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KSB Pumps: Other income to the rescue - Views on News from Equitymaster

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KSB Pumps: Other income to the rescue

Aug 6, 2009

Performance summary
  • Revenues decline by 8% YoY in 2QCY09, led by 46% YoY decline in revenues of valves segment.
  • Operating margins contract marginally by 0.6% on account of a less than proportionate fall in the cost of operations.
  • Profit before tax declines by 7% YoY during 2QCY09. The fall in profitability is lower as compared to operating profits, on account of a five-fold growth in other income.
  • Despite poor show at the PBT level, bottomline reports marginal growth of 1.1% YoY owing to lower taxes.
  • Half yearly bottomline grows 3% YoY on the back of a similar drop in topline

Financial performance snapshot
(Rs m) 2QCY08 2QCY09 Change 1HCY08 1HCY09 Change
Net sales 1,512 1,392 -8.0% 2,837 2,740 -3.4%
Expenditure 1,217 1,129 -7.2% 2,331 2,245 -3.7%
Operating profit (EBITDA) 296 263 -11.0% 506 495 -2.3%
EBITDA margin 19.6% 18.9%   17.8% 18.1%  
Other income 6 35 458.7% 27 53 94.8%
Interest 4 8 116.7% 7 14 105.7%
Depreciation 31 42 34.8% 60 82 36.2%
Profit before tax/(loss) 267 248 -7.0% 466 451 -3.3%
Tax 96 75 -21.5% 166 143 -14.2%
Net profit 171 173 1.1% 300 308 2.7%
Net profit margin 11.3% 12.4%   10.6% 11.2%  
No of shares (m)       17.4 17.4  
Diluted EPS (Rs)*         37.7  
P/E (times)         10.5  
*trailing twelve month earnings

What has driven performance in 2QCY09?
  • KSB Pumps, a leading pump and valve manufacturing company, has reported an 8% YoY decline in topline during 2QCY09. The dismal topline growth is a result of the 46% YoY fall in revenues of the valves segment. Pumps and valves account for over 90% of the total revenues, while the rest is contributed by other segment that includes after sales services and assistance in maintenance. The Pump division has reported muted growth of merely 2.6% YoY, the growth in other segment has come in lower by 28.5% YoY during the period under consideration.

  • 60% of the company’s revenues come from project based spends. The growth of the company is dependent upon end-user industries like energy and power. Lower economic growth has led to the deferment of expansion plans of end-user industries. The same can be said to have impacted topline growth.

  • However, going forward, the growth is expected to rise on account of the government’s increased focus and investments in the agricultural sector and infrastructural activities.

  • Softening of steel prices has benefited the company as its cost of consumption of raw materials has declined by 15% YoY. However, the advantage of the lower raw materials costs is not reflected at the operating profits level as employee costs have increased during the quarter. Consequently, operating margins have shrunk by 70 basis points.

  • Profit before tax declined by 7% YoY during 2QCY09. Despite higher depreciation and interest costs, PBT has declined at a slower pace as compared to operating profits. This is on account of more than five-fold growth in other income. Net profits have grown by 1.1% YoY, led mainly by the lower tax outgo.

What to expect?
At the current price of Rs 395, the stock is trading at price to earnings multiple of 7.4 times our estimated CY11 earnings. The half yearly performance of the company has come in lower than our expectations. However, we believe that the impact of the government's increased investments in industrial sector and announcement of stimulus packages will be reflected over a period of time. Nevertheless, at the current juncture, the stock looks fairly valued. Considering the valuation, which is at the fag end of our valuation band, we advise investors' to practice caution.

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