pick of the month vol-4, no-6 ksb pumps …reports.progressiveshares.com/researchreports/fr...and...

OVERVIEW: Industry- Pumps and Valves: A pump is a device that moves fluids, or sometimes slurries, by mechanical action. Pumps operate by a mechanism (typically reciprocating or rotary), and consume energy to perform mechanical work by moving the fluid. Pumps operate via many energy sources, including manual operation, electricity, engines, or wind power, come in many sizes, from microscopic for use in medical applications to large industrial pumps. (as per Wikipedia).

A valve is a device that regulates, directs or controls the flow of a fluid by opening, closing or partially obstructing various passageways. Valves are technically fittings, but are usually discussed as a separate category. The three common valve functions include stopping and starting flow, throttling (control) flow, and acting as a non-return check for flow (checking the direction for flow). Classification of Pumps: The pumps market is broadly classified into two categories: Industrial pumps, which cater to infrastructure sectors; and Agriculture and Domestic pumps. On the basis of the type of pumps; the market is segmented into Centrifugal pumps and Positive Displacement pumps.

Centrifugal Pumps are widely used due to the inexpensive manufacturing cost and simple working system. These constitute about 95% of the market (with single stage radial flow pumps and submersible pumps together make up 70%) widely used for increasing the flow rate of the liquid. On the other hand, Positive Displacement pumps are used for maintaining the flow rate of the fluid and comprise of the remaining 5% of the market. The main difference between the two types of pumps is that positive displacement pumps will move fluid at the same speed regardless of the pressure on the inlet end (flow is constant with changing pressure) and centrifugal pumps will not. With regards to the efficiency, Positive displacement would have increase in efficiency with increase in viscosity and pressure, while for the centrifugal, efficiency decreases with increase in viscosity and peaks at the best efficiency point (at higher and lower pressure the efficiency decreases). Pumps and their various components are made up of a number of different materials. Some of the common materials used are cast iron, plastics, steel and stainless steel. Other materials used in pump construction include aluminum, brass, bronze, ceramics, nickel-alloy.

CMP: Rs.820 TARGET PRICE: Rs.1100 TIME : 12 months

SNAPSHOT

52 week H / L Mcap (INR mn)

936 / 659 28,542

Face value: 10

BSE Code NSE CODE

500249 KSBPUMPS

Annual Performance

(Rs mn) CY15 CY16 CY17 CY18E

Sales (Net) 8,188 8,248 9,443 10,415

EBITDA 1,041 1,053 1,075 1,302

EBITDA (%) 12.7 12.8 11.4 12.5

Other Income 309 262 317 167

Interest 17 32 37 53

Depreciation 278 294 309 409

PBT 1,055 990 1,047 1,007

PAT 698 653 677 655

Equity ( Rs mn) 348 348 348 348

EPS (INR) 20.1 18.7 19.5 18.8

Ratio Analysis

Parameters (Rs mn) CY15 CY16 CY17 CY18E

EV/EBITDA (x) 25.3 26.9 26.5 21.9

EV/Net Sales (x) 3.2 3.4 3.0 2.7

M Cap/Sales (x) 3.5 3.5 3.0 2.7

M Cap/EBITDA (x) 27.4 27.1 26.5 21.9

Debt/Equity (x) 0.002 0.01 0.1 0.1

ROCE (%) 19 16 16 15

Price/Book Value (x) 5.2 4.6 4.3 4.1

P/E (x) 40.9 43.7 42.2 43.6

Share Holding Pattern as on 31st March, 2018

Parameters No of Shares %

Promoters 23,114,306 66.41

Institutions 6,682,345 19.20

Public 5,011,193 14.39

TOTAL 34,807,844 100.00

Quarterly Performance

Parameters (Rs mn) Jun-17 Sep-17 Dec-17 Mar-18

Sales (Net) 2,102 2,005 3,282 2,125

EBITDA 238 211 423 198

EBITDA (%) 11 11 13 9

Other Income 71 53 97 77

Interest 1 6 7 5

Depreciation 74 76 85 97

PAT 154 116 274 112

Equity ( Rs mn) 348 348 348 348

Note: All the data is calculated as per Market Price on 15th June 2018

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KSB Pumps Limited

June 18, 2018 PICK OF THE MONTH VOL-4, NO-6

Please Turn Over

BUY

Exhibit: Classification of Pumps:

Source: FICCI

Source: Annual Report


KSB Pumps Limited


BUY

Page No 2 Please Turn Over

Industries catered: Agricultural sector is the largest source of demand for Pumps in India. The other industries catered include: Power generation Building services Oil & Gas Water and Waste water Metals and mining Construction

As per industry sources, the global pump market size is pegged at USD47bn as of 2014 and is expected to reach USD56bn in 2017, growing at a CAGR of 6.0% in CY14-17E. The Indian pump market size is pegged at ~Rs10,400cr as of 2014 and expected to grow at a CAGR of 5% in FY14-19E to Rs13,273cr in FY19E.

Also, the Indian Water Pumps (Centrifugal Pumps & Positive Displacement Pumps) is expected to cross USD3.2bn by 2023. (As per industry reports). Key drivers for growth: Growth in the infrastructure space Increase in the urban density New sources of water to be tapped: equitable distribution of water, interlinking of water Growth across the different end user industries

On the other hand, the industry faces the challenges of rising input costs that lead to price sensitivities and margin pressures. Any economic slowdown could impact infrastructure investments which in turn will reduce the demand of pumps. About the company: KSB AG (Klein Schanzlin & Becker) has three companies in India - KSB Pumps Limited, KSB Tech Pvt. Ltd and MIL Controls Ltd. As a global player, KSB provides services and produces complete hydraulic systems for the transport of water and waste water across industries. KSB AG (Germany) is one of the largest pump manufacturers with sales in excess of €2.2bn (~USD2.8bn) out of the total pump market, which is pegged at USD47bn as of 2014. Our company of interest; KSB Pumps Limited (KSB), is promoted by KSB AG. It was established in 1960 by setting up a pump manufacturing facility in Pimpri, Pune (Maharashtra). The company has been at the forefront of importing technology from its parent for delivering cutting edge and high quality products into the domestic market. It is engaged in the business of manufacture of power driven pumps and industrial valves. In India, KSB supplies pumps and valves to all major industries i.e. energy, oil and gas, water, waste water treatment, agriculture, process industries, construction, etc. KSB‟s products are used for pumping, transportation and flow control of fluids, which include clean or contaminated water, explosive fluids, corrosive and viscous fluids, slurries and fluid or solid mixtures. The company has Mr. G Swarup as the Chairman and Mr. Rajeev Jain as the Managing Director of the Company. KSB Tech Private Limited has been formed as a 100% subsidiary of KSB SE & Co. KGaA to meet its global requirements of engineering inventions, designs, renovations, improvements and of developing and improving computer software, firmware and information technology programs useful for its business and activities.

MIL Controls Limited (Associate with 49% by KSB with an investment of Rs62.65mn) , a KSB production facility, offers Control Valves and Actuators for all process Industries and has a marked presence in the nation‟s power stations, oil refining (upstream & downstream), petrochemical and fertilizer plants and other industry segments. With an installed base of more than 1,70,000 control valves, MIL is a leading supplier of control valves in the Energy as well as Industry segments. MIL reaches out to customers across the globe through the widespread KSB network. Pofran Sales and Agency Limited is 100% subsidiary of KSB Pumps, India. Manufacturing base: KSB operates through 6 manufacturing plants located in Pimpri, Chinchwad, Khandala, Vambori, Sinnar and Coimbatore. Five existing plants are currently working at 85-90% capacity utilization. Through these facilities, KSB has been manufacturing and supplying Power Driven Centrifugal Pumps and Industrial Valves, to cater to customers from the Water and Waste Water; Agriculture; Construction; General industries; Oil, Refineries and Petrochemicals; and Power Plants including Super Critical Power Plants and Nuclear Power plants.

Source: FICCI Report

Exhibit: Industry Breakup:


KSB Pumps Limited


BUY


Business Segments:

The Company's operational segment includes Pumps segment (83% of the revenues), Valves segment (17% of the revenues) and others. Castings are mainly produced for captive consumption. The company enjoys around 9% market share in the Pumps industry. The Pumps segment includes manufacturing or trading of all types of pumps, such as industrial, submersible, effluent treatment, and spares and services. The Valves segment consists of manufacturing and trading of industrial valves, and spares and services. The others segment is engaged in the manufacturing of castings. The Company offers submersible pumps and waste water pumps or circulator pumps, among others. It provides solutions for various areas of automation and drive technology. Its products and services are designed for industry, building services and process engineering applications, as well as for the waste water and water sector, mining and energy applications.

INVESTMENT RATIONALE: (A) Different divisions: One stop solution: The company has different divisions which are defined according to different product segments that it caters. (i) Irrigation and Process Division (Pimpri Pune): KSB caters to the wide ranging pump needs of water supply and treatment, drainage, sugar, pulp and paper and chemical process including petrochemical industries. This division has pumps that include Chemical Process, Multistage High Pressure, Non Clog Pumps and special pumps for Refineries. (ii) Power Projects Division (Chinchwad, Pune): Through this division, the company is supplying high precision pumps to Hydro, Thermal, Co-Gen; Nuclear and Supercritical Ultra Mega Power Plants globally. Products manufactured include, Primary Heat Transport Pumps (PHT); Primary System Feed Pumps, Residual Heat Removal Pumps, Primary Pressurising Pumps, Main Boiler Feed Pumps, Multi-stage Condensate Extraction pumps, Re-heater Drain Pumps and Auxiliary Boiler Feed Pumps to cater to the Indian power needs. (iii) Energy Pumps Division (Khandala, Satara): Key features of this plant is: the material handling capabilities of upto 80 tons, power availability expandable up to 10MW from 6MW, can easily handle products up to 13 meters height, Assembly and final aggregate is in a dust free environment by pressurizing the shop, state-of-the-art testing facilities include - hot water testing; thermal shock; dry running; string test etc.; zero discharge facility making the plant environment friendly. (iv) Standard Pumps Division (Sinnar Nashik): Currently, the Standard Pumps Division produces standard bore well submersible pump sets ranging from 100-350 mm sizes, sewage handling pumps, and standard industrial pumps in the end suction and multistage constructions. (v) Foundry Division (Vambhori, Ahmednagar): The production line features quality castings in Ferrous Alloys like CF8M and CF3M for corrosive fluids, CA6NM for boiler feed and mildly corrosive fluids, GSC25 / WCB for refineries and high temperature fluids; NiCI for caustics, alkalis and basic salts apart from Cast Iron. The non - ferrous alloys include LTB2, and Zinc free Bronze like CuSn10. (vi) Valves Division (Coimbatore): High quality valves for Steam and Process fluid applications across the industry segments. KSB SICCA ranges of valves are in operation in a wide spectrum of Industries for Feed Water, Super-Heated Steam, Process Steam, Thermic fluids and other process fluids.

Exhibit: Breakup of revenues as per segments


Exhibit: Domestic Exports breakup



KSB Pumps Limited


BUY


INVESTMENT RATIONALE:

(B) Presence across different fields of application: KSB Pumps and Valves have presence across all the major applications that come to mind, like industrial processes, water transport or energy conversion. It is the expertise and technical skills that the company masters are the key.

(C) New Product launches: To address the newer markets, a variety of products are introduced in submersible, domestic and standard industrial pumps segments. It clearly indicates that the company is abreast with the requirements of different customers & markets.


Source: Company’s Website

Exhibit: Different fields of application:

Exhibit: Recent Product launches:


KSB Pumps Limited


BUY


INVESTMENT RATIONALE (contd.)

(D) Growth through diversification: With the company catering to multiple industries through its diverse product portfolio; there is no dependency on a single industry, which helps it retain its market share. Moreover, KSB is among the few players in India with product offerings which are highly specialized towards process industries like power generation, oil & gas and chemicals. The portfolio mix meets some of the stringent global standards like German Institute for Standardization (DNI), American National Standards Institute (ANSI) and American Petroleum Institute (API) for supply of pumps and valves for use in process industries. All of this insulates the company from the downturn across specific industries catered and garner the maximum from across different industries. (E) Orders keep flowing: Shows conviction: KSB has bagged an order worth Rs4.1bn from the Nuclear Power Corporation of India (NPCIL) to deliver coolant pumps and electric motors (8 nos. Primary Coolant Pumps - RSR 400/2 with related accessories) for the nuclear power plant that is being set up in Haryana. Delivery of these pumps is expected to begin from June 2021 with a target to complete the order by March 2023. This is in tandem to the Indian Government‟s ambitious growth plans in the energy sector, and the aim to raise contribution in indigenous manufacturing under „Make in India‟ initiative. KSB‟s technical expertise came to the forefront after it became the only company to win an order from NPCIL in the pumps segment, adding to the conviction in the working capabilities of the company. This order entails the delivery of super critical pumps over 2022-23E thereby highlighting KSB‟s ability to play an important role in the nuclear power sector. Further, the management has indicated a healthy 8-10 months order book to the tune of ~Rs8bn which adds to the conviction in the operations. KSB began commercial production at its manufacturing facility in Shirwal (Dec 2017) where it intends to manufacture super critical pumps. This was done at a capex of about Rs1bn and the company intends to incur similar capex over the next 2 years as well for the phase-2 of the facility. As per the company, it is envisaged to reach capacity utilization of ~70% by end of CY18E. The incremental capacity provides the company with ample levers to grow and service its strong order backlog. (F) Benefit from Govt Initiatives: Time and again, the central government has emphasized on its aim to double the farm income by 2022, to be attained through better productivity and enhanced farm realisations. With limitation of land, better productivity has to be the focus. The need is to increase the irrigation penetration (currently at around 45%) to have better farm productivity, more significant in the present times of uneven distribution and increasing volatility over occurrence of monsoon. Further, the government‟s directive to ensure minimum support price (MSP) at 1.5x the cost of production for key crops domestically and a wider e-NAM network, is likely to result in healthy farm income. The government is providing further impetus to the irrigation space by increasing its total allocation under its flagship programme PMKSY (Pradhan Mantri Krishi Sinchayee Yojana). KSB being one of the leading pump manufacturers domestically with a quality product profile and strong brand recall will be a key beneficiary of an increase in farm income and the government‟s impetus on increasing irrigation penetration domestically. (G) Strong Order Positioning: The current order book of the company is to the tune of ~Rs7.1bn. The company expects strong ordering from the oil, petrochemicals and industrial segments over the next two years. It expects to generate 60% of its pumps revenue from the technology-intense industrial-pumps segment. Nuclear power plant orders are expected to show strong growth in CY19. Also a favourable monsoon is expected to generate strong growth in standard pumps. The order inflow is expected to increase going forward as well from the segments mentioned coupled with the order from NPCIL, which collectively gives a strong revenue visibility over the next 2-3 years. Also, although the pricing scenario continues to remain challenging, most of the growth will be volume-led from sectors such as oil & gas, waste water treatment, construction and nuclear power. In a strong capex mode: KSB is in capex programme of ~Rs2.3bn in phases to set up a manufacturing facility for pumps for super critical power plants. The company has successfully commissioned phase-1 by incurring a capex of Rs1.2bn in CY17, which largely consisted of de-bottlenecking the Chinchwad plant. Phase-2 and Phase-3 will focus on increasing the manufacturing capacity. Thereby, the blend of strong order book with the capex incurred as well as chalked for the future should augur well for the company going forward. Financials: Improvement on the net sales: The company reported growth of 14.5% in CY17, the highest sales reported in the last 6 years. This was mainly led by the strong order inflow from the Oil & gas, standard industrial pumps and Valves segment. This was despite the slowdown witnessed in the Agri-business due to demonetization, GST headwinds and continuous pricing pressure by both organised and unorganised competitors.


Exhibit: Sales (Rs mn)


KSB Pumps Limited


BUY


Financials (contd.) Sales Mix: Over the last 2-3 years, there has been a change in the sales mix of the company with the customised pumps decreasing from 70% to 50% of the revenue contribution. This has also led to the rejig in the margins accordingly. The company is also working towards increasing the aftermarket and servicing sales from 15% to 30%.

We expect that growth across the pumps segment should be led by revival in industrial activity and irrigation penetration domestically. With regards to the Valves segment; KSB is one of the leading manufacturers of industrial valves. In-spite of being a reliable brand, the profitability is subdued due to the enhanced presence of the unorganised segment, thereby resulting in increased competition. The profitability has been under pressure, however there has been turnaround seen from the sales in CY17 (growth of 12% y-o-y). Going forward, we do expect not a rapid though but gradual pick up from the Valves segment. Other Financial Triggers: Working Capital: The Company has a strong working capital management in comparison to its peers. (CY17 around 110 days). This indicates the turnaround time of the company being better off compared to other players. Also as the company has no exposure to the project/EPC business in India with strong focus on product business, the WC cycle ought to be under control. Debt Free: The Company is virtually debt free except for the short term borrowings needed for the operations part of the company. This also gives it an edge as a key player in the industry. Net Profits under pressure: With the margins contracted, the net profits also saw contraction in the last couple of years. The drop in the Ebidta margins was attributed to the high commodity prices and an unfavorable sales mix. Q1CY18 Results: KSB reported a flat Q1CY18 performance mainly due to the deferral of certain power sector orders to the following quarters. The total income in Q1CY18 came in at Rs2,125mn, growth of 3.4% with the pumps division down by 0.8% y-o-y while valves division on the other hand up by 23.3% y-o-y. Muted Ebidta margins were attributed to poor sales growth in pumps coupled with raw material cost pressures. Lower PAT, down by 16% y-o-y was due to higher depreciation post commissioning of new facility amid higher than expected other income. Our projections for CY18E: Mainly due to the one off other income in CY17 which pertains to the sundry write back, our projections do not account for that and hence we get the profits as de-growth. If one normalizes the other income, it will be growth of mid-teens at the net level.

Exhibit: NWC Cycle


Exhibit: Sales Mix


Exhibit: Pumps & Valves Mix



KSB Pumps Limited


BUY


Risks and concerns: The competition is expected to be aggressive leading to increasing pricing pressures. Uncertainty across global economic growth is expected to impact the growth rate in India and consequently the Company‟s operations. The growth in the industrial sector depends on government policies, better infrastructure, removal of labour market rigidities while growth in the agricultural sector would depend on favourable monsoons and effectiveness of implication of Government policies to boost income of farmers. Outlook and valuations: With incremental capacity in place and pick-up in the industrial activity; KSB is on a strong footing with robust prospects, going forward. It is best placed to capture the envisaged opportunity in the domestic refining segment (change in fuel efficiency), revival of domestic capex cycle and increasing thrust on irrigation projects (lift irrigation). With the waning of GST impact and good monsoon expected; we expect that CY18 should be a good growth year for the company. Overall, we feel that there should be improvement in the performance of the company in tandem to the growth triggers chalked for the company and the industry as a whole. We initiate BUY on the stock with a target price of Rs1,100 over a 12 months horizon.

Exhibit: KSB Pumps vs Nifty

Source: Ace Equity

Exhibit: One year forward P/E

Source: Ace Equity

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