Buy KSB Pumps; target of Rs 1080: ICICI Direct

ICICI Direct's research report on KSB Pumps

KSB Pumps (KSB) is a leading pumps & valves manufacturer domestically. It realises ~80% of sales from the pump segment and remaining ~20% of sales from the valves segment Within the pumps segment, it realises 35% of sales from the standard product meant primarily for irrigation (agriculture) purposes. It realises remaining 65% of sales from the engineered pump segment (industrial). Hence, it is one of the unique propositions that offers a twin play of agri and industry and would be a key beneficiary of an increase in farm income amid government spends on rural India. KSB has a good product profile (centrifugal pumps, solar water pumps) with a strong brand recall KSB would also be a key beneficiary of a revival of domestic capex cycle particularly the aggressive capex spend envisaged in the oil & gas space (upgradation of refineries) KSB has recently commissioned a new plant (December 1, 2017) which is intended to be used for manufacturing super critical power pumps for power and industrial segments and, thus, provides requisite capacities to grow, going forward KSB has previously supplied pump to NPCIL. Hence, it would be a key contender to supply pumps for new nuclear power plants in India

Outlook

Strong promoter group (KSB AG); levers to grow; retain BUY! KSB is a technology driven organisation with support from parent group i.e. KSB AG. It also realises healthy core RoICs of ~15%+. KSB has a lean balance sheet with surplus cash on books and possesses best in class working capital cycle among its listed peers. Its net working capital cycle constitutes ~50 days, which results in robust cash (CFO) and FCF generation. Over CY17-20E average CFO generation is ~Rs 120 crore, offering an impressive CFO yield of ~4%. With increasing tendering activity being seen in the lift irrigation space and KSB enjoying good brand recall in the domestic and international markets we expect KSB to witness robust sales and profitability growth, going forward. KSB’s last quarter performance was encouraging with higher double digit growth in top line in the pumps segment and resurging profitability in the valves segment, the sustainability of which is likely to result in a further re-rating of the stock. We upgrade our estimates and now expect KSB to record sales, PAT CAGR of 12.4%, 24.2%, respectively, in CY17-19E. We model 200 bps improvement in EBITDA margins largely factoring in operating leverage benefits coupled with margin recovery in the valve segment. We value KSB at 35x P/E on CY19E EPS of Rs 30.7 and assign a target price of Rs 1080 with a BUY rating on the stock.