consolidated revenue trend 1100 Exhibit 8: Revenue bifurcation (pumps vs. valves) CY14-16E CAGR: 13.6% 1000 715 795 733 | crore | crore 800 878 800 902 900 CY14-16E CAGR: 15.0% 1000 1026 700 600 400 600 200 500 0 146 400 CY12 CY12 CY13 CY14 CY15E 664 603 565 764 135 144 CY14 CY15E Pumps Valves CY16E 128 122 CY13 CY16E Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research In the pumps segment, going forward, for CY15E and CY16E, we have built in sales growth of 15%, on the back of domestic industrial activity being at the cusp of cyclical recovery (in CY15E) with lot of emphasis being laid on increasing the manufacturing base out of India. This will directly result in a revival of domestic capex cycle with consequent demand for pumps. Consolidated EBITDA & PAT to grow 30.9% & 33.9% CAGR in CY14-16E We expect KSB’s consolidated EBITDA to grow at a CAGR of 30.9% in CY14-16E to | 173 crore in CY16E, primarily on the back of an improvement in EBITDA margins from 12.7% in CY14 to 16.9% in CY16E. EBITDA margins are expected to improve on the back of subdued pig iron prices, increasing share of profitable pumps segment in the overall sales mix and benefits of operating leverage. We expect KSB’s PAT to grow at a CAGR of 33.9% in CY14-16E to | 123 crore in CY16E. Exhibit 9: EBITDA & EBITDA margins (%) trend 0 CY12 CY13 CY14 EBITDA CY15E EBITDA Margins Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research CY16E 18 16 14 12 10 8 6 4 2 0 140 CY13-16E CAGR: 33.9% 120 80 123 99 100 | crore 144 101 101 50 173 12.7 100 92 | crore 150 12.9 13.8 16.9 % 16.0 200 Exhibit 10: PAT trend 64 67 68 CY12 CY13 CY14 60 40 20 0 CY15E CY16E Source: Company, ICICIdirect.com Research Page 7 Outlook and valuation KSB is among the industry leaders in the pumps segment domestically with a strong presence in the industrial (power segment) and agricultural segments. KSB has no exposure to the project/EPC business in India with strong focus on product business, which will always keep its working capital cycle under control. The company realises 65% of its pumps segment revenues from the technology intensive industrial pumps segment wherein it enjoys leadership and, consequent, higher margins. Domestically, industrial activity has been subdued in the recent past with mining operations across India taking a hit due to policy logjam. The same was reflected in the IIP index, which fell from 8.2% in FY11 to -0.1% in FY14. However, with a new government at the helm and the recent initiatives undertaken by them viz. coal blocks auctioning (to make coal production incremental to increase power generation) and thrust on making India a global manufacturing hub (Make in India campaign) bodes well for the domestic pump industry and is likely to lead to a rejuvenation of the industry, going forward. We expect KSB to record modest revenue growth of 13.6% CAGR in CY14-16E to | 1026 crore in CY16E (| 795 crore in CY14). In the pumps segment, revenues are expected to grow at a CAGR of 15.0% in CY14-16E to | 878 crore in CY16E (| 664 crore in CY14). In the valves segment, revenues are largely expected to remain subdued (CY14-16E sales CAGR of 6%) at | 144 crore in CY16E (| 128 crore in CY14) primarily on the back of the company’s focus on improving profitability rather than chasing growth. The EBITDA and PAT are expected to grow at a CAGR of 30.9% and 33.9%, respectively, in CY1416E. We have valued the company at 23x P/E (0.7x PEG) on CY16E EPS of | 35.2 and arrived at a target price of | 810 with a BUY rating on the stock. We believe KSB is a quality play and any correction in the stock price should be used a buying opportunity in the counter. With industrial activity at the cusp of a cyclical recovery, we believe KSB is on a strong footing on recovery with increasing sales and profitability, going forward. Exhibit 11: Two year forward P/E (KSB currently trading at 19.3x) 800 700 600 (|) 500 400 300 200 100 Price 21x 18x 15x 13x 12x 10x Jan-15 Jul-14 Jan-14 Jul-13 Jan-13 Jul-12 Jan-12 Jul-11 Jan-11 Jul-10 Jan-10 Jul-09 Jan-09 Jul-08 Jan-08 Jul-07 Jan-07 0 9x Source: Reuters, ICICIdirect.com Research We also believe that phased implementation of the Goods & Services Tax (GST) and a shift towards star rated pumps (energy rating) is likely to result in a shift of the residual domestic pump market from the unorganised segment to the organised segment. This, in turn, will also be beneficial for KSB. ICICI Securities Ltd | Retail Equity Research Page 8 Company snapshot 900 Target Price: 810 800 700 600 500 400 300 200 100 Dec-15 Jun-15 Dec-14 Jun-14 Dec-13 Jun-13 Dec-12 Jun-12 Dec-11 Jun-11 Dec-10 Jun-10 Dec-09 Jun-09 Jun-08 Dec-08 0 Source: Bloomberg, Company, ICICIdirect.com Research Key events Date/Year 2008 2009 2010 2011 2012 2013 2014 Event During 2008, the company had partly executed a large order of Bharat Oman Refinery, whose order was worth | 27 crore. The company was also able to bag a prestigious order of | 32 crore from Coastal Gujarat Power. For 2007-08, the company had planned capital expenditure (capex) of | 150 crore, which was spread over three years. However, due to the economic slowdown, the capex programme was put on hold The company faced severe competition in the valves segment domestically on account of aggressive marketing of products by its competitor and the largest domestic valve manufacturer i.e. AUDCO (a JV of L&T). During CY09, the management had also revamped and modernised its steel foundry at the cost of | 22 crore. It has increased the capacity to 1200 metric tonne per annum KSB has received order from Nuclear Power Corporation of India (NPCIL) for manufacture of nuclear pumps, which will be delivered during CY12 The management has earmarked a capex of around | 90-100 crore for KSB Pumps India for CY11. The capex is for brownfield expansions largely in the pump segment, which will result in an increase in capacity both for existing line of products as well as newer products The company has guided for a capex spend of ~| 30 crore in CY'12. On the valves business, the company has completed its entire restructuring process and the management expects to realise benefits of cost rationalisation and product differentiation, going forward. The company for the first time clocked exports of | 100 crore wherein it only exports through its parent arm based out of Singapore The company's performance was a bit subdued in CY13 on account of a delay in order execution. The company is also facing increasing competition from companies like Flowserve, etc. which are expanding their capacities domestically The company completely executes the order received from NPCIL for nuclear pumps. KSB plans to take a calibrated approach in its valves segment with focus on improving profitability rather than chasing growth Source: Company, ICICIdirect.com Research Top 10 Shareholders Shareholding Pattern Rank 1 2 3 4 5 6 7 8 9 10 (in %) Promoter FII DII Others Name Latest Filing Date % O/S Position (m) Position Change (m) Canadian Kay Pump, Ltd. 31-Dec-14 40.54 14.1 0.0 Industrial and Prudential Investment Co Ltd 31-Dec-14 20.51 7.1 0.0 Reliance Capital Asset Management Ltd. 31-Dec-14 7.33 2.6 0.0 Paharpur Cooling Towers, Ltd. 31-Dec-14 4.17 1.5 0.0 ThyssenKrupp AG 31-Dec-14 3.10 1.1 0.0 PineBridge Investments Asia Limited 31-Dec-14 2.36 0.8 0.0 UTI Asset Management Co. Ltd. 31-Dec-14 2.26 0.8 0.0 Bajaj Allianz Life Insurance Company Limited 31-Dec-14 2.17 0.8 0.0 31-Dec-14 1.40 0.5 0.2 Sundaram Asset Management Company Limit 31-Jan-15 0.77 0.3 0.0 DSP BlackRock Investment Managers Pvt. Ltd Dec-13 Mar-14 Jun-14 Sep-14 66.4 66.4 66.4 66.4 1.2 2.0 2.3 2.6 12.3 13.1 13.8 14.2 20.1 18.5 17.5 16.8 Dec-14 66.4 2.6 14.5 16.5 Source: Reuters, ICICIdirect.com Research Recent Activity Buys Investor name Sundaram Asset Management Company Limited Bajaj Allianz Life Insurance Company Limited PineBridge Investments Asia Limited Value 1.66m 0.21m 0.08m Shares 0.16m 0.02m 0.01m Sells Investor name PineBridge Investments Asset Management Company (India) Reliance Capital Asset Management Ltd. Dimensional Fund Advisors, L.P. Value -0.58m -0.10m -0.04m Shares -0.06m -0.01m 0.00m Source: Reuters, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 9 Financial summary (Consolidated) Profit and loss statement (Year-end March) Net Sales Other Operating Income Total Operating Income Growth (%) Raw Material Expenses Employee Expenses Other Operating Expense Total Operating Expenditure EBITDA Growth (%) Depreciation Interest Other Income PBT Exceptional Item Total Tax PAT Profit from Associates Reported Net Profit Growth (%) EPS (|) | Crore CY13 732.7 0.0 732.7 2.4 344.4 110.1 177.4 631.9 100.8 9.6 26.5 2.6 12.7 84.4 -1.1 28.4 57.1 9.6 66.7 4.9 19.2 CY14 795.0 8.7 803.7 9.7 381.5 127.1 193.9 702.6 101.1 0.3 27.6 2.2 22.9 94.3 0.0 32.5 61.8 6.6 68.4 8.2 19.7 CY15E 901.5 9.5 911.1 13.4 408.6 140.5 217.9 767.1 144.0 42.4 31.0 1.4 24.8 136.4 0.0 45.0 91.4 7.9 99.3 47.9 28.5 CY16E 1025.5 10.5 1036.0 13.7 464.9 157.2 240.7 862.8 173.2 20.3 33.1 0.2 28.8 168.8 0.0 55.7 113.1 9.5 122.6 23.7 35.2 Cash flow statement (Year-end March) Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions Others CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Issue/(Buy back) of Equity Inc/(dec) in loan funds Dividend paid & dividend tax Inc/(dec) in Share Cap Others CF from financing activities Net Cash flow Opening Cash Closing Cash | Crore CY13 66.7 26.5 19.8 14.0 2.6 129.6 -5.7 -30.8 0.1 -36.4 0.0 -13.7 -22.4 0.2 -2.6 -38.5 54.8 105.2 160.0 CY14 68.4 27.6 -81.1 47.6 2.2 64.6 -1.4 -38.8 -1.5 -41.7 0.0 21.2 -22.4 -0.7 -2.2 -4.0 18.8 160.0 178.7 CY15E 99.3 31.0 -26.1 19.6 1.4 125.3 -4.9 -30.0 0.0 -34.9 0.0 -20.0 -30.5 0.7 -1.4 -51.3 39.0 178.7 217.8 CY16E 122.6 33.1 -58.6 47.5 0.2 144.8 -6.5 -30.0 0.0 -36.5 0.0 -4.0 -38.7 0.0 -0.2 -42.9 65.3 217.8 283.1 CY13 CY14 CY15E CY16E 19.2 26.8 147.0 5.5 45.9 19.7 27.6 160.1 5.5 51.3 28.5 37.4 180.0 7.5 62.6 35.2 44.7 204.1 9.5 81.3 13.8 11.5 9.1 91.3 63.1 112.3 12.6 11.7 8.5 92.7 82.2 120.0 15.8 15.0 10.9 90.0 75.0 110.0 16.7 16.3 11.8 90.0 75.0 110.0 13.0 14.4 21.0 12.3 12.7 18.3 15.9 17.9 27.5 17.3 19.7 32.9 35.5 21.9 3.0 3.2 4.6 34.6 21.9 2.8 3.0 4.2 23.8 15.0 2.4 2.6 3.8 19.3 12.0 2.0 2.3 3.3 0.0 0.0 2.0 1.3 0.0 0.0 2.0 1.4 0.0 0.0 2.1 1.4 0.0 0.0 2.1 1.5 Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research Balance sheet | Crore (Year-end March) Liabilities Equity Capital Reserve and Surplus Total Shareholders funds Total Debt Deferred Tax Liability Minority Interest / Others Total Liabilities CY13 CY14 CY15E CY16E 34.8 477.0 511.8 3.2 0.0 6.0 521.1 34.8 522.4 557.2 24.4 0.0 6.7 588.3 34.8 591.8 626.7 4.4 0.0 6.7 637.8 34.8 675.8 710.6 0.4 0.0 6.7 717.7 Assets Gross Block Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets Liquid Investments Other Investments Goodwill on Consolidation Inventory Debtors Loans and Advances Other Current Assets Cash Total Current Assets Creditors Provisions Current Liabilities & Prov Net Current Assets Others Assets Application of Funds 388.4 207.0 181.4 8.1 189.5 0.0 48.5 0.0 183.3 126.7 79.7 3.5 160.0 553.2 225.5 52.4 277.9 275.3 7.8 521.1 427.2 234.6 192.7 8.1 200.8 0.0 49.9 0.0 201.8 179.0 87.5 6.0 178.7 653.1 261.4 64.0 325.5 327.6 10.0 588.3 457.2 265.5 191.7 8.1 199.8 0.0 54.8 0.0 222.3 185.2 88.4 4.5 217.8 718.2 271.7 73.4 345.1 373.1 10.0 637.8 487.2 298.6 188.6 8.1 196.7 0.0 61.4 0.0 252.9 210.7 90.2 5.1 283.1 842.1 309.1 83.4 392.5 449.6 10.0 717.7 Key ratios (Year-end March) Per share data (|) EPS Cash EPS BV DPS Cash Per Share (Incl Invst) Operating Ratios (%) EBITDA Margin PBT / Total Op. income PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio Source: Company, ICICIdirect.com Research Source: Company, ICICIdirect.com Research ICICI Securities Ltd | Retail Equity Research Page 10 RATING RATIONALE ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more; Head – Research Pankaj Pandey [email protected] ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai – 400 093 [email protected] ICICI Securities Ltd | Retail Equity Research Page 11 ANALYST CERTIFICATION We /I, Chirag Shah PGDBM; Shashank Kanodia MBA (Capital Markets), Research Analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our views about the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & conditions and other disclosures: ICICI Securities Limited (ICICI Securities) is a full-service, integrated investment banking and is, inter alia, engaged in the business of stock brokering and distribution of financial products. ICICI Securities is a wholly-owned subsidiary of ICICI Bank which is India’s largest private sector bank and has its various subsidiaries engaged in businesses of housing finance, asset management, life insurance, general insurance, venture capital fund management, etc. (“associates”), the details in respect of which are available on www.icicibank.com. ICICI Securities is one of the leading merchant bankers/ underwriters of securities and participate in virtually all securities trading markets in India. We and our associates might have investment banking and other business relationship with a significant percentage of companies covered by our Investment Research Department. ICICI Securities generally prohibits its analysts, persons reporting to analysts and their relatives from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without prior written consent of ICICI Securities. While we would endeavour to update the information herein on a reasonable basis, ICICI Securities is under no obligation to update or keep the information current. Also, there may be regulatory, compliance or other reasons that may prevent ICICI Securities from doing so. Non-rated securities indicate that rating on a particular security has been suspended temporarily and such suspension is in compliance with applicable regulations and/or ICICI Securities policies, in circumstances where ICICI Securities might be acting in an advisory capacity to this company, or in certain other circumstances. This report is based on information obtained from public sources and sources believed to be reliable, but no independent verification has been made nor is its accuracy or completeness guaranteed. This report and information herein is solely for informational purpose and shall not be used or considered as an offer document or solicitation of offer to buy or sell or subscribe for securities or other financial instruments. Though disseminated to all the customers simultaneously, not all customers may receive this report at the same time. ICICI Securities will not treat recipients as customers by virtue of their receiving this report. Nothing in this report constitutes investment, legal, accounting and tax advice or a representation that any investment or strategy is suitable or appropriate to your specific circumstances. The securities discussed and opinions expressed in this report may not be suitable for all investors, who must make their own investment decisions, based on their own investment objectives, financial positions and needs of specific recipient. This may not be taken in substitution for the exercise of independent judgment by any recipient. The recipient should independently evaluate the investment risks. The value and return on investment may vary because of changes in interest rates, foreign exchange rates or any other reason. ICICI Securities accepts no liabilities whatsoever for any loss or damage of any kind arising out of the use of this report. Past performance is not necessarily a guide to future performance. Investors are advised to see Risk Disclosure Document to understand the risks associated before investing in the securities markets. Actual results may differ materially from those set forth in projections. Forward-looking statements are not predictions and may be subject to change without notice. ICICI Securities or its associates might have managed or co-managed public offering of securities for the subject company or might have been mandated by the subject company for any other assignment in the past twelve months. ICICI Securities or its associates might have received any compensation from the companies mentioned in the report during the period preceding twelve months from the date of this report for services in respect of managing or co-managing public offerings, corporate finance, investment banking or merchant banking, brokerage services or other advisory service in a merger or specific transaction. ICICI Securities or its associates might have received any compensation for products or services other than investment banking or merchant banking or brokerage services from the companies mentioned in the report in the past twelve months. ICICI Securities encourages independence in research report preparation and strives to minimize conflict in preparation of research report. ICICI Securities or its analysts did not receive any compensation or other benefits from the companies mentioned in the report or third party in connection with preparation of the research report. Accordingly, neither ICICI Securities nor Research Analysts have any material conflict of interest at the time of publication of this report. It is confirmed that Chirag Shah PGDBM; Shashank Kanodia MBA (Capital Markets), Research Analysts of this report have not received any compensation from the companies mentioned in the report in the preceding twelve months. Compensation of our Research Analysts is not based on any specific merchant banking, investment banking or brokerage service transactions. ICICI Securities or its subsidiaries collectively or Research Analysts do not own 1% or more of the equity securities of the Company mentioned in the report as of the last day of the month preceding the publication of the research report. Since associates of ICICI Securities are engaged in various financial service businesses, they might have financial interests or beneficial ownership in various companies including the subject company/companies mentioned in this report. It is confirmed that Chirag Shah PGDBM; Shashank Kanodia MBA (Capital Markets), Research Analysts do not serve as an officer, director or employee of the companies mentioned in the report. ICICI Securities may have issued other reports that are inconsistent with and reach different conclusion from the information presented in this report. Neither the Research Analysts nor ICICI Securities have been engaged in market making activity for the companies mentioned in the report. We submit that no material disciplinary action has been taken on ICICI Securities by any Regulatory Authority impacting Equity Research Analysis activities. This report is not directed or intended for distribution to, or use by, any person or entity who is a citizen or resident of or located in any locality, state, country or other jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which would subject ICICI Securities and affiliates to any registration or licensing requirement within such jurisdiction. The securities described herein may or may not be eligible for sale in all jurisdictions or to certain category of investors. Persons in whose possession this document may come are required to inform themselves of and to observe such restriction. ICICI Securities Ltd | Retail Equity Research Page 12
© Copyright 2024 Paperzz