STOCK UPDATE : KSB Pumps

Pump division drives growth
Result highlights
* KSB Pumps’ Q4CY2008 results are slightly better than expected owing to a stronger than anticipated top line.

STOCK UPDATE : KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Under review
Current market price: Rs202
* The company has reported a strong 31.4% improvement in its top line to Rs175.4 crore. The top line growth was primarily driven by a 46.9% rise in the pump revenues. However, the revenues of the valve division declined by 7.9% during the quarter but remained almost flat on a sequential comparison.

* The operating profit margin (OPM) of the company has remained volatile over the last couple of years. On a segmental basis, the profit before interest and tax (PBIT) margin of the pump division declined by 270 basis points to 12.8% on account of a different mix of orders while that of the valve division declined by 410 basis points to 21% due to a slower top line growth. Consequently, the overall OPM of the company declined by 440 basis points year on year (yoy) to 15.8%. As a result, the operating profit for the quarter grew marginally by 2.7% to Rs27.7 crore. Slightly higher interest and depreciation costs led the company to report a 17.3% decline in its net profit to Rs16.2 crore.

* Looking at its full year’s performance, the company has reported a 28.1% growth in its net sales while the OPM for the full year has marked an improvement of 260 basis points to 18%. Resultantly, the adjusted net profit grew by 40.5% to Rs64.7 crore.

* As had been mentioned in our previous updates, we had not expected similar performance reported in Q2 and Q3 in terms of margins to be sustainable. In line with anticipation, the margins have softened in the current quarter, and the same are likely to remain lumpy on account of the change in the nature of orders executed in each quarter. Going forward, we expect the margins to soften by 100 basis points in CY2009 in view of slower topline growth.

* Pump makers are likely to benefit mainly on account of the strong investments in the power sector, though there has been considerable slowdown in some of the other user segments, such as petrochemicals. We are not making any changes to our yearly estimates for KSB Pumps as of now and expect the company to report a flattish growth in profit for the next year, in view of the significant curtailment in the corporate capital expenditure. However, we will take a re-look at our numbers for CY2009 and introduce our CY2010 estimates after the company’s annual general meeting scheduled on April 21, 2009.

* At the current market price, the stock is trading at 5.4x its CY2009E earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3x. The valuations seem to be attractive considering the stock’s historic valuations. The stock also offers a healthy dividend yield of 2.74% due to which we maintain our optimism on KSB Pumps. We maintain our Buy recommendation on the stock while we put the price target of the stock under review.

Source : The Sharekhan Research Team

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