Robust demand from user industries and a tactical shift in the product mix are positives.

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.