KSB Pumps

KSB Pumps

Tata Chemicals, Patels Airtemp, Jindal SAW, KSB Pumps, Sanghvi Movers, BL Kashyap, HCL Technologies, BASF India, Navneet Publications, Ranbaxy Labs,

Tata Chemicals, Patels Airtemp, Jindal SAW, KSB Pumps, Sanghvi Movers, BL Kashyap, HCL Technologies, BASF India, Navneet Publications, Ranbaxy Labs, Madras Cement

Wockhardt, Bharti Airtel, KSB Pumps,Gateway Distripaks, Nucleus Software Exports, Andhra Bank

Wockhardt, Bharti Airtel, KSB Pumps,Gateway Distripaks, Nucleus Software Exports, Andhra Bank

JP Associates, KSB Pumps, Sun Pharma

Sun Pharmaceutical Industries
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs1,475
Current market price: Rs1,252

Exclusivities galore!

Key points

• Sun Pharmaceuticals (Sun) has received the final approval from the US Food and Drug Administration (USFDA) for its abbreviated new drug application (ANDA) to manufacture and market Amifostine injection 500mg, the therapeutic equivalent of MedImmune's Ethyol. Being the first to file an ANDA for generic Ethyol with a Para IV certification, Sun has been awarded a 180-day marketing exclusivity for the product. We do not exclude the possibility of an at-risk launch by Sun, in which case Sun could generate $14 million in revenues, leading to incremental earnings of Rs1. 4 per share.
• The company has received tentative approval for generic Gemzar, for which it had filed an ANDA containing a Para IV certification. Gemzar, or generic gemcitabine injection, is Eli Lilly's anti-cancer drug with annual sales of $680 million in the USA. According to our calculations, the launch of generic Gemzar under exclusivity for 180 days could yield revenues and profits of $51 million and $25 million respectively, translating into incremental earnings of Rs4.8 per share for Sun.
• In the last one month, Sun has received three final approvals from the USFDA--for benzonatate capsules, fosphenytoin sodium injection and torsemide tablets. Additionally, Sun has also received tentative approval for divalproex sodium delayed release tablet, which is the generic version of Abbott's anti-epileptic drug, Depakote, with annual sales of $755 million. We expect the final approval for generic Depakote to come through in July 2008, upon the expiry of the patent. However, the market for this product is crowded with numerous players already having tentative approvals and hence we expect the gains from this product to be limited.
• There are two positive developments related to Sun's bid to acquire Taro Pharmaceuticals (Taro). On the one hand, Sun has acquired the 9.4% stake of Brandes, which is one of the major institutional investors in Taro and was opposing Sun's bid for Taro. Following the acquisition, Sun's stake in Taro has increased from 25% earlier to 34.4%. On the other hand, Taro, in its declaration of its preliminary unaudited financials for CY2007, has reported a very strong operating performance, which is positively surprising. The Taro acquisition is not part of our current estimate and will provide upside to our FY2010 earnings estimate, if Sun is successful in its bid.
• With the base business performing well, clarity on the launch of generic Effexor XR under exclusivity, the receipt of USFDA approval for and the subsequent launch of generic Gemzar, the potential launch of generic Ethyol under exclusivity and the progress on the Taro acquisition will act as near-term triggers for the stock. At the current market price of Rs1,252, Sun is valued at 25.1x FY2008E and 19.4x FY2009E fully diluted earnings. We reiterate our Buy recommendation on the stock with a price target of Rs1,475.

KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs451
Current market price: Rs307

Price target revised to Rs451

Result highlights

• KSB Pumps' Q4CY2007 results were slightly ahead of our expectations, both on the top line and the profitability front. The net sales for the quarter rose by 21.7% to Rs131.8 crore.
• After a couple of disappointing quarters, the profitability improved substantially during this quarter as the overall margin improved by 60 basis points year on year (yoy) and by 770 basis points sequentially to 19.1%. On a segmental basis, the profit before interest and tax (PBIT) margin of the pump division rose to 15.6% (up 220 basis points yoy and 860 basis points sequentially) while that of the valve division stood at 25.1% (down 30 basis points yoy but up 610 basis points sequentially).
• We believe that the profitability of the company improved on the back of higher contribution of the project business, which carries higher margins. We understand that the order book of the company in the project business is growing at about 40% yoy. Considering this, we continue to expect strong revenue booking in the subsequent quarters also.
• A higher other income, stable interest and depreciation costs, and lower taxes led to a 62.1% growth in the net profit to Rs19.6 crore.
• In view of the slower growth this year, particularly in the first nine months, we are downgrading our earnings estimate for CY2008 by 18.8% to Rs32.2. We shall introduce our CY2009 estimate in our subsequent update.
• Considering the buoyancy in its user segments, particularly refineries and the power sector, we maintain our positive outlook on the company. At the current market price of Rs307, the stock is trading at 9.5x its CY2008E earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 5.2x. We maintain our Buy recommendation on the stock with a revised price target of Rs451.

Jaiprakash Associates
Cluster: Ugly Duckling
Recommendation: Buy
Price target: Rs390
Current market price: Rs233

Stake sale in Jaypee Infratech

Key points

• ICICI Bank buys 1% stake in Jaypee Infratech Ltd (JIL) for Rs250 crore, thereby valuing the company at Rs25,000 crore. This is largely in line with our estimates of Rs24,400 crore. JIL also obtains long term financing of Rs900 crore from ICICI Bank.
• The stake sale and closure of long-term financing from ICICI Bank is a positive development both in terms of raising required resources and boosting investor confidence.
• At the current market price, the stock is trading at 41x its estimated FY2009 earnings. We have revised the sum-of-the-parts (SOTP) based price target to Rs390 to reflect the de-rating of some of its businesses in line with the prevailing market conditions. We maintain our Buy call on the stock.

Friday Telefolio Plus - KSB Pumps

Friday Telefolio Plus - KSB Pumps

KSB Pumps: Buy

Long-term investments can be considered in the stock of KSB Pumps, one of the leading players in the organised pumps and valves market.

At the current market price, the stock trades at about 12 times its expected calendar year 2008 per share earnings. Given the increase in capex across user industries such as power generation and refineries, we believe the revenue visibility of KSB is likely to remain buoyant.

In addition to this increased sourcing by its parent company, the tactical shift in product mix and an increase in capacity lend more confidence to its growth prospects over the long term.

Investment Rationale

KSB is among the leading manufacturers of pumps and valves in India. The pumps division, which caters to the agricultural, industrial and services segments, is likely to benefit from the favourable investment climate across user industries, besides the government's increased outlay towards irrigation and water resource management. For the year ended December 2006, the pumps division recorded 8 per cent growth in topline, contributing about 71 per cent of the total sales. In the absence of any negative growth triggers, this division is likely to sustain stable revenue growth. The valves division, on the other hand, with a perceptible increase in overall contribution, is likely to drive growth. Given the increasing demand for valves from industrial users, KSB's decision to dedicate its Coimbatore plant for making valves appears right. The division contributed about 23 per cent of the total sales and recorded a double-digit revenue growth of 30 per cent in CY-06.

KSB, given its established presence in the market, is likely to capitalise on any opportunity that might arise from the on-going capex across power generation and petrochemical industries. In addition, the high-wear condition in such industries is also likely to result in a good replacement market for its products. The competition in this segment is fairly low since pump manufacturers catering to the refineries and petrochemical industries are required to conform to the API (American Petroleum Institute) standards.

On the exports front, revenues are likely to improve, given the increased sourcing by KSB AG, its parent company. This has not only helped KSB diversify its target market, but also improve the overall realisation for its products. Also, the export of submersible pumps has helped decrease seasonal influences on its business, due to monsoons.

Financials

For the full-year ended December 2006, while the total revenues grew about 13 per cent compared to the corresponding previous period year, earnings rose 36 per cent. The operating profit margins improved by 230 basis points to 20.4 per cent, leading to a 27 per cent increase in operating profit.

Operating margins are likely to improve thanks to the plant automation programme undertaken by KSB. This would decrease engineering time, leading to an increase in the company's operational efficiency.

Concerns

Any slowdown in the capex plans of user industries is likely to affect the growth of KSB negatively. Also, any unprecedented volatility in raw material prices could also affect the company's earnings. However, KSB's ability to pass on raw material price hikes to its customers offers some respite.

Sharekhan Investor's Eye dated March 23, 2007

KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs650
Current market price: Rs518

Strong performance

Result highlights

• KSB Pumps delivered good results for Q4CY2006. Its net sales grew by 24.9% to Rs108.3 crore during the quarter. There was a delay in the dispatch of certain orders in the previous quarter; the delayed sales got reflected in the fourth quarter, boosting the Q4CY2006 performance.
• On segmental basis, the revenues of the pump business went up by 16.2% to Rs78.9 crore while that of the valve business grew by a strong 57.7% to Rs28.7 crore. However, the margin in the pump business declined to 13.4% from 15.3% last year, while the profit before interest and tax (PBIT) margin in the valve business grew by 120 basis points to 25.4%.
• Overall, the operating profit grew by 24.2% to Rs20 crore, while the operating profit margin (OPM) was stable at 18.5%. This despite a steep hike in the raw material cost, which rose from 41% in the same quarter last year to 46.4%. However, substantial savings were made in the staff cost and other expenses.
• The profit after tax (PAT) for Q4CY2006 rose by 42.4% to Rs12.1 crore. For CY2006, the OPM grew to 20.4% from 18.1%, while the full years' PAT grew by 38.3% to Rs51.6 crore.
• Sales are traditionally better in the first and second quarters for pump makers because of seasonal factors. Hence, we should expect even better results from the company in the coming quarters, both in terms of revenues and margins.
• The pumps industry is set to benefit from the huge investments being planned in the user industries, particularly power and petrochemicals. KSB Pumps, enjoying a 12% market share, would be one of the key beneficiaries of the same and hence we expect the growth momentum to sustain going forward. We are introducing our CY2008 earnings per share (EPS) estimate at Rs46 for KSB Pumps. At the current market price of Rs518, the stock quotes at CY2007E price/earnings ratio (PER) of 11.3x and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.2x. We maintain our Buy recommendation on the stock with a price target of Rs650.

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SECTOR UPDATE

Banking

Revised guidelines on CAR of banks
The revised guidelines on the capital adequacy requirements of banks are broadly in line with the previous guidelines issued in February 2005. However, certain changes have been made which include the introduction of a prudential floor for capital adequacy, increase in the Tier-I ratio and a change in the risk weights for corporate and non-banking finance company (NBFC) exposures. The major changes have been highlighted in a tabular form given below. The revised guidelines would impact some private banks like ICICI Bank, HDFC Bank and UTI Bank as the release of capital has been delayed. An increase in the risk weights for exposure to NBFCs would make the borrowing costs higher for companies like IDFC.

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VIEWPOINT

Garware Offshore Services

Fleet expansion to drive growth
Incorporated in 1976, Garware Offshore Services Ltd (GOSL) is part of the Garware group of companies and involved in providing supply and support vessels to oil exploration & production (E&P) companies operating in offshore blocks.

Currently, the company has a fleet of six vessels: four anchor handling tugs (AHTs; deployed with Oil & Natural Gas Corporation [ONGC] with day rates of $4,500) and two platform support vessels (PSVs; one deployed with Transocean [day rate of $15,500] and another with British Gas on long-term charter at day rate of $14,500).

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