Edel Invest Research Not Rated Kirloskar Brothers Ltd: Visit Report Pumping back to profitability CMP: INR 167 Salil Utagi We recently met the senior management of Kirloskar Brothers Ltd (KBL), the largest pump manufacturer Research Analyst in India with 14% market share in the domestic organized pump industry. At the consolidated level, the +91 (22) 4272 2319 company’s turnover remained flat between FY12 and FY16, but the proportion of international business [email protected] increased from 21% in FY12 to 31% in FY16. In the domestic business as well, the revenue composition changed significantly from Project business to Product business. KBL has a dominant market share in Debashish Mazumdar small and medium sized pumps - used in Agriculture and Domestic Housing. The management is looking Research Analyst to strengthen this dominance through tripling of its industry-leading retail selling points over the next 3-4 +91 (22) 4088 5819 years. Strong focus on the Product business and declining exposure to the Project business are expected [email protected] to improve the company’s profitability, de-leverage the balance sheet and improve cash flows in the domestic operation going forward. Internationally, the company is diversifying the business, both vertically and horizontally, to achieve higher growth and improved profitability. At the CMP of INR 167, the stock is trading at P/S of 0.5x and P/BV of 1.4x on FY16 basis. KBL transforming domestic business model from Project-driven to Product-driven During FY05-09, KBL had aggressively acquired projects in Irrigation and Water Supply to diversify its core operations. But, due to economic slowdown and political instability in some states, projects got delayed or Bloomberg: KKB:IN cancelled, affecting the company’s revenue and margins, besides resulting in a bloated balance sheet. Post 52-week range (INR): 198 / 113 FY09, the company realigned its focus on scaling up the Products business, with its share in standalone revenue rising from 43% to 76% during FY09-16. The Projects business’ executable order backlog has Share in issue (Crs): 7.95 declined from INR 2,500 cr in FY11 to INR 1,100 cr in FY16. KBL has put a lot of efforts to execute the stuck projects, which is reflected in consistent revenue and closure of various projects. M cap (INR crs): 1,326 In a period when the Government is aggressively focusing on replacing inefficient pumps in the Agriculture Avg. Daily Vol. BSE/NSE 143.6 space and increase spending on Irrigation and Water Management, KBL’s revived focus on pump :(‘000): manufacturing and supply business is expected to lift revenue growth and improve the margin performance. SHARE HOLDING PATTERN (%) International business – Diversifying exposure and focus on increasing profitability KBL grew the international business, both organically and inorganically, across different geographies. The company’s International business (predominantly Products) has grown at a CAGR of 16.3% over FY10-15. But, a sharp fall in crude oil prices hurt the international business in FY16 (30% revenue from Oil & Gas). Under the leadership of Mr. Alok Kirloskar, the company is diversifying the international business into different industries (Onshore Exploration, Desalination and Downstream Petrochemicals) and varied Public, 34.6 geographies (USA, South Africa, South-East Asia). KBL is also looking to expand its Spares & Services business in the international market to derive higher profitability and annuity income. Promoter, Valuation 65.4 At the CMP of INR 167, the stock is trading at P/S of 0.5x and P/BV of 1.4x on FY16 basis. During the capex cycle of 2003-08, as a focused products company, KBL had posted peak EBIDTA margin and RoCE of 16% and 48% respectively in FY06 while trading at an average 1-year forward PE multiple of 23x. We believe that as KBL transforms from a Projects company to a Products player, the margins and returns ratios are likely to 120 trend towards the peak of FY06. 110 Financial highlights (Consolidated) 100 Year to March FY12 FY13 FY14 FY15 FY16 90 80 Revenues (INR Cr) 2,554 2,612 2,690 2,728 2,594 70 Rev growth (%) (4.3) 2.3 3.0 1.4 (4.9) 60 EBITDA (INR Cr) 135 200 199 190 65 50 PAT (INR Cr) 63.9 59.5 60.0 44.4 -32.6 40 EPS (INR) 6.4 8.3 8.2 5.6 -4.1 15 16 15 16 15 16 15 16 15 16 15 16 - - - - - - - - - - - - Jul Jul EPS growth (%) (48.2) 30.0 (0.6) (32.2) NA Jan Jan Sep Sep Nov Nov Mar Mar May May KBL Sensex P/E (x) 26.2 20.1 20.3 29.9 NA P/B (x) 1.5 1.4 1.3 1.3 1.4 RoACE (%) 7.0 11.6 11.1 7.2 -0.9 Date: 9th December, 2016 RoAE (%) 5.8 7.3 6.8 4.5 -3.2 1 Edel Invest Research Kirloskar Brothers Ltd I. Kirloskar Brothers – A dominant pump manufacturer in India Global pumps market – growth muted due to Oil & Gas slump The global pumps market has grown at a CAGR of 4% over 2006-15 from $33bn to $47bn, with a large part of growth coming from China, India and the CIS countries. Growth has been lower due to the sharp fall in crude oil prices, as the Oil & Gas sector contributes ~10% to the global pumps market. According to the European Industrial Foundation (EIF), the pumps market is expected to grow by 3.5% during 2015-20. Ggrowth would be driven by investments in Irrigation, Water & Water Resource Projects, Sewage and Power Capacity additions in developing countries. The developed countries are expected to spend on Municipal Water, Nuclear Power, Fire & HVAC Packages and Commercial Establishments. World Pump Market 2006 - $33bn World pump market 2015-$47bn Western Europe Others Western Others 27% 25% 18% Europe 19% Americas 23% Asia Americas 40% Asia 21% 27% Source: EIF, Edel Invest Research. Indian pumps market – Growing at a faster pace; Organised players consolidating position EIF as well as the Indian Pump Manufacturers Assocation (IPMA) estimate that the organised pump market in India in 2016 was valued at around INR 11,178 cr and is expected to reach approximately INR 14,255 cr in 2020E, growing at a CAGR of 6.3%. The organised pumps market in India is represented by over 300 players, with the top 10 accounting for 45% of the overall pie. Over and above the organized market, the value of the unorganized market (more than 600 players) and imports is ~INR 9,000 cr. Over the period FY09-16, share of organised market has grown from 35% to 55% respectively. Sector composition - By user industry Organised sector - Market share Kirloskar Bros Others CRI Metal & (Stnd) 13.0% Agri- 10.9% Mining culture 13.6%** 4.0% 27.0% Crompton Other Oil & Gas Consumer organised 6.5% 8.0% players (45% KSB Power Pumps Gener- 7.7% ation Building Sulzer 12.0% Water & Services 5.3% Waste 19.0% WPIL Grundfos Texmo Water (Stnd) Shakti 4.5% 17.0% 3.7% 2.0% 2.5% Source: Edel Invest Research. ** includes product content in projects 2 Edel Invest Research Kirloskar Brothers Ltd KBL - Consolidating leadership position in domestic pumps market KBL, the largest pumps manufacturer in India, has expanded its Products market share from 9% in FY10 to 14% in FY16 in the domestic organized products market. The company is also transforming its model from Projects-centric one (57% of revenue in FY09) to a Products-centric company (75% of revenue in FY16) in the domestic market. In the international market, KBL has grown inorganically in different geographies as a Products player, specializing in Engineered Pumps and Services. KBL Organization Structure KBL- Standalone Kirloskar Brothers Ltd Joint Ventures (INR 1680cr) (INR 2994cr) Subsidiaries Kirloskar Kirloskar Kirloskar Brothers Karad Project Kolhapur Steel Kirloskar Systech Corrocoat Ebara(45 %) International BV (100%) (Rs263cr) (96% )(INR 39cr) (100%)(INR 22cr) (100%) (INR 873cr) (65%)(INR 46cr) (INR 71cr) Kirloskar Kirloskar SPP Kirloskar SPP MENA Brothers Brothers (UK) Pompen (Egypt) Thailand Ltd Africa (PT) SPP SPP Breybar Rodelta (South (US) (Mining) Africa) Syncroflow *- Revenue numbers are on gross levels (before inter-segmental) During FY10-16, KBL’s consolidated revenue remained flat, with a CAGR of only 0.7%, with growth impacted by overall economic slowdown and delay in large projects. However, the composition of revenue has changed during FY10-16, wherein the international business has grown from INR 459 cr in FY10 (16% of revenue) to INR 873 cr in FY16 (31% of revenue). During FY10-16, the company’s net profit slumped from a high of INR 146 cr in FY10 to a loss of INR 7 cr in FY16, as projects faced execution issues with huge cost over-runs and lower oil prices post FY15 led to the curtailment of the global Oil & Gas related capex. Revenue composition - International operations growing in size Profitability deteriorates due to project cost over-runs and slowdown in Oil & Gas capex 2,86 2,868 2,849 2,893 2,950 3,057 2,994 146 100 61 68 66 57 -7 100% 100% 339 356 303 445 18 23 13 502 430 441 80% 10 80% 459 16 31 31 411 591 658 882 60% 37 975 873 36 60% 40% 118 61 43 20% 31 48 12 8 40% 0% (1) (6) 2,066 1,955 1,828 1,879 (19) 1,765 1,637 1,680 -20% 20% (15) -40% 0% -60% (4) FY10 FY11 FY12 FY13 FY14 FY15 FY16 -80% FY10 FY11 FY12 FY13 FY14 FY15 FY16 kirloskar Bros - Standalone Kirloskar Brs International BV kirloskar Bros - Standalone Kirloskar Brs International BV Indian Subsidiaries+JV Indian Subsidiaries+JV *-revenue nos are before intersegmental , *-profits are before intra group transactions and share of assoc/minority interest Source: Compnay data, Edel Invest Research.