KSB Pumps’ Q1CY2009 results were in line with our expectation at net level despite a slower-than-expected top line on account of better margins. The company’s net sales grew by a marginal 1.6% to Rs134.2 crore during the quarter.
On segmental basis, the revenues of the pump division went up by 6% to Rs108.3 crore while that of the valves division declined by a 14.2% to Rs25.8 crore.
On margin front, the pump business improved its margins by 200 basis points from 12.4% last year to 14.4% this year on account of a better product mix, while a lower top line led to a fall in the margins of valves business, which declined by 630 basis points to 17.8%.
Led by the growth in the pump business, the overall operating profit margin (OPM) grew by 70 basis points to 16.8% as the operating profit improved by 5.9% to Rs22.5 crore.
On the back of higher interest and depreciation costs due to heavy capital expenditure (capex) exercise by the company during the year, the profit after tax (PAT) for Q1CY2009 grew by 5% to Rs13.5 crore, more or less in line with our estimate of Rs13.4 crore.
We also attended the company’s annual general meeting to interact with its management. The outlook for the company is pretty challenging in view of slowing order inflows and deferment and cancellation of orders.
There is a significant slowdown in projects business, which contributes roughly 60% to the company’s total revenues, with the current order book at about 6-8 months of its sales, which is not a very comfortable position.
Moreover, the performance in the first quarter is not expected to be repeated for the remainder of the year, both in terms of top line as well as margins.
There are strong pressures on realisations and the price cut going forward is likely to be in the region of about 10-15%, which would sharply affect the estimates.
Though, there would be some relief from the reduction in the raw material prices, in the current scenario, the entire benefit is likely to be passed on, while the pressure on the margins is likely to intensify particularly in wake of slowing order inflows.
The company had chalked out a plan to spend close to Rs150 crore over a period of two-three years for its capacity expansion.
Though about Rs60 crore were spent in CY2008, the company might delay its capex going forward, if the demand scenario remains as it is.
With price cuts, slowing order inflows and intensified competition, the earnings for the current year are likely to come under pressure, with the performance of the first quarter unlikely to be repeated for the remainder of the year.
Outlook and valuation
We are reducing our CY2009E estimates by 6.1% to Rs34.9 and expect a marginal earnings growth of 0.5% in CY2010.
At the current market price, the stock is trading at 6.9x its CY2010E earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortization (EBIDTA) of 3.6x.
The valuations are close to historic lows even on the downgraded estimates, which would limit the downside risk from the current levels.
However, the upside is also likely to be capped in near to medium term on account of tough environment and likely pressure on its financial performance.
Consequently, we believe the stock continues to be an attractive opportunity for long-term and patient investors, and hence we are shifting the stock from Emerging Star cluster to Vulture’s Pick.
We maintain our HOLD recommendation on the stock with an 18-month price target of Rs348 (10x on an average of CY2009E and CY2010E earnings).