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Summary of Contents
STOCK UPDATE
KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs650
Current market price: Rs518
Strong performance
Result highlights
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KSB Pumps delivered good results for Q4CY2006. Its net sales grew by 24.9% to Rs108.3 crore during the quarter. There was a delay in the dispatch of certain orders in the previous quarter; the delayed sales got reflected in the fourth quarter, boosting the Q4CY2006 performance.
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On segmental basis, the revenues of the pump business went up by 16.2% to Rs78.9 crore while that of the valve business grew by a strong 57.7% to Rs28.7 crore. However, the margin in the pump business declined to
13.4% from 15.3% last year, while the profit before interest and tax (PBIT) margin in the valve business grew by 120 basis points to 25.4%.
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Overall, the operating profit grew by 24.2% to Rs20 crore, while the operating profit margin (OPM) was stable at 18.5%. This despite a steep hike in the raw material cost, which rose from 41% in the same quarter last year to
46.4%. However, substantial savings were made in the staff cost and other expenses.
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The profit after tax (PAT) for Q4CY2006 rose by 42.4% to Rs12.1 crore. For CY2006, the OPM grew to 20.4% from 18.1%, while the full years' PAT grew by 38.3% to Rs51.6 crore.
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Sales are traditionally better in the first and second quarters for pump makers because of seasonal factors. Hence, we should expect even better results from the company in the coming quarters, both in terms of revenues and margins.
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The pumps industry is set to benefit from the huge investments being planned in the user industries, particularly power and petrochemicals. KSB Pumps, enjoying a 12% market share, would be one of the key beneficiaries of the same and hence we expect the growth momentum to sustain going forward. We are introducing our CY2008 earnings per share (EPS) estimate at Rs46 for KSB Pumps. At the current market price of Rs518, the stock quotes at CY2007E price/earnings ratio (PER) of
11.3x and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 6.2x. We maintain our Buy recommendation on the stock with a price target of Rs650.
SECTOR UPDATE
Banking
Revised guidelines on CAR of banks
The revised guidelines on the capital adequacy requirements of banks are broadly in line with the previous guidelines issued in February 2005. However, certain changes have been made which include the introduction of a prudential floor for capital adequacy, increase in the Tier-I ratio and a change in the risk weights for corporate and non-banking finance company (NBFC) exposures. The major changes have been highlighted in a tabular form given below. The revised guidelines would impact some private banks like ICICI Bank, HDFC Bank and UTI Bank as the release of capital has been delayed. An increase in the risk weights for exposure to NBFCs would make the borrowing costs higher for companies like IDFC.
VIEWPOINT
Garware Offshore Services
Fleet expansion to drive growth
Incorporated in 1976, Garware Offshore Services Ltd (GOSL) is part of the Garware group of companies and involved in providing supply and support vessels to oil exploration & production (E&P) companies operating in offshore blocks.
Currently, the company has a fleet of six vessels: four anchor handling tugs (AHTs; deployed with Oil & Natural Gas Corporation [ONGC] with day rates of $4,500) and two platform support vessels (PSVs; one deployed with Transocean [day rate of $15,500] and another with British Gas on long-term charter at day rate of $14,500).
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