KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs550
Current market price: Rs399
A profit pump
Key points
- KSB Pumps, a leading manufacturer of pumps and valves, is all set to reap the benefits of the huge investments being planned in the fluid-handling sectors, such as oil & gas production, oil & gas refining and marketing, petrochemicals, etc.
- KSB's boiler-feed water pumps are extensively used in the power sector and we expect the company to be the prime beneficiary of a four-fold increase in the investments (Rs500,000 crore in the 11th Plan as against Rs112,000 crore in the 9th Plan) being made in the sector.
- After the turn-around of the valve division the company's earnings before interest and tax (EBIT) margin jumped by a whopping 1,080 basis points to 21.1% in H1CY2005. The division would be a key driver of KSB's growth in future as it is doubling its manufacturing capacity to capitalise on the opportunities resulting from the buoyancy in the fluid-handling sectors.
- Driven by the sterling performance of the pump division and the expansion of the valve capacity, we expect KSB's earnings to grow at a compounded annual growth rate (CAGR) of 40% from Rs17.2 in CY2004 per share to Rs33.9 per share in CY2006.
- KSB has the strongest financials in the industry, as it is virtually a debt-free company with a very low debt/equity ratio of 0.06. Its return ratios are also impressive: return on capital employed (RoCE) of 42.1% and return on net worth (RoNW) of 22.5%.
- At the current market price of Rs399 the stock is discounting its CY2006E earnings by 11.8x. The average price/earnings ratio (PER) for the pump manufacturing companies is close to 29x while KSB is trading at 23x (both on a historical basis). We initiate coverage on KSB with a Buy recommendation and a twelve-month price target of Rs550.