Kirloskar Brothers - "Pumping Up its Resources" - Way2Wealth

Kirloskar Brothers Limited (KBL), a multinational Indian company, incorporated in 1920 with over 123 years of engineering expertise in Fluid Management Systems, is one of the largest pump manufacturing and exporting company in India with focused areas in Irrigation, Water Resource Management, Building and Construction, Industry, Power, Gas, Oil and Defense.

Investment Rationale

A key market player with a 15% market share in the pumps industry The global market for pumps is expected to grow at an average CAGR of 2.8% from 2005-2015. The Indian pump industry is poised to register a faster growth rate than global average, ~increasing its share of global market from 2.9% in 2005 to 4.4% in 2015. With a 15% market share in the pumps sector & exports contributing to 19% of its revenues in FY12, KBL would be garnering stable growth in the near future.

The "Manthan" initiative

KBL has launched the Manthan Initiative whereby it will focus on its core competent product business of centrifugal pumps & valves & strengthen it further rather than focus on its EPC business. Its consolidated product business sales have increased from 62% to 69% in FY12 with focus on positive cash generation for KBL.

Initiated Balance Sheet cleaning up exercise

KBL has embarked on a mission to clean up its balance sheet & generate positive cash flows by dispatching its products to customers who have the capacity to pay. Selective bidding for new projects has been made with strong filtrations of being profitable & cash positive.

Merger of its loss making subsidiary KCEL with itself

KBL plans to merge or dispose off its loss making subsidiary Kirloskar Constructions & Engineers Ltd. which have consistently eroded its consolidated profits since its acquisition in 2007 (25% of consolidated PAT in FY12). An affirmative resolution hiving off or merging KCEL will positively impact the consolidated profitability of KBL.

Valuation

Stable growth in the pump sector from the water, chemical & maintenance segment, restructuring of its business verticals, cleaning up of its balance sheet, we find KBL to be an interesting value pick with key change in its revenue mix from project to product. At the CMP of Rs.148, the stock quotes at a PE of 11x its FY14E EPS of Rs.14 per share. We initiate coverage with a BUY Rating on the stock.

Source : Equity Bulls

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