Sector overview: The growth of the pump and valves sector is driven by the growth and increased investments in power and energy sectors apart from the agricultural sector. It is estimated that the size of the Indian pump industry is currently around US$ 980 m and is expected to grow by around 7% in the medium term. Almost 95% of the country’s demand is met by domestic players. India produces nearly 1.5 m pumps per year for various applications and the market is still highly fragmented with presence of several small and medium scale companies that compete with large domestic and international players.
Company overview: KSB Pumps India has been promoted by KSB group, Germany, a global market leader in manufacturing of pumps and valves. KSB Pumps India manufactures various pumps and valves and of various specifications to enable fluid transportation. It is perhaps the only company that manufactures pumps and valves to support functions of agricultural sector and water and sewage management systems apart from industrial applications such as power, petrochemicals, etc.
The company has 5 plants in India – two in Pune that cater to the requirements of irrigation and power projects, one in Nashik that manufactures multistage pumps, water and submersible motor pumps, a valve manufacturing plant in Coimbatore and a foundry in Ahmednagar to support captive consumption of castings. In 1997, the company acquired MIL Controls, a producer of control valves and level instruments to support its growth.
Business structure: The company earns 30% of its revenues by way of sales of standard products, 65% through project based (made to order) revenues and the remaining by way of after sales services. It also extends services like repairing instruments of other makes, both imported and indigenous and offers all possible assistance in maintenance. KSB Pumps has registered 20% compounded annual growth in revenues in past 5 years, while bottomline growth for the same period stood at 31%. The government’s increased focus on infrastructure investment led to increase in demand of pumps and valves. Thus, the topline growth has come in on account of increased volumes. On the other hand, the earnings growth has been supported by improved product mix, cost control measures and introduction of new products in the high growth areas such as submersible business.
If one looks at the cost structure, cost of raw materials has increased in the recent past. Castings and forgings are key inputs, the prices of which are linked to steel prices. Volatility in steel prices impacts company’s raw material costs. Despite consistent hike in cost of materials the company was able to expand margins mainly on account of improved product mix and introduction of value added products that fetch better margins. It is also a segment where the company enjoys competitive edge over other players on account of its quality and ability to provide products as per specifications, made to order or project based.
Thus, while the agricultural sector reported single digit growth of 2% to 3%, the company’s increased focus to cater to the needs of industrial sector. The company has also an established dealer network serving customer needs on pan India basis. All these have resulted in higher margins and increased earnings.
Our view
KSB Pumps being a leading manufacturer of custom-made pumps and valves is all set to reap the benefit of increased investments in end user industries. Economic slowdown is likely to trim down growth rate in medium term., However, the long term growth prospects remain intact considering the planned investment outlay. At the current price of Rs 246, the stock is trading at 6 times its CY08 earnings. We shall soon update readers with our discussion with the management and our view on the stock.
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