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KSB Pumps: Profitability not compromised - Views on News from Equitymaster

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KSB Pumps: Profitability not compromised
Mar 27, 2009

We recently met the management of KSB Pumps, a leading manufacturer of pumps and valves, to get the company’s view on the sector, its performance and growth prospects going forward. Here are the key takeaways. Capex plans: The year gone by has been a good crop year. On account of increase in agricultural income, investments in agricultural sector are expected to be on the higher side. The same is likely to benefit companies supplying tools for agricultural activities like pumps and valves. The company has recently expanded capacity of its Nashik plant to cater to the increasing demand for these standard products and the same is sufficient to cater to the domestic demand. Also, on account of economic slowdown, investments in the infrastructure sector have taken a hit. The companies are moving cautiously with their investment plans. Thus, the current capacity is sufficient to cater to domestic needs and hence the company has not outlined aggressive capex plans. The company plans to invest Rs 300 to 400 m per year, which will be funded by its internal accruals.

KSB Pumps: Shareholders' perspective
Value creator: The company has never targeted growth by leveraging its balance sheet, compromising profitability and hence returns to invested capital. The improved earnings were shared with investors in the form of dividends and improved ROIC. The same is depicted in the adjacent chart. In recent years, the company has expanded capacity at its Nashik plant. Also, depending upon demand, the company expands support functions at various facilities to cater to increasing demand from various end user industries. Of late, the power and energy sectors were on an expansion spree and the company has bagged orders from majors from these sectors. This has resulted in increased utilization of earnings to support growth resulting in lower dividend payout. However, as an unstated policy the company has always focused on adding value to investors’ wealth rather than mere growth.

The company has the ability to sustain margins as it is a preferred brand in high end categories over existing players on account of its quality of products and ability to provide products as per specifications. As the company always concentrated on its ability to generate returns to shareholders, it never comprised margins for topline growth. It did not ramp up its capacity by leveraging its balance sheet. The company increased its order book strategically and gradually expanded capacity considering the demand supply scenario. These moves helped the company to add value to shareholders’ wealth.

Sector growth prospects: The growth of the pump and valves sector is linked to economic growth. The increased investments in the industrial sector, especially in the power and energy sector, have driven growth of the economy and that of the pumps and valves sector. The increased investments in infrastructure related sectors translated into higher demand for intermediates and related goods such as pumps and valves as they support fluid transportation. Recently, economic growth has slowed down. But if the Indian policy makers have to put the country on a high GDP growth trajectory, sizeable investments in infrastructure will have to be made. The government has outlined Rs 20.2 trillion of total expenditure in the infrastructure space in the Ninth five year plan. The thrust on power and electricity continues to remain a priority for the government. Further, in the oil sector major quality upgradations are expected to continue. Out of the total expenditure in the eleventh plan, nearly 54% is projected to be spent towards improving living conditions in urban areas. Further, the government has also noticed that the performance of the agricultural sector has not been enthusing; clocking single digit growth of merely 2% to 3%. It continues to play an important role in the Indian economy given the fact that 60% of the population is still dependant on agriculture. Thus, the increased investments in industrial sector and continuous impetus being given by the government to infrastructure are likely to contribute to the overall growth in the economy; which in turn will support growth of the pumps and valves sector going forward.

Way forward…
While the company has been able to clock robust growth, such high growth rates may not be sustainable in the medium term on account of slowing economic growth that has led to deferment of expansion plans of end user industries. Despite this, the company foresees 10% to 12% growth in topline. The same would be on account government’s increased focus and investments in agricultural and infrastructural activities to sustain and boost economic growth. The growth of these sectors is likely to translate into higher demand for intermediate and related goods such as pumps and valves as they support fluid transportation. This is likely to benefit companies like KSB Pumps.

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