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KSB Pumps: Lacking in foresight - Outside View

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KSB Pumps: Lacking in foresight
May 10, 2010

It is difficult to understand what exactly is the game plan of the management. Slow and steady appears to be the magic mantra for the present. But before we delve into its mindset let's get to the good news. The good news is that the company completed 50 years of operations in India in 2009 and celebrated the occasion in style by declaring a record dividend payout of 125% against 55% in the preceding year. No bonus shares though!!!!

Not surprisingly the two principal shareholders - the parent KSB of Germany which holds 41% of the equity and the Swarups of Paharpur Cooling Towers who hold 26% - were the principal beneficiaries of the board's largesse

Now for the not so good news. Sales for the year declined to Rs 5.8 bn from the preceding year's not very significant figure if Rs 6 bn. Miraculously enough its gross and net profits registered a rise in a year in which the management claims was fraught with difficulties-what with the recessionary and economic slowdown in the advanced nations.

This claim does not necessarily hold much water as the Indian operations were shielded from any demand slack and, even in respect of its export sales which are fairly considerable and, showed no decline over that of the preceding year.

Margins improved the mgmt says due to a variety of tricks that it was able to deploy-effective cost control measures, as also the margins emanating from past orders. A not insignificant saving in expenses came from the drastic fall in royalty payments -with outflow on this account falling to Rs 4.6 m from Rs 27.8 m in the preceding year - a point not highlighted by the directors.

The company is a tightly run ship for sure. But it helps that it is midget sized to boot - the operations are small beer by any standards considering the spread of industries that it caters to. It makes assorted power driven industrial pumps and valves for a humungous variety of industrial sectors, ranging from the agricultural sector, energy, oil and oil related biz and, waste water and sewage projects (all infrastructure projects). It can't get any broader than this.

By its own admission it appears to be a bit player in its field. The directors' lament that there are more than 500 manufacturers in the pump sector which is characterised by a flood of SSI units and MNCs. Quite a contradiction here. In all probability therefore the products on offer by KSB has no particular brand equity. This is even more surprising in the context of the almost worldwide operations of the parent-the Indian operation has dealings with an eclectic range of KSB units across the globe. Obviously then the parent does have technology on offer.

Given the possible scale of operations that it can rustle up, the vast market at hand, and the margins that it brings in, per se, one wonders at the 'go slow' by the management. The marginal addition to installed capacity of its pumps unit to 1.5 lakh units was almost flogged to full capacity during the year though there was a notable slack in the mfg and sale of valves. Backward integration into foundry manufacturing helps to monitor quality issues on the raw material front. Sales of pumps rings in 75% of all sales while valves bring in another 15%.Service income and the like brings in the balance moolah.

The company is a mass of contradictions. Though it appears to have a wide medley of competition in the marketplace, the company is still able to squeeze customers and get them to part with advance payments for future deliveries. It has also done the very opposite of what comapnies do in a slack marketplace. That in itself is a test book lesson for other corporates.

Consider what it did. It reduced debtor outstanding, kept trade creditors at bay, reduced inventories sharply, and thus generating more cash from operations. This generation of resources was promptly used to reduce borrowings to a meagre Rs 75 m from Rs 313 m previously. Thus reducing the interest burden.

The question that begets is, if the company can resort to gymnastics of such a high order in bleak times - why did it not do so when the going was in its favour?

Amazingly enough with the KSB brand in its pocket the company sells its products through sole selling agents. The company paid a cool Rs 114 m on this count, though down from Rs 140 m in the preceding year. Why then pray does it simultaneously employ a highly paid marketing and sales director?

There is really very little to commend this share given its present state. Disclosure: Please note that I am not a shareholder of this company

This column "Cool Hand Luke" is written by Luke Verghese. Luke has been a business journalist, financial analyst and knowledge management head with a professional experience of more than 20 years. An avid watcher of the stock market, he has written extensively on stock market trends. His articles have featured in Business Standard, Financial Express and Fortune India amongst others. He has also been the Deputy Editor, Fortune India and the Financial Editor of The Business and Political Observer.

The views mentioned above are of the author only. Data and charts, if used, in the article have been sourced from available information and have not been authenticated by any statutory authority. The author and Equitymaster do not claim it to be accurate nor accept any responsibility for the same. The views constitute only the opinions and do not constitute any guidelines or recommendation on any course of action to be followed by the reader. Please read the detailed Terms of Use of the web site.
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