KIRLOSKAR BROTHERS---MULTIBAGGER
Multi Bagger: Kirloskar Brothers
Recommended Price Rs 385.95
K.R Choksey Report Dated: Nov 24, 2007
Investment Rationale
KBL, the flagship company of the Rs 3660 crore Kirloskar Group
incorporated in 1920, is the largest manufacturer and exporter of
Centrifugal Pumps in India. It manufactures power driven pumps,
valves, turbines, electric motors, anti-corrosion products and alloy
iron castings at its five manufacturing plants located in the states
of Maharashtra and Madhya Pradesh. KBL has five Strategic Business
Units (SBUs) namely, Industrial Pumps (IP), Projects & Engineered
Pumps (PEP), Agriculture & Domestic Pumps (ADP), Valves and Others of
which PEP is the highest contributor to the revenues followed by ADP
and IP. Besides, the Company also has strategic tie-ups in form of JVs
and subsidiaries either specializing in niche categories or in their
geography. KBL is transforming itself into a total water solution
company from a mere product company by
spreading its wings in the domestic and global markets. KBL has
reputed companies and state & Central governments of various countries
as its customers. All the five SBUs of KBL have witnessed strong
double-digit growth ranging from 30% to 130% and pending orders in
FY2007. Robust construction & infrastructure development in the
economy has been the major growth driver for KBL's businesses. High
pending orders and a buoyant outlook for the user industries makes us
confident of the sustainability of the high growth rates in future. An
unexciting quarterly performance in Q1 and Q2FY2008 marked by
aberration has beaten the stock substantially on the bourses. We
however, consider this a good buying opportunity considering the
bullish outlook for the company's performance going ahead on the back
of strong order book position and a buoyant outlook for the user
industries.
Key Developments and Impact:
Capacity Expansion KBL is undertaking major capacity expansion in the
current year by investing to the tune of Rs 150 crore for setting up a
greenfield facility for manufacturing hydel turbines as also
increasing its capacity of manufacturing large capacity pumps. The new
Capex is almost entirely for building new capacities resulting in a
60% increase in its Gross Fixed Assets.
Management control of The Kolhapur Steel Ltd (TKSL)
KBL has recently taken over the management control of TKSL by
inducting a majority of directors on the board of the subject company.
TKSL, incorporated in 1965, is engaged in manufacturing of alloy steel
castings catering to sugar, cement, steel, pumps/valves, marine, earth
moving and other general engineering industries sectors. TKSLâEURO(tm)s
steel casting manufacturing capacity will be utilized for KBLâEURO(tm)s
captive consumption as well as for selling in the external market.
Financials:
Net sales during Q2FY2008 grew by 14% to Rs 318.12 crore from Rs
279.07 crore in Q2FY2007. Domestic sales grew by 28% due to robust
demand scenario. However, Export sales declined by 66% due to high
base year effect. Exports during the year-ago quarter were higher on
account of spill over of FY2006 order into Q1FY2007. Lower Other
Income restricted the Total Income growth to 8.9%. Operating Profit
declined by 24.2% to Rs 22.6 crore due to sharp rise in RM and Staff
cost. EBITDA declined at a sharper rate, 30.5% to Rs 42.6 crore due to
lower Operating Profit coupled with lower Other Income. Higher
depreciation charge, steep rise in interest cost and higher tax rate
affected the already low profits. Profit After Tax was also affected
by absence of extraordinary income (profit on sale of & dividend from
investment in Kirloskar Copeland Limited) which was present in the
year ago quarter. PAT thus declined by 88.2% to Rs 27 crore. Despite
an unexciting quarterly performance in Q2F Y2008, we remain bullish on
the companyâEURO(tm)s performance going ahead due to strong order book
position and a buoyant outlook for the user industries.
Industry Scenario:
The domestic pump market valued at Rs 3500 crore can be categorized
into: agricultural, industrial, utilities and services. Being
fragmented in nature, the unorganized segment accounts for 30% of
market. The fortune of pumps industry depends on the performance of
and outlook for its user industries namely, refining, petrochemical,
fertilizer, drugs & pharmaceutical, agriculture, cement, etc. There
are various types of pumps like centrifugal pumps, reciprocating
pumps, diaphragm pumps, gear pumps and dosing pumps. Indian pump and
valves industry is on upswing with all its industry majors registering
impressive double-digit growth rate. Major demand drivers for this
industry are as follows: âEURO¢ Investment and thrust on agriculture,
development of drinking water supply & drainage system âEURO¢ Performance
of the fluid handling industries like petrochemicals, etc âEURO¢
Investment in infrastructure development and construction activities
Financial Analysis:
Profits affected due to higher Operating Expenses, reduced Other
Income & absence of Extraordinary Income as in year-ago quarter. Net
sales during Q2FY2008 grew by 14% to Rs 318.12 crore from Rs 279.07
crore in Q2FY2007. Domestic sales grew by 28% due to robust demand
scenario. However, Export sales declined by 66% due to high base year
effect. Exports during the year-ago quarter were higher on account of
spill over of FY2006 order into Q1FY2007. Lower Other Income
restricted the Total Income growth to 8.9%. Operating Profit declined
by 24.2% to Rs 22.6 crore due to sharp rise in RM and Staff cost.
EBITDA declined at a sharper rate, 30.5% to Rs 42.6 crore due to lower
Operating Profit coupled with lower Other Income. Higher depreciation
charge, steep rise in interest cost and higher tax rate affected the
already low profits. Profit After Tax was also affected by absence of
extraordinary income (profit on sale of & dividend from investment in
Kirloskar Copeland Limited) which was present in the year ago quarter.
PAT thus declined by 88.2% to Rs 27 crore.
Valuations:
At the CMP of Rs 385.95, KBL is trading at about 2.9x MCap/Sales, 3x
EV/Sales and 21.7x EV/EBITDA on TTM basis.
Risks:
Financial and integration risk arising from inorganic growth
initiatives: KBL in order to achieve its target of becoming one of the
top 15 companies in the world is considering acquisitions in the
domestic and international markets. However, acquisitions could lead
to integration risk to a certain extent and financial distortion for
some time.
Growth:
Healthy industrial growth, boom in construction & infrastructure
development, rapid urbanization leading to escalating need of drinking
& waste water management, GovernmentâEURO(tm)s thrust on agricultural
development & irrigation and its target of âEUROOEPower for all by 2012âEURO
ensures strong revenue visibility from domestic market. KBL is one of
the only three manufactures of primary moderator circulation Canned
Motor Pump over 200 kW. The Indo-US nuclear treaty would open up huge
opportunity for KBL. Besides, its association with Bechtel, USA will
be an added advantage to win new global power projects. KBL is
expanding its global presence (70 countries at present) by focusing on
countries like Africa. Thus, geographical expansion would ensure
additional revenue stream and hence would further boost the topline of
the pumps major. The stock is moving downwards. The support for the
stock exists at around 369 levels. The MACD indicator for the stock is
moving sideways in negative zone. Investors can buy the stock at
declines