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KSB Pumps: No respite from margins - Views on News from Equitymaster
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KSB Pumps: No respite from margins
May 11, 2011

KSB Pumps has announced its March quarter results. The company has reported a 20% growth in topline and a 33% fall in bottomline on a YoY basis. Here is our analysis of the results.

Performance summary
  • Topline grows by 20% YoY during the quarter.
  • Strong contraction in operating margins leads to a 29% fall in operating profits.
  • Bottomline suffers a fall of 33% YoY, mainly on account of poor operating performance.


(Rs m) 1QCY10 1QCY11 Change
Net sales 1,385 1,662 20.0%
Expenditure 1,169 1,510 29.1%
Operating profit (EBDITA) 216 152 -29.5%
EBDITA margin (%) 15.6% 9.1%  
Other income 14 22 63.5%
Interest expense/(income) 2 4 94.4%
Depreciation 49 53 8.9%
Profit before tax 179 118 -34.0%
Tax 61 40 -35.6%
Extraordinary inc/(expense) - -  
Profit after tax/(loss) 118 79 -33.2%
Net profit margin (%) 8.5% 4.7%  
No. of shares (m) 199.7 17.4  
Diluted earnings per share (Rs)*   27.4  
Price to earnings ratio (x)*   17.5  
(* on trailing twelve months earnings)

What has driven performance in 1QCY11?
  • The company operates predominantly through 2 business segments viz. pumps and valves. The 20% growth in overall revenues was driven by the latter as it managed a 53% YoY growth. The pumps business, which is around 5 times bigger than the valves segment managed a growth of 14%, thus pulling the overall revenue growth down. The growth in revenues is better than the CAGR of 11% witnessed in the five years between CY05 and CY10. What makes it even more impressive is that it has come in the backdrop of increased competition and slightly more challenging macroeconomic environment.

    Segmental break up...
    Segment 1QCY10 1QCY11 Change
    Pumps      
    Revenues 1,158 1,318 13.8%
    PBIT 183   88 -52.0%
    PBIT margin 15.8% 6.7%  
    Valves      
    Revenues 216 330 52.9%
    PBIT   (5)   28 n.a.
    PBIT margin -2.2% 8.4%  
     Others       
    Revenues 81 99 22.3%
    PBIT (1.1) (1.8)  
    PBIT margin -1.4% n.a.  

  • The strong growth in revenues seems to have come at the expense of operating margins as the same have come down significantly by more than 6%. At 9.1%, it is even lower than the 10.7% witnessed during the December quarter. Commodity prices had again moved up in the March quarter and with the company being unable to pass on the same to end users, margins seemed to have impacted negatively. From the tone of the company’s annual report, it appears that the margin pressure is likely to trouble the company going forward as well. Perhaps, the 17% operating margins that it has averaged in the past five years is now a thing of the past.

    Cost break-up...
    (Rs m) 1QCY10 1QCY11 Change
    Raw materials 662 845 27.5%
    % sales 47.8% 50.8%  
    Staff cost 210 249 18.3%
    % sales 15.2% 15.0%  
    Other expenditure 297 416 40.2%
    % sales 21.4% 25.1%  

  • A 9% growth in depreciation charge has further affected profitability and led to the 34% decline in PBT. At 33%, the fall in bottomline is slightly less and has been driven by lower than proportional fall of 36% in tax outgo.

What to expect?
At the current price of Rs 240 (1:1 bonus adjusted), the stock trades at around 11.4 times its revised CY12 earnings per share. The revision in earnings is on account of lower margin profile in the future and affects our target price by around 26%. Our revised target price now stands at Rs 316 per share (adjusted for bonus as well as revised EPS) and translates into a 31% upside from the current levels.

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