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KSB Pumps: Betting on the power sector - Views on News from Equitymaster

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KSB Pumps: Betting on the power sector
Jun 15, 2010

We recently met the management of a leading pumps and valves manufacturer, KSB Pumps. The purpose of the meet was to understand the company's future plans, sector prospects and to understand what impacted performance in CY09. The year gone by: In CY09, the company had performed marginally below our expectations. This is because of subdued growth reported by both the segments - pumps and valves. Pumps segment managed to report stable growth. However, revenues from the valves division reported sharp fall. Thus, KSB Pumps reported lower growth in revenues in CY09.

The stock has breached our earlier target price. From here on, things are likely to change in favour of the company. This is primarily on account of economic recovery. Hence, we did meet the management of the company to understand its future plans and what went wrong in CY09. Form our meeting we did decipher that competitive prices restricted growth. The demand for pumps and valves has not fallen but competition has increased. Industry as a whole has achieved volume growth on the back of price war. Of the two segments, valves segment did more harm. Valves segment is more of an unorganised market. It does not require any high end technology. Despite of all this company was able to report higher earnings on account of operational efficiency and cost control measures.

Initiatives that sustained balance sheet strength: The year was fraught with difficulties. Slow economic recovery and recessionary situation in global markets had impacted the performance of end user industries. In a scenario when typically working capital requirements should increase, it was other way round for KSB pumps. Being proactive has helped the company. The management had foreseen these issues. Hence, it started tightening its norms with regards to procurement and dispatch front from October 2008. Thus a review of its credit policy has helped the company to shorten its working capital requirements. The company was able to command the terms of payment on account of its quality of products and it being a preferred brand with pan India basis.

The way forward: The company had recently expanded its capacity. It expects to invest in the range of Rs 300 to 400 m towards refurbishment of plants and maintenance capex. The same will be funded by internal accruals. Going forward, growth would be backed by economic recovery and increased investments on infrastructure front. It expects the power sector to specifically drive the growth of the pump division. For some time valves division is likely to witness competitive pricing scenario. This is mainly on account of built up of capacity by industry. As demand increases and capacity gets absorbed we expect the pressure on pricing front is likely to ebb.

The sector offers immense potential to grow. The impact of the government's increased investments in industrial, infrastructural and agricultural sectors will be reflected over a period of time. This is because, the growth of these sectors is likely to translate into higher demand for intermediate and related goods such as pumps and valves. Since, they support fluid transportation. Though the industry is fragmented, we do not foresee stiff competition in high end products. Thus, with infrastructure projects taking off, players like KSB Pumps would stand to gain.

Our view: It's a well managed company. The management's foresight and the initiatives implemented helped the company sustain financial strength in a difficult year. It has maintained return on capital employed at 25% levels. This is commendable. We expect the company to report ROIC of 25% in future too with an upward bias.

On topline front the company might have reported subdued numbers. However, it has not failed to generate returns on share holders' wealth. It has created value for shareholders'. That too consistently over the economic cycles. We are reviewing our estimates and thus reiterate our positive view on the stock. This is taking into account the future growth prospects, ability to grow even in difficult situations, industry standing and clean balance sheet.

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