Jitendra Kumar Gupta Moneycontrol Research
The know-how built over the past 40 years in the fluid engineering business is now expected to yield dividends for Roto Pumps. This little-known company, which is engaged in manufacturing of screw pumps and parts of pumps, could well turn heads soon.
Why look at the stock now?
Over the past few years, it has expanded its reach (particularly in international markets) and added huge manufacturing capacity with focus on high-value products and branding. These past efforts are now expected to yield results.
To put it in perspective, its revenue in the last three years remained almost stagnant at about Rs 95 crore despite the fact that the value of fixed assets rose to Rs 82 crore in FY16 from Rs 40 crore in FY14. It clearly shows that the company still has underutilized assets which can be unlocked further for better sales.
Recently in 2014, the company expanded its large-size pump capacity in Noida. These new additions are capable of generating revenues to the tune of Rs 300 crore at full capacity. This is almost three times its current revenues indicating that there is a lot more headroom for the utilisation to go up leading to significant impact on earnings.
Early signs are visible. In Q4 of FY17, its sales went up 31 percent to Rs 31.3 crore from the year-ago period but profit jumped by whopping 246 percent to Rs 3.33 crore. Since it’s not a seasonal business and there is no one-time income, these numbers speak for a fairly good outlook.
Even at 70 percent of the quarterly profit, the company is likely to report annual profitability to the tune of Rs 9.3 crore on equity of Rs 50 crore.
After adjusting for dividend (on an average the company paid out dividend of Rs 33-93 lakh over five years) its return on equity will move to an excess of 14 percent as against 7.85 percent in FY16.
Today, despite 25 percent operating margin, 10 percent net profit margins and debt-to-equity of 0.7 percent, return ratios are impacted due to low capacity utilizations. However, this could change once global and domestic industrial recovery gathers momentum.
Roto Pumps derives close to 65 percent of revenue from the exports market. It should benefit from any industrial upturn that seems to be showing nascent signs of recovery globally.
In India also, the company is looking at higher-order flows riding on government’s initiatives like Make In India, Smart Cities Mission and reforms in the energy sector. Also, post implementation of the GST, private capex may revive in the organised small-scale sector as well.
Domestic opportunity – not yet harnessed
Roto has a wide range of products. Its PCP (Progressive Cavity pumps) range includes industrial pump, food pump, dosing pump, general-purpose pump and mining pump. The company's products serve various industries, which include sugar, agriculture and cattle, oil and gas, mining, chemicals, among others.
The size of the domestic motor pump market is about Rs 11,000 crore, which is largely dominated by players such as Kirloskar Brothers, KSB Pumps and Shakti Pumps. Kirloskar Brothers is the largest player having an annual sales turnover of Rs 1656 crore. The second largest player in this segment, KSB Pumps has turnover of Rs 827 crore followed by Shakti Pumps with an annual revenue of Rs 264 crore.
Roto with domestic sales of about Rs 33 crore is a much smaller player, but it is growing and has good clients. It has supplied its products to companies like Cairn India, ONGC, Reliance Industries, Indian Navy and Engineers India.
Consistent performer
Despite its small size, the company boasts of a track record of consistency. In the last 10 years it never had negative cash flows from its operations nor has it reported a loss in any of the years. During these years, it had grown equity at 18.50 percent annually without any dilution. It is noteworthy that in the last 15-16 years, it had not skipped dividend in any of the years.
Valuation – bang for the buck
Roto is a good play on India’s capex cycle which is expected to achieve recovery a few quarters down the line. With extremely low debt of Rs 39 crore, the impact of operating leverage on profitability should be significant.
The current market capitalisation is Rs 126 crore on sales of Rs 94 crore, which is quite reasonable considering that there is enough headroom to scale the business. Historically, the company’s assets turnover ratio has been in the range of 2.5 times as against the current levels of 1.1 times.
In Q4FY17, the company reported an EPS of Rs 2.16 per share, if we annualise and on a conservative basis assume that only 80 percent of the same will be achieved, price-to-earnings ratio at current market price of Rs 83 per share works out to a reasonable 12 times. This looks reasonable in the context of the quality of balance sheet and the growth prospects that lie ahead for this company.
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