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KSB Pumps: Margins disrupt the flow - Views on News from Equitymaster
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KSB Pumps: Margins disrupt the flow
Aug 4, 2011

KSB Pumps has announced its June quarter results. The company has reported a 23% growth in topline and 27% YoY fall in net profits for the quarter ended June 2011. Here is our analysis of the results.

Performance summary
  • Topline grows by 23% YoY during the quarter
  • Operating margins contract by 7% as higher raw materials expenses take toll
  • Bottomline suffers a fall of 27% YoY on the back of poor operating performance
  • Half yearly bottomline falls 30% YoY despite a robust 22% growth in topline


(Rs m) 2QCY10 2QCY11 Change 1HCY10 1HCY11 Change
Net sales 1,528 1,882 23.2% 2,912 3,544 21.7%
Expenditure 1,303 1,738 33.4% 2,472 3,248 31.4%
Operating profit (EBDITA) 225 144 -36.0% 440 296 -32.8%
EBDITA margin (%) 14.7% 7.7%   15.1% 8.4%  
Other income 47 63 33.4% 61 86 40.2%
Interest (net) 1 3 277.8% 3 7  
Depreciation 52 54 4.5% 100 107 6.6%
Profit before tax 220 150 -31.8% 399 268 -32.8%
Extraordinary items - -   - -  
Tax 61 34 -44.4% 123 74 -40.0%
Profit after tax/(loss) 159 116 -27.0% 276 194 -29.6%
Net profit margin (%) 10.4% 6.2%   9.5% 5.5%  
No. of shares (m) 17.4 34.8   17.4 34.8  
Diluted earnings per share (Rs)*         12.5  
Price to earnings ratio (x)*         18.5  
(* on trailing twelve months earnings)

What has driven performance in 2QCY11?
  • Company's topline managed to grow by a decent 23% YoY during the quarter. This was driven by both its major segments viz. pumps and valves. These managed to grow by 20% and 43% respectively on a YoY basis. The overall growth during the quarter was slightly higher than that witnessed in the first quarter and the fact that it came in an even more challenging environment makes it noteworthy.

    Cost break-up...
    (Rs m) 2QCY10 2QCY11 Change 1HCY10 1HCY11 Change
    Raw materials 686 961 40.1% 1,348 1,806 33.9%
    % sales 44.9% 51.1%   46.3% 50.9%  
    Staff cost 229 278 21.5% 439 526 20.0%
    % sales 15.0% 14.8%   15.1% 14.9%  
    Other expenditure 388 499 28.8% 685 916 33.7%
    % sales 25.4% 26.5%   23.5% 25.8%  

  • As far as margins are concerned, they took a knock of a huge 7% over the same quarter last year. This was mainly on account of raw materials expenses that shot up 40% YoY. On account of lack of pricing power, the company was able to pass on very little of this increase and hence, the huge fall in margins. On a segmental basis, the pumps division suffered huge margin erosion to the tune of nearly 8%. At 1.2%, the fall in margin of the valves division was comparatively quite less.

  • PBT for the quarter fell less than the operating profits owing to a 33% increase in other income. While interest cost shot up, it was on a very low base and hence, hardly had an impact. While company's total debt went up nearly three fold, the debt to equity ratio is still placed at a pretty comfortable 0.05 times. Net profits for the quarter fell by 27% YoY. The decline was stemmed to some extent by the lower tax rate.

    Segmental break up...
    Segment 2QCY10 2QCY11 % change 1HCY10 1HCY11 % change
    Pumps
    Revenues 1,252 1,507 20.4% 2,410 2,824 17.2%
    PBIT 167 82 -50.9% 350 170 -51.5%
    PBIT margin 13.3% 5.4%   14.5% 6.0%  
    Valves
    Revenues 253 361 42.6% 469 691 47.4%
    PBIT 16 18 15.3% 11 46 316.4%
    PBIT margin 6.2% 5.0%   2.3% 6.6%  
    Others
    Revenues 82 139 69.3% 163 238 46.1%
    PBIT - (0.9)   (1.1) (2.7)  
    PBIT margin N.A. N.A.   N.A. N.A.  
    Excl. inter segment revenues and other unallocable income net of unallocable expenditure

What to expect?
At the current price of Rs 232, the stock trades at a multiple of around 11 times its expected CY12 earnings per share. It should be noted that we had revised the target price of the company to Rs 316 per share. On account of the buoyant topline growth and expectations that margin would improve in the forthcoming quarters on account of easing of raw materials cost pressure, we maintain our positive view on the stock.

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