Hold Kirloskar Brothers with a target Rs 570: Emkay

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Emkay research has recommended hold rating on  Kirloskar Brothers with a target price of Rs 570.

 

Emkay research report on Kirloskar Brothers

 

Kirloskar Brothers Ltd. (KBL) is the largest manufacturer and exporter of pumps in India. KBL serves to the core sectors of the economy like industrial sector, infrastructure sector, agriculture & irrigation sector and utilities sector. Besides manufacturing of pumps, it also undertakes infrastructure pumping projects. The company is on high growth path with its consolidated net sales and net profit growing at a three year CAGR of 38.5% and 63.7% respectively for the period FY04 to FY07.

 

The continuous inflows of orders have boosted the financials of the company. It has strong order book position of Rs 32 billion that is 1.8 times of FY07 consolidated net sales. Recently one of its joint ventures has received contract worth Rs 7612.4 million for a canal project from Government of Andhra Pradesh which has further strengthened its order book. With an expected CAGR of 41% in its net sales and 38% in net profit over FY07A-FY10E, we remain positive on the long term prospects of the company and recommend hold with the target price of Rs 570.

 

Order book position strengthened with the new order inflows

 

KBL has strong order book position of Rs 32 billion (1.8x FY07 consolidated revenues) which is to be executed in the next 2-3 years. KBL is bagging orders on continuous basis. Recently one of its joint ventures had received Rs 7610 million order for Hindri Niva Sujala Sravanthi canal project from the government of Andhra Pradesh.

 

KBL's share of the contract is worth Rs 1140 million. KBL has also received additional order of Rs 1460 million for the supply of pumps and pumping system from Megha Engineering & Infrastructures. The received orders would strengthen the future financials of the company.

 

Inorganic and organic growth strategy

 

KBL is investing continuously for meeting the rising demand of pumps. In FY07 it incurred a capital expenditure of Rs 810 million and in FY08 it plans to invest Rs.1550 million for meeting expansion plan. The company has adopted organic and inorganic route to support its growth.

 

Recently KBL has acquired Gondwana Engineers which specializes in various water, sewage and effluent treatment plants for Rs 76.3 million. KBL is adopted the organic route to grow by doubling its capacity in the next three years. It plans to expand its existing plant at Kirloskarwadi and Kondhapuri. It is also planning to set up a new factory for the manufacture of hydel turbines.

 

Huge growth opportunity in the pump industry

 

The global pump market stands at approximately over Rs.1.34 trillion (USD30 billion) today and is growing at about 3-4% per annum. It is expected to reach US D36 billion by 2010. Centrifugal pump (in which KBL operates in) comprises 65% of the total pumps demand. The estimated size of the Indian pump market is over Rs.32billion, which continues to grow at over 12-15% in various segments.

 

The Indian pump industry is expected to drive its growth from continuous industrial growth, booming construction and infrastructure development, increasing need of drinking and waste water management from urban areas, special focus by central and state governments on agriculture sector, thrust on irrigation projects and strong demand from nuclear & thermal power projects.

 

Valuation

 

We estimate FY08E and FY09E consolidated EPS at Rs 21.9 and Rs 30.7 respectively. With large scale of operation and fully integrated business model in infrastructure pumping space, we believe that KBL would continue to command premium valuation over its peers. The scrip discounts FY09E consolidated EPS (Rs 30.7) 16x. We are positive on the long term prospects of the company and give hold recommendation with the target price of Rs 570. At our target price the stock discounts 18.5x FY09E EPS.