KSB Pumps Research Report By ICICI-Direct

Resounding topline growth instills confidence

• KSB Pumps (KSB) reported a robust Q4CY17 performance. The impressive showing was witnessed in both pumps & valves segment

• Total operating income in Q4CY17 came in at Rs 328.2 crore, up 30.6% YoY. Pumps division reported sales at Rs 276 crore, up 34.1% YoY while valves division reported sales at Rs 52 crore, up 19.4% YoY

• EBITDA margins for the quarter came in at 12.9% (down 153 bps YoY) mainly due to higher than anticipated raw material costs. The corresponding EBITDA was at Rs 42.3 crore. The EBIT margin for the pumps segment in Q4CY17 was at 14.3%. The valves division ended on a high as EBIT came in at Rs 5.4 crore (margin 10.3%)

• Consequently, PAT came in at Rs 27.4 crore, up 19.0% YoY. Higher PAT was supported by higher other income (Rs 9.8 crore) partly compensated by higher tax incidence (~36%)

• Associate company i.e. MIL Control Valves also reported a robust performance with PAT share for CY17 at Rs 5.2 crore, up 13% YoY

• KSB also declared a dividend of Rs 6/share for CY17

Union Budget 2018-19: Focus on income insurance benefits KSB
Union Budget 2018-19 was pro-farmer in nature & well aligned to double farm income by 2022. Apart from the increase in allocation towards risk mitigation (crop insurance) and efficiency (irrigation including micro irrigation) schemes, it lays special emphasis on augmenting farm income through remunerative farm gate prices thereby targeting “income insurance”.

Emphasis has been put on fixing MSP prices at a mark-up of 50% above cost of production while at the same time bringing more crops under the MSP net. On the risk mitigation front, in its flagship insurance scheme i.e. PMFBY, allocation has been increased to Rs 13,000 crore.

On the efficiency front, in the irrigation space, total allocation under PMKSY is being increased to Rs 9,429 crore, up 28% YoY. Institutional credit for agriculture sector has been modestly raised to Rs 11 lakh crore, up 10% YoY. KSB is one of the leading pump manufacturers with quality product profile of energy efficient pumps & strong brand recall.

Hence, it will be a key beneficiary of increasing irrigation penetration domestically.

Incremental capacity in place; levers to grow; credible MNC; retain BUY

In CY17, KSB realised consolidated sales of Rs 946 crore, up 16% YoY with sales at the pumps segment at Rs 788 (up 15% YoY) while the valves segment posted sales of Rs 158 crore (up 19% YoY). Double digit topline growth is comforting and is re-emerging after five years. With technology support from its parent i.e. KSB AG, KSB is best placed to capture the envisaged opportunity in the domestic refining segment (change in fuel efficiency), revival of domestic capex cycle and increasing thrust on irrigation projects (lift irrigation).

The company’s recent order win from NPCIL (Rs 413 crore) supports our view and KSB’s ability to play an important role in the nuclear power industry, going forward. On the balance sheet front, KSB has a debt free balance sheet with surplus cash of ~Rs 100 crore as of CY17. However, KSB did witness an elongation of working capital cycle with increase in debtor days by ~ 30 days (CY17).

We believe this will normalise in CY18-19E. KSB has also in the recent past (December 2017) commenced commercial production at its
manufacturing facility in Satara where it intends to manufacture high margin super critical pumps. Factoring in the positives, on a consolidated basis, we model sales, PAT CAGR of 12.7%, 23.2%, respectively, in CY17-19E.

We build in a 230 bps improvement in EBITDA margins in the aforesaid period. We value KSB at 35x P/E on CY19E EPS of Rs 30.9 with a target price of Rs 1080 and a BUY rating on the stock.