Kirloskar Brothers Ltd is well poised for further growth: Sharekhan

Kirloskar Brothers Limited’s (KBL’s) annual report review highlights strong underlying demand from key domestic industries andexpansion of the company’s product and services portfolio that would help it capture market share in both domestic and international markets. The company’s strong position in the retail business with a market share of 10-14% and green energy offerings (energy-efficient pumps) bode well for growth. Its international order book also stands strong at Rs. 1,511 crore registering a growth of 36% y-o-y in FY23. The company has minimal exposure to low-margin and working capital-intensive EPC business. Hence, its working capital cycle, net asset turnover ratios improved considerably. Thus, a promising business outlook and multiple growth triggers make us positive on the stock.

► Pumps biz gushes forth – For FY23, the company’s topline grew at a healthy pace, driven by a better product mix, recovery in key geographies and robust momentum in B2C pumps in the domestic market. Further, a reduced exposure to the engineering, procurement and construction (EPC) business (75% in FY10 to 5% in FY23) shortened the working capital cycle and cash flows. The company also diversified its presence in the water, power, and irrigation sectors. KBL is the only company to offer energy-efficient pumps with IE4 and IE5 motors, priced higher as compared to regular pumps. Although these pumps are costlier, the lifecycle cost of a pump comes down drastically due to energy savings. Hence, many players, particularly in the oil & gas space, are shifting to these pumps.

► B2B space growing robustly – In FY23, the water resources department received substantial orders from large OEMs and contractors in Uttar Pradesh, Rajasthan, and Uttarakhand. Furthermore, it secured a significant number of orders for the multi-stage pumps, split-case pumps and large VT pumps. Moreover, the solar power business is seeing growth in the institutional segment and the open market. In Irrigation, opportunities are likely to emerge in the large metallic volute pump (MVP) business as the government’s river linkage programme to manage water resources is likely to pick up pace in the medium to long term. The building and construction segment grew by 25% y-o-y in FY23 and the company commissioned fire pumps at GMR Goa International Airport and Sabarmati High-Speed Rail depot, Ahmedabad. In power, KBL achieved a milestone by indigenously designing and manufacturing boiler feedwater pump for the Rajasthan Atomic Power Station (RAPP) nuclear power plant.

► We expect Revenue/PAT CAGR of 11.5%/21% over FY23-FY25E – Our revenue growth estimates are built in taking into account the higher base of FY2023. Going forward, we believe growth will be driven by a healthy standalone/consolidated order book of Rs. 1,820 crore/Rs. 2,888 crore for made-to-order and engineered-to-order products. Further, rising demand for energy efficient pumps in various industries such as oil & gas, irrigation and agriculture, power, and building and construction would drive demand for its standard pumps. Falling commodity prices, improvement in global supply chain as well as some of the cost-rationalization and the rising share of services revenue in the total overseas business would boost margins. Further, we expect balance sheet to strengthen further as debt declines, cash flows pick up and working capital cycle shortens. We build in a revenue/PAT CAGR of 11.5%/21% over FY23-FY25E.t.

Change in Estimates: We have maintained our estimates for FY24-FY25E.

Our Call

Valuation – Maintain Positive view; Expect 23% upside: KBL is leveraging its brand equity and has diversified its portfolio in the pumps industry to capitalize on the emerging opportunities in its key target industries, including sunrise sectors such as solar and nuclear. KBL is concentrating on building its competitiveness by new product launches and focusing on scaling its spares, services, and subscription platform and maintenance business, which would help counter the cyclicality and create a recurring revenue stream and upfront cash payments. We also expect its margin trajectory to improve, driven by healthy growth in revenues, stable commodity prices, improving supply chain, and increasing share of services business. Despite the sharp run-up in the stock since our viewpoint initiation in February, 2023, the stock trades at a reasonable valuation of ~18/~15x its FY2024E/FY2025E EPS. Hence, we maintain our Positive view on the stock and expect an upside of 23% from the current price levels as we expect its strong performance to continue backed by strong industry demand, product innovation and improvement in internal efficiencies.

Key Risks

► Fluctuations in raw-material prices (steel and cast iron) could adversely impact margins.

► Company has considerable exposure to international markets in terms of exports and international subsidiaries. Hence, forex fluctuations could impact profitability.

► High competition in the pumps industry is a key risk.