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Engineering & Capital goods

India I Equities
Sector Report

03 February 2017

Capital Goods Sensex: 28241

Transformers and pumps look promising Nifty: 8741

Bhalchandra Shinde
Research Analyst

Anand Rathi Share and Stock Brokers Limited (hereinafter ARSSBL) is a full-service brokerage and equities-research firm and the views expressed therein are solely of
ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst
certifications are present in the Appendix.

Anand Rathi Research India Equities


Engineering & Capital goods
India I Equities
Sector Report

03 February 2017

Capital Goods Sensex: 28241

Transformers and pumps look promising Nifty: 8741

Utilisation in manufacturing industries is now ~65%. In this capital-


intensive sector, capacity-addition plans look distant. Oil & gas and
power T&D, however, are expected to continue capex investments in
the next three years. Thus, we believe the transformer and pump
segments should have strong sales growth in the next three years. We
expect Voltamp Transformers and Kirloskar Brothers to out-amp peers.
Good monsoon, key trigger of robust growth in pumps. The good
monsoon would lead to better crop yields and water levels in wells across
India; in turn this would lead to higher demand for agriculture pumpsets for
rabi crops. Hence, we believe that agriculture pumps would grow a strong 12-
15% in the next three years.
Capacity utilisation in oil & gas at an optimum. Capacity utilisation in oil
& gas is at optimal levels. Hence, we believe that capex investment would be
strong in oil & gas. Oil & gas capex should lead to significant improvement in
order inflows for pumps in the next three years. Hence, we believe that
pumps would see strong growth in the next three years.
Transformer capex to be robust. Power generation has improved
significantly over the last three years. At present, India is ~2% power surplus.
However, the surplus is in the North and West; the South and North-east are
still power-deficient. Hence, the government is largely focusing on improving
grid connectivity. Interstate power distribution capex is expected to pick up in
the next three years. Hence, we believe that transformers below 220 kVA Bhalchandra Shinde
would significantly pick up in the next three years. Research Analyst
Top picks. We believe that sales and earnings of Kirloskar Brothers and
Voltamp Transformers would be better than those of their peers. These
stocks are now quoting at attractive valuations.

Upside /
M cap Price TP Downside P/E (x) P/BV (x) RoE (%) RoCE (%) Net debt / equity (x)
Key data Reco `m ` ` (%) FY18e FY19e FY18e FY19e FY18e FY19e FY18e FY19e FY18e FY19e

Kirloskar Brothers Buy 18,224 230 357 55 24.3 12.5 1.7 1.5 7.4 13.1 11.2 17.2 0.2 0.1
KSB Pumps** Sell 21,442 616 521 -15 30.2 26.0 3.1 2.8 10.6 11.3 15.2 16.3 -0.3 -0.3
Shakti Pumps Buy 2,685 160 214 33 21.0 15.0 1.2 1.2 6.1 8.0 10.7 12.6 0.5 0.5
Voltamp Transformers Buy 9,827 973 1,433 47 15.6 11.9 1.8 1.6 12.1 14.4 17.2 20.9 -0.1 -0.2
TRIL Buy 5,475 413 539 30 19.9 15.3 1.5 1.3 7.6 9.0 15.4 16.8 0.4 0.4
st
Source: Company, Anand Rathi Research, * prices are as on 1 Feb, 2017. ** CY ending year

Anand Rathi Share and Stock Brokers Limited (hereinafter ARSSBL) is a full-service brokerage and equities-research firm and the views expressed therein are solely of
ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst
certifications are present in the Appendix.

Anand Rathi Research India Equities


03 February 2017 Capital Goods Transformers and pumps look promising

Capital Goods
Transformers and pumps look promising

Good monsoon, key trigger of robust growth in pumps ................................. 3

Capacity utilisation in oil & gas at an optimum .............................................. 6

Transformer capex to be robust .................................................................... 9

Outlook and Valuations ............................................................................... 13

Company section ....................................................................................... 14

Kirloskar Brothers ....................................................................................... 15

KSB Pumps................................................................................................. 31

Shakti Pumps .............................................................................................. 45

Transformers and Rectifiers ........................................................................ 58

Voltamp Transformers................................................................................. 70

Anand Rathi Research 2


03 February 2017 Capital Goods Transformers and pumps look promising

Good monsoon, key trigger of robust


growth in pumps
Pump-sets play an important role due to deficient irrigation
Large parts of India do not have proper irrigation systems to extract water
from sources such as surrounding lakes, rivers or snowmelt areas. Thus,
agriculture largely depends on monsoon rainfall, filling wells and aquifers
for the rest of the year.
Kharif crops in India require monsoon rains. Maize, cotton, paddy, soybean,
groundnut, bajra and sesame are among the major crops that rely on
monsoon rains.
After two years of drought in India, the monsoon this year was within the
normal range (~97% of the 50-year average). This is expected to lead to
better crop yields and satisfactory water levels in wells.
We expect pump-sets for wells to grow ~12-15% in the next one year due
to greater crop yields and higher farm income.

Fig 1 Wells in use across all farmers


Wells with Wells with
Wells in use Wells with electric diesel
Area covered with pump- pump-sets pump-sets pump-sets
by wells No. of wells sets % % %
All classes 14,156,125 9,830,502 69 79 21
8,756,219 5,193,925 59 79 21
Farmers with marginal land
Below 0.5 ha 6,588,711 3,441,142 52 81 19
holdings
0.5 - 1 ha 2,167,508 1,752,783 81 76 24
Farmers with small land 2,547,754 2,192,838 86 81 19
holdings 1 - 2 ha 2,547,754 2,192,838 86 81 19
1,760,985 1,526,759 87 80 20
Farmers with semi & medium-
2 - 3 ha 1,172,028 1,017,254 87 80 20
sized land holdings
3 - 4 ha 588,957 509,505 87 78 22
916,531 777,936 85 77 23
Farmers with medium land 4 - 5 ha 355,128 303,377 85 77 23
holdings 5 - 7.5 ha 399,385 339,878 85 78 22
7.5 - 10 ha 162,018 134,681 83 75 25
174,636 139,044 80 75 25
Farmers with large land
10 - 20 ha 143,440 115,121 80 75 25
holdings
20 ha & more 31,196 23,923 77 74 26
Source: MOSPI

Water level
The ground water level across the country has been continuously falling
and varies with states. Within states, the water level is uneven and varies
significantly from one region to another. Most states such as Madhya
Pradesh, Punjab, Haryana, Rajasthan, Uttar Pradesh and Karnataka have
ground-water levels of 100-400ft. The water level in Maharashtra is still
satisfactory and ranges between 40ft and 150ft, in contrast to West
Bengals ground-water level of from 250ft to 750ft. The level of ground
water in most areas of Gujarat, however, is below 500ft.

Anand Rathi Research 3


03 February 2017 Capital Goods Transformers and pumps look promising

Fig 2 Ground- water level, state-wise


State Ground-water level (feet)
Punjab & Haryana 250
Uttar Pradesh 130 to 240
West Bengal 250 to 450 in Burdwan, 600 to 750 in South 24 Parganas
Madhya Pradesh 100 to 300
Rajasthan 300 to 400
Gujarat 500 to 700
Maharashtra 40 to 150
Andhra Pradesh 170 to 500
Karnataka 100 to 250
Tamil Nadu 40 to 200
Source: MOSPI

Demand factors for pump selection in agriculture


Low voltage compatibility is the most important factor in pump
selection. Most states (Maharashtra, UP, Haryana, West Bengal, AP)
are faced with low-voltage issues, making low-voltage compatibility of
pump-sets a necessity for farmers. In Maharashtra and UP, this is an
utmost priority. Farmers in other states (Rajasthan, Punjab & Haryana,
West Bengal, AP, Gujarat, Tamil Nadu) also consider it an important
requirement.
The warranty/guarantee is the second important feature, as pump-
sets are meant for rugged usage and lengthy durations. For farmers (in
Rajasthan, Punjab & Haryana, AP), a warranty for pumpsets is the
most important factor. Farmers in other states (Maharashtra, UP, West
Bengal, Karnataka, Gujarat, Tamil Nadu) also consider it one of the
important factors in selecting pumps. According to industry
interaction, a locally made pumpset needs repairs within a year; a
brand-named pumpset is sturdier and requires repairing after 2-4 years
Price is an important factor in selecting pumps for farmers in
Rajasthan, Punjab & Haryana, West Bengal, AP, Karnataka and Tamil
Nadu owing to their budgetary constraints. It is also important for
farmers in Maharashtra, Gujarat and UP.
Farmers demand high standards of pumpsets within their purchasing
power for hassle-free operations. For farmers in West Bengal and
Karnataka, standards hold the top-most priority when selecting pumps.
Except in AP, it also is significant for farmers of other states
(Rajasthan, Punjab & Haryana, Maharashtra, UP, Gujarat and Tamil
Nadu).
After-sales service is looked at as an important factor in selecting
pumps among farmers in most states (Rajasthan, Punjab & Haryana,
Maharashtra, UP, West Bengal). For farmers in Gujarat after-sales
support is the prime factor in selecting pumps. However in AP,
Karnataka and Tamil Nadu this is not very important.
Farmers in Gujarat, UP and MP consider greater water output an
important feature in selecting pumps.

Anand Rathi Research 4


03 February 2017 Capital Goods Transformers and pumps look promising

Fig 3 Top brands in each state


State Organised Brands Regional Brands
Punjab & Haryana Texmo, CRI, KSB, Lubi Oswal, Singla, Pluga, Maxwell, Niagra
Uttar Pradesh CRI, Texmo, Varuna, KSB Hi-Tech, Aroma, Rama
Villiers, Kalama, Atul, Shakti
West Bengal Texmo, KSB, CRI, Crompton, Varuna
Chinese brands: Tricycle, CD
Madhya Pradesh Texmo, CRI, Kirloskar Dhanush, Akash, Jal Ganga, Classic
Rajasthan Texmo, CRI, Varuna Chetan, Ambuja
Gujarat Lubi, Varuna and Unnati Shiv shakti, Jagdish, Freedom
Mahalakshmi, Wega, Alpha, Paras,
Maharashtra Texmo, Kirloskar, CRI, Varuna, Crompton
Waterfall, Asian
Andhra Pradesh Texmo, CRI, Falcon, Suguna JK Pumps, Lakshmi
Karnataka Texmo, CRI, Kirloskar V Guard, Tormac
Tamil Nadu Texmo, CRI, Kirloskar Krishna, Mak, Besten
Source: EESL

Considering all demand features and market penetration, Kirloskar


Brothers would be most preferred. We expect it to be a major beneficiary
of forthcoming agricultural demand.

Anand Rathi Research 5


03 February 2017 Capital Goods Transformers and pumps look promising

Capacity utilisations in oil & gas at an


optimum
Various segments in manufacturing are faced with overcapacity. Utilisation
rates in manufacturing, however, are not significantly lower than those of
the last five years, except some oddities. Hence, additional investment is
possible in some segments. For example, in cement, while South India has
overcapacity, new investment is possible in the East and North. Similarly,
investment is possible in autos due to different utilisation levels among
manufacturers and to the necessity of launching products or setting up
export-oriented capacities. Even so, based on interaction with industry
experts, a demand pick-up and consumption improvement would play
critical roles in reviving private capex.
Trend in utilisation rates in capital-intensive industries
Fig 4 Capacity utilizations across capital intensive sectors (%)
FY04 FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 Max ( 20 years) Min ( 20 years)
Cement 85 73 80 84 83 73 72 73 77 67 65 65 70 85 65
Metals 59 50 49 64 66 59 54 62 61 53 62 60 65 71 49
Power 73 74 74 77 79 77 78 75 74 70 67 63 60 79 63
Energy 85 98 102 109 108 108 102 103 91 102 103 102 103 109 51
Auto 67 59 58 66 64 47 55 64 47 83 68 78 82 83 47
Source: MOSPI, ACE equity

Cement, metals and power are at the lowest levels of utilisation. Average
utilisation in the auto and energy sectors, however, in near maximum level.
Hence, marginal demand revival can lead to capex revival in companies in
the auto and energy sectors.
Capex trend in industries indicates auto and energy likely to revive
early
Fig 5 Capex trends across all industries
(` bn) FY05 FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16
Cement 22 20 41 79 85 77 81 79 87 94 99 67
YoY (%) 214.3 (9.1) 105.0 92.7 7.6 (9.4) 5.2 (2.5) 10.1 8.0 5.3 -32.0
Metals 85 130 183 287 336 386 529 466 505 628 449 348
YoY (%) 97.7 52.9 40.8 56.8 17.1 14.9 37.0 (11.9) 8.4 24.4 (28.5) -22.5
Power 142 179 277 344 516 588 889 909 916 716 628 659
YoY (%) 44.9 26.1 54.7 24.2 50.0 14.0 51.2 2.2 0.8 (21.8) (12.3) 5
Energy 244 344 658 591 755 797 1,050 1,138 966 1,261 1,266 1,367
YoY (%) 44.4 41.0 91.3 (10.2) 27.7 5.6 31.7 8.4 (15.1) 30.5 0.4 8.0
Auto 36 53 97 136 197 163 187 289 345 469 500 553
YoY (%) 111.8 47.2 83.0 40.2 44.9 (17.3) 14.7 54.5 19.4 35.9 6.6 10.6
IT / Telecoms 91 125 255 487 474 469 600 370 311 411 388 485
YoY (%) 35.8 37.4 104.0 91.0 (2.7) (1.1) 27.9 (38.3) (15.9) 32.2 (5.6) 25.0
Construction 13 31 77 116 159 200 263 237 224 189 660 664
YoY (%) (7.1) 138.5 148.4 50.6 37.1 25.8 31.5 (9.9) (5.5) (15.6) 249.2 0.6
Textiles 26 44 86 116 105 75 90 108 110 151 94 126
YoY (%) 127.4 69.3 98.6 34.3 (9.5) (29.0) 20.8 19.4 2.3 36.9 (37.9) 34.4
Banks/finance 52 60 67 90 99 103 124 114 135 162 171 180
YoY (%) 2.0 15.4 11.7 34.3 10.0 3.6 20.5 (7.8) 18.4 19.9 5.3 5.3
Pharma 31 37 52 64 79 56 180 116 99 114 126 130
YoY (%) 48.5 21.2 39.6 22.8 24.2 (29.6) 222.8 (35.6) (14.2) 14.8 10.5 3.0
Realty 10 13 40 84 80 163 27 23 24 29 12 12.1
YoY (%) 566.7 26.0 217.5 109.3 (5.0) 104.7 (83.2) (15.8) 4.3 18.8 (59.3) 0.5
Source: ACE Equity

Anand Rathi Research 6


03 February 2017 Capital Goods Transformers and pumps look promising

In the last 2-3 years, private-sector companies postponed investment plans


due to overcapacity and shrinking demand. With the low-base effect,
investment in capex has sturdily grown, but is still much below peak levels.
A favourable environment and demand revival would lead to improved
capex plans, but mostly after end-FY16.
Scenario analysis

Fig 6 Demand versus utilisations across all capital-intensive sectors


5% CAGR demand 10% CAGR demand 20% CAGR demand
% Utilisation over FY16-18 over FY16-18 over FY16-18
Cement 77 85 101
Metals 72 79 94
Power 66 73 86
Energy 114 125 148
Auto 90 99 118
Source:

According to the above analysis, a 5% CAGR in demand over FY15-17


would suffice to reach optimal utilisation levels in the auto and energy
sectors. Hence, we expect auto and energy to be major capex contributors
in FY17. Considering the present economic situation, we expect demand
across all segments to grow at least 10% over FY16-18. Hence, other
capital-intensive sectors (cement, metals, power) will see capex revival
mostly from end-FY18.
Oil & gas industry, a trigger for growth in the pumps sector
Fig 7 Forthcoming projects in oil & gas
Potential orders in Anticipated
Company Forthcoming projects Value (` m)
pumps (` m) completion
Ennore LNG terminal 51,858 2,500-3,500 FY19
Paradip-Raipur-Ranchi pipeline 18,157 900-1,300 FY18
Paradip-Haldia-Durgapur LPG pipeline and extension to Muzaffarpur 18,425 950-1,400 FY20
Indian Oil Corp. Polypropylene unit at Paradip 31,825 1,600-2,200 FY18
Distillate yield improvement at Haldia 31,088 1,500-2,200 FY18
Paradip-Hyderabad pipeline 23,450 1,200-1,700 FY20
(1,150km, 4.5m tpa)
Mumbai refinery 42,000 2,100-3,000 FY19
Visakh refinery 208,000 10,400-15,000 FY22
HPCL
MDPL phase-II - extension from Palanpur to Vadodara 19,000 950-1,400 FY19
VVSPL phase-II - refinery expansion 30,000 1,500-2,100 FY20
Bina refinery 200,000-250,000 10,000-14,000 FY22
BPCL
Mumbai refinery 150,000 7,500-10,500 FY22
Total capex `623bn -700bn 30,000-49,000
Source: IOC, HPCL, BPCL

Anand Rathi Research 7


03 February 2017 Capital Goods Transformers and pumps look promising

Considering the capacity additions planned by Indian oil companies, orders


of ~`10bn-15bn a year are expected to be executed over the next 3-4 years.
KSB Pumps is one of the market leaders in oil- & gas-related orders and is
expected to see strong order inflows. However, Kirloskar Brothers has
recently received the requisite approvals to participate in oil & gas capex.

Fig 8 Oil & gas refinery schematic diagram

Source: Company

Pumps are an important part of oil & gas capex. Hence, forthcoming capex
in oil & gas would lead to robust order inflows and execution for KSB
Pumps, and Kirloskar Brothers will be strong in the next 3-4 years.

Anand Rathi Research 8


03 February 2017 Capital Goods Transformers and pumps look promising

Transformer capex to be robust


Power T&D: robust order inflows to continue
India has a three-tier transmission-and-distribution sector, consisting of the
inter-regional grid, the state grid and distribution networks. As a rule of
thumb, for every rupee invested in power generation, a rupee should be
invested in T&D. In the past, however, under-investment has dogged
T&D, resulting in the transmission lagging generation-capacity added.
Therefore, PGCIL (an all-India Central transmission utility) needs to catch
up in the 12th and 13th Plans.
In FY16, the energy surplus was 1.1% (13,252m units) and peak surplus
was 2.6% (4,250 MW). Peak shortages are likely to persist, mainly in the
South and Northeast, of respectively 10% and 3.8%. On the other hand,
surpluses of 4.9% and 10.3% are anticipated in the East and West
respectively. These are the findings of the Load-Generation Balance report
for FY16, released by the Central Electricity Authority.
Fig 9 Transformer capacity required for generation capacity
Assessment of
transformation
Generation Transmission capacity MVA per capacity
MVA
requirement MW
Generation capacity Weights MVA per MW
Generation transformers 805
765 kV Sending 765 kV 22 kV to 765 kV 1080
generation 660 MW Receiving 765 kV 765 kV to 400 kV 1080 50% 4.70
system 6210 9.4
400 kV 400 kV to 220 1620
220 or 132 kV 220 kV to 132 KV or 33 kV 2430

400 kV Generation transformers 610


generation 500 MW Sending 400 kV 22 kV to 400 kV 811 35% 1.1
system 1622 3.2
Receiving 400 kV 400 kV to 220 or 132 kV 811

220 kV Generation transformers 224


generation 200 MW Sending 220 kV 22 kV to 400 kV 500 15% 0.75
system 1000 5.0
Receiving 400 kV 220 to 132 kV 500
Total 6.6
Source: Anand Rathi Research

Industry experts, however, consider these are suppressed shortages. With


the improving economy, power shortages will suddenly spike up, if T&D is
not improved in advance. To ensure free and uninterrupted flow of power,
every one MW of fresh generation capacity needs to have ~7 MVA of
equivalent transformation capacity added.

Fig 10 Current transformer capacity versus generation capacity


Plans Generation (MW) Transformation capacity (MVA) MVA / MW
VI 42,584 46621 1.1
VII 63,636 75322 1.2
VIII 85,795 125,042 1.5
IX 105,045 181,942 1.7
X 132,329 257,639 1.9
XI 199,877 409,551 2.0
XII (till Oct16 ) 307,278 698,009 2.3
Source: CEA

Anand Rathi Research 9


03 February 2017 Capital Goods Transformers and pumps look promising

At present, however, India has only 2.3 MVA of transmission capacity per
MW of generation capacity (far below the required 7 MVA); this largely
explains the congestion visible in inter-state power transmission. While
Power Grid has done a good job in terms of adding transmission capacity,
this has been insufficient. Understanding this need, the government opted
to open up the sector to private contractors (from Jan11 for inter-state and
from Jan13 for transmission within states).
Another important event that contributed to the renewed focus on
establishing a robust and reliable transmission system was the northern
region blackout in CY12 after a grid failure. Two severe power blackouts
affected most of northern and eastern India on 30th and 31st Jul12. The
first day affected over 300m people, the second was the largest power
outage and affected over 620m, about 9% of the world population or half
of India's.
Strong growth expected in expenditure on transmission
India currently has two transmission segments: the Inter-state
Transmission System (I-STS) and Intra-State Transmission System (Intra-
STS). Together these make up 342,437ckm of transmission lines (>220kv),
15,512 MW of high-voltage direct-current (HV DC) terminals and 681,509
MVA of transformer capacity (incl. HV DC lines).
Fig 11 Present and planned transmission capacity across India
Voltage (kV) 6th Plan 7th Plan 8th Plan 9th Plan 10th Plan 11th Plan 12th Plan 12th Plan
Transmission type level Unit end end end end end end In Oct16 additions target
765 ckm - - - 1,160 2,184 5,250 28,274 23,024 32,250
AC transmission lines 400 ckm 6,029 19,824 36,142 49,378 75,722 106,819 153,147 46,328 144,189
220 ckm 46,005 59,631 79,600 96,993 114,629 135,980 161,016 25,036 170,980
HVDC ckm - - 1,634 4,738 5,872 9,432 15,512 6,080 16,872
765 MVA - - - - - 25,000 154,500 129,500 174,000
AC substation transformer
400 MVA 9,330 21,580 40,865 60,380 92,942 151,027 225,387 74,360 196,027
capacity
220 MVA 37,291 53,742 84,177 1,16,363 156,497 223,774 301,622 77,848 299,774
HVDC MW - - - 5,200 8,200 9,750 16,500 6,750 22,500

Inter-regional transmission
MW 14,050 27,750 62,650 34,900 65,500
capacity

Source: CEA

Based on the capacity addition required for the inter-state and intra-state
transmission segments, in the 13th Plan `2,600bn capex would be required,
half for each (on the latter, states would spend `300bn for 400kV and
`1,000bn primarily for 220kV and below).

Fig 12 Plan-wise transmission capex


(` bn) 11th Plan 12th Plan 13th Plan
Inter-state (400 / 765 kV / HV DC) 550 1,200 1,300
Intra-state (220 kV, 400kV) 562 550 1,300
Total transmission capex 1,112 1,750 2,600
Source: CEA

Growth in expenditure on I-STS would slow down to `100bn in the 13th


Plan (from `650bn in the 12th). Intra-STS spending would jump by `750bn
over the 12th Plan as states step up spending to upgrade their networks to
align with the inter-state transmission corridors.

Anand Rathi Research 10


03 February 2017 Capital Goods Transformers and pumps look promising

The vast growth in I-STS during the 12th Plan was driven by the `670bn
expended on setting up nine high-capacity transmission corridors (HC TC)
to link generating plants.
The contraction in expenditure on I-STS along with higher state spending
would have the following two repercussions for the sector:
With Intra-STS spending rising 136% to `1.3trn, states would need to
step up their spending requirements in building transmission capacity.
PGCIL has already started working with states to help them upgrade
their infrastructure (JVs formed with Bihar and Odisha). This would be
possible either through spending by the states themselves or via the
PPP route.
Not only is PGCIL required to win I-STS projects on tariff-based
bidding going into the 13th Plan, the rise in expenditure on such
projects is also seen to be slowing down (8% in the 13th Plan, 118% in
the 12th). This implies that PGCIL would need to diversify its growth
areas (in distribution and the smart grid) to keep up its momentum.
The focus would shift away from PGCIL to state-level orders since
states would need to increase expenditure on upgrading their networks.
Working with different states vs. working only with PGCIL has its
own set of challenges including a protracted working-capital cycle, and
multiple customers vs. a single customer (PGCIL). We are given to
understand, however, that competition for state-level projects is lower
than in PGCIL projects.
Greater capex expected in state transmission
We expect a huge jump in expenditure by the states on intra-state
transmission and on HVDC lines while capex in 765kV/400kV
(transformers, lines, sub-stations) would decelerate. Since state-level
spending would primarily be for 220kV, we expect keener competition
(than in 400kV / 765kV) for orders as the number of bidders would be
higher.

Fig 13 Trend in transmission capex, Plan-wise


Transmission system type Voltage (kV) level Unit 12th Plan target 12th Plan addition 13th Plan target 13th Plan addition
765 ckm 32,250 23,024 54,450 26,176
AC transmission lines 400 ckm 144,189 46,328 17,4819 21,672
220 ckm 170,980 25,036 256,694 95,678
HVDC ckm 16,872 6,080 27.472 11,960
765 MVA 174,000 129,500 25.3000 98,500
AC sub-station transformer capacity 400 MVA 196,027 74,360 24.5027 19,640
220 MVA 299,774 77,848 459,774 158,152
HVDC 22,500 12,750 37,500 21,000
Source: CEA

Transformers
Based on transformer capacity addition of 288,000 MVA (220kV and
above), spending on transformers in the 13th Plan is expected to be 7%
over the 12th Plan and 92% over the 11th. More importantly, transformer
capex in the 765kV sub-segment is likely to decline 47% yoy to `24bn in
the 13th Plan, and increase 9% in 400kV to `15bn. Orders for 1,200kV
transformers are likely to start flowing in only toward the beginning of the
14th Plan (from 2023). The 220kV sub-segment is likely to see a sharp,
111%, jump in the 13th Plan to `48bn (10% in the 12th) as states upgrade
their transmission networks.

Anand Rathi Research 11


03 February 2017 Capital Goods Transformers and pumps look promising

Fig 14 Transformer capex, Plan-wise


Transformer capex (` bn) 11th Plan addition 12th Plan addition 13th Plan addition YoY (%)
765 kV 7,500 44,700 23,700 47.0
400kV 17,426 13,500 14,700 8.9
220 kV 20,183 22,800 48,000 110.5
Total capex 45,109 81,000 86,400
Source: CEA

Transformer capacity (MVA) across the industry in transmission and


distribution

Fig 15 Transformer capacity, operator-wise


Company Name FY16 (MVA)
ABB 20,410
Alstom T & D, India 25,075
Crompton Greaves 40,000
Siemens 15,000
TBEA Shenyang 15,000
Bharat Heavy Electricals 45,000
TRIL 33,200
Bharat Bijlee 15,000
Emco 20,000
Indo Tech Transformers 7,450
Voltamp Transformers 13,000
Schneider Electric 7,000
Total 247,135
Formal, as % of total capacity 63
Total capacity 394,000
Source: Anand Rathi Research

Most operators strong in 400/765kV transformers have not been very


pushy in the 220kV sub-segment, which has in the past seen more
competition and is a more commoditised market. However, Voltamp
Transformers operates largely in transformers up to 220 kVA. It has good
long-term relations with many T&D private operators and is expected to
gain the most from the higher capex in the transmission sector, especially
below 220 kVA.
TRIL Indias order inflows would revive largely after 12-18 months due to
SEBs better financial condition and a pick-up in capex.
Further, we believe that Voltamps profitability would be better and its
earnings growth higher due to its stronger balance sheet than TRIL.

Anand Rathi Research 12


03 February 2017 Capital Goods Transformers and pumps look promising

Outlook and Valuations


Our analysis indicates that investments in power T&D and in oil & gas
capex would grow robustly in the next three years. Hence, we see healthy
growth in transformers and pumps.
The good monsoon would lead to better crop yields and high water levels
in wells across India. Greater farm income would lead to demand reviving
in pumps. Similarly, higher capex investments in T&D would lead to
greater demand for transformers. Companies such as Voltamp
Transformers and Kirloskar Brothers would outstrip other companies such
as Transformers and Rectifiers, Shakti Pumps and KSB Pumps.

Fig 16 Recommendation summary


Company CMP (`) Target Price (`) Rating Key Arguments
Kirloskar Brothers 230 357 Buy Given Kirloskar Brothers focus on improving its projects business, provisioning is
almost complete and we see no major impact on profit in the next three years. Hence,
we expect better operating cash-flows. We believe that the improving rural economy and
the companys focus on greater profitability would lead to a re-rating due to the greater
assurance of profitability.
KSB Pumps 616 521 Sell A recovery in orders for KSB (on a pick-up in oil & gas industry orders) is not expected
before end-CY17. Hence, subdued sales growth is likely over CY16-18. Further, margins
would only slightly improve because of the unfavourable sales mix. Hence, despite a
consistent performance and prudent working-capital management, a 6.2% earnings
CAGR over CY15-18 would cap valuations at 22x CY18e.
Shakti Pumps 160 214 Buy On expectation of higher demand in energy-efficient pumps, Shakti is confident of
attaining strong growth in the next three years. Similarly, industrial products are
expected to improve significantly. Added markets such as the US and south-east Asia
are expected to compensate for west Asian markets. Strong sales growth and margin
expansion would likely lead to a re-rating.
Voltamp Transformers 973 1,433 Buy Its strong order book, healthy balance sheet and better profitability would keep earnings
growth strong in the next three years. We expect earnings to record a 16% CAGR over
FY16-19. A pick-up in power distribution capex and in investment in manufacturing
would lead to the companys improved order book.
TRIL 413 539 Buy Its strong order book, forthcoming capex in state transcos and greater profitability would
keep earnings growth strong in the next three years. A pick-up in transmission capex
from state transcos would lead to further betterment in the order book.
Source: Anand Rathi Research

Anand Rathi Research 13


03 February 2017 Capital Goods Transformers and pumps look promising

Company Section

Anand Rathi Research 14


Engineering & Capital goods
India I Equities
Initiating Coverage

03 February 2017

Kirloskar Brothers Rating: Buy


Target Price: `357
Turnaround on the cards; initiating, with a Buy Share Price: `230

Given Kirloskar Brothers focus on improving its projects business,


provisioning is almost complete and we see no major impact on profit
Key data KKB IN / KRBR.BO
in the next three years. Hence, we expect better operating cash-flows. `232 / `113
52-week high / low
We believe that the improving rural economy and the companys focus Sensex / Nifty 28241 / 8741
on greater profitability would lead to a re-rating due to the greater 3-m average volume $0.4m
assurance of profitability. Hence, we initiate coverage on Kirloskar Market cap `18.2bn / $274m
Brothers, with a Buy rating and a price target of `357 (55% potential). Shares outstanding 79.4m

Provisioning would be restricted by stagnant and slow-moving orders.


Stagnant orders amount to ~`3.2bn, of which the Pranhita package (of 22
pumps, ~`2.5bn) is the largest. Slow-moving orders amount to ~`23bn. Shareholding pattern (%) Dec16 Sep 16 Jun 16
Execution is expected to improve due to a pick-up in Telanganas irrigation Promoters 65.4 65.4 65.4
projects. We believe the Pranhita project would most likely be cancelled due - of which, Pledged
to conflict over state borders; hence, on the lower provisioning required, we Free Float 34.6 34.6 34.6
- Foreign Institutions 1.5 1.5 1.4
anticipate no major impact on profitability over FY16-19.
- Domestic Institutions 8.9 8.9 9.8
24.1 24.1 23.5
SPP Pumps orders have bottomed out. Lower prices of crude oil have - Public
affected order inflows and the order book for SPP pumps in the last three
years. With new applications and an already bottomed-out order book, we see
more sales and greater profitability over the next three years.
Relative price performance
Latest certification in oil & gas, better rural economy would lead to 220
strong growth in the products business. The company recently received 200
KKB
approvals from Engineers India to supply pump-sets and valves to the oil & 180
gas
` industry. Further, last years normal monsoon would lead to greater 160
demand for agricultural equipment such as pumps. Hence, we see strong 140
growth in the companys products business. 120 Sensex
100
Valuation. We initiate coverage on Kirloskar Brothers, with a Buy
Aug-16
Sep-16
Jan-16
Feb-16

Apr-16

Jun-16

Jan-17
Jul-16
May-16
Mar-16

Nov-16
Dec-16
Oct-16

recommendation and a price target of `357 (55% potential). Risks. Higher-


than-expected provisioning and curtailed demand for pump-sets. Source: Bloomberg

Key financials (YE Mar) FY15 FY16 FY17e FY18e FY19e


Sales (` m) 27,279 25,944 26,509 29,959 33,941
Net profit (` m) 411 -332 240 751 1,459
EPS (`) 5.2 -4.2 3.0 9.5 18.4
Growth (%) -48.9 NM NM 212.4 94.3
PE (x) 44.3 NM 75.8 24.3 12.5
PBV (x) 1.8 1.9 1.9 1.7 1.5
Bhalchandra Shinde
RoE (%) 4.1 -3.4 2.5 7.4 13.1
Research Analyst
RoCE (%) 8.5 1.4 6.1 11.2 17.2
Dividend yield (%) 0.2 0.3 0.3 0.3 0.8
Net debt / equity (x) 0.3 0.3 0.3 0.2 0.1
Source: Company, Anand Rathi Research

Anand Rathi Share and Stock Brokers Limited (hereinafter ARSSBL) is a full-service brokerage and equities-research firm and the views expressed therein are solely of
ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst
certifications are present in the Appendix.

Anand Rathi Research India Equities


03 February 2017 Kirloskar Brothers - Turnaround on the cards; initiating, with a Buy

Quick Glance Consolidated Financials and Valuations


Fig 1 Income statement (` m) Fig 2 Balance sheet (` m)
Year-end: Mar FY15 FY16 FY17e FY18e FY19e Year-end: Mar FY15 FY16 FY17e FY18e FY19e
Net revenues 27,279 25,944 26,509 29,959 33,941 Share capital 159 159 159 159 159
Revenue growth (%) 1.7 -4.9 2.2 13.0 13.3 Reserves & surplus 9,958 9,521 9,690 10,370 11,643
- Oper. expenses 25,374 25,291 25,059 27,736 30,686 Net worth 10,116 9,680 9,849 10,529 11,801
EBIDTA 1,904 653 1,450 2,223 3,255 Total debt 3,555 3,650 3,653 3,671 3,693
EBITDA margins (%) 7.0 2.5 5.5 7.4 9.6 Minority interest 36 31 35 17 12
- Interest 505 523 488 453 418 Def. tax liab. (net) -163 -253 -98 -98 -98
- Depreciation 947 771 828 885 941 Capital employed 13,544 13,109 13,440 14,119 15,408
+ Other income 172 303 190 209 229 Net fixed assets 5,107 4,942 4,844 4,682 4,465
- Tax 173 -15 90 306 595 Intangible assets 724 774 674 571 467
Effective tax rate (%) 27.6 4.5 28.0 28.0 28.0 Investments 0 0 0 - -
+ Associates / (minorities) -42 -11 8 -37 -71 - of which, Liquid - - - - -
Adjusted PAT 411 -332 240 751 1,459 Working capital 7,076 6,779 6,895 7,608 8,431
+ Extraordinary items - - - - - Cash 637 613 1,027 1,258 2,045
Reported PAT 411 -332 240 751 1,459 Capital deployed 13,544 13,109 13,440 14,119 15,408
Adj. FDEPS (` / sh) 5.2 -4.2 3.0 9.5 18.4 W C turn (days) 95 95 95 93 91
Adj. FDEPS growth (%) -48.9 NM NM 212.4 94.3 Book value (` / sh) 127.4 121.9 124.0 132.6 148.6
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 3 Cash-flow statement (` m) Fig 4 Ratio analysis @ `230


Year-end: Mar FY15 FY16 FY17e FY18e FY19e Year-end: Mar FY15 FY16 FY17e FY18e FY19e
Adjusted PAT 411 -332 240 751 1,459 P/E (x) 44.3 NM 75.8 24.3 12.5
+ Non-cash items 947 771 828 885 941 Cash P/E (x) 13.4 41.6 17.0 11.1 7.6
Cash profit 1,358 438 1,069 1,636 2,400 EV / EBITDA (x) 11.1 32.6 14.4 9.3 6.1
- Incr. / (decr.) in WC 500 -297 116 713 823 EV / sales (x) 0.8 0.8 0.8 0.7 0.6
Operating cash-flow 858 736 953 923 1,577 P/B (x) 1.8 1.9 1.9 1.7 1.5
- Capex 1,246 657 630 620 620 RoE (%) 4.1 -3.4 2.5 7.4 13.1
Free cash-flow -388 79 323 303 957 RoCE (%) 8.5 1.4 6.1 11.2 17.2
- Dividend 42 71 71 71 186 Dividend yield (%) 0.2 0.3 0.3 0.3 0.8
+ Equity raised -211 -38 4 -18 -5 Dividend payout (%) 10.3 NM 29.7 9.5 12.8
+ Debt raised 447 6 158 18 21 Net debt / equity (x) 0.3 0.3 0.3 0.2 0.1
- Investments -116 -0 - -0 - Debtor days 105 92 92 92 92
- Misc. items - - - - - Inventory days 45 52 52 52 52
Net cash-flow -79 -24 413 231 787 Payables days 84 78 78 78 78
+ Op. cash & bank bal. 716 638 614 1,027 1,258 Interest cover (x) 2.2 0.4 1.7 3.4 6.1
Cl. Cash & bank bal. 638 614 1,027 1,258 2,045 Fixed asset T/O (x) 4.7 4.5 4.8 5.7 6.9
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 5 Price movement Fig 6 Project sales versus product sales


(`) (`m)
350 25,000

300
20,000
250

200 15,000
KKB
150 10,000
100
5,000
50

0 0
FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e
Jul-12

Jul-13

Jul-14

Jul-15

Jul-16
Apr-12

Oct-12

Apr-13

Oct-13

Apr-14

Oct-14

Apr-15

Oct-15

Apr-16

Oct-16
Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Project sales Product sales

Source: Bloomberg Source: Company, Anand Rathi Research

Anand Rathi Research 16


03 February 2017 Kirloskar Brothers - Turnaround on the cards; initiating, with a Buy

Restricted provisioning
Order book stagnant and slow moving
At end-Q2 FY17, Kirloskar Brothers standalone order-book was `14.5bn,
its consolidated order-book `23.4bn. At present, orders of `3.2bn are
stagnant and `2.3bn are slow-moving, having been put on hold by
customers.
In FY08-09, the company vigorously procured orders of `7.5bn in
irrigation and power. Most of the projects were in Andhra Pradesh.
Political instability in AP and conflicts about state borders led to many
projects being stalled.

Fig 7 Ongoing stagnant and slow-moving orders


Sr. No. Description Orders not moving Orders on hold
1 PADA 4 - 112
2 PADA 5 - 284
3 PADA 6 - 464
4 Indira Sagar - 506
5 Rajiv Sagar - 967
6 Pranhita package 14 374 -
7 Pranhita package 22 2,508 -
8 PS Velingoda LIS 210 -
9 SRPS-Konaimakula 27 -
10 Shri Bhaveshwar - 9
11 MEIL-Sripadsagar - stage-1 - 1
12 GLIS Phase-III, package 5 125 -
Total 3,244 2,343
Source: Company

In the past eight years, the company has focused specifically on reducing
exposure to project orders. Till now, ~ `800m-1,000m has been provided
for projects executed. The largest, for a stagnant order, is `2.5bn, located
on the border of Telangana and Maharashtra.

Fig 8 Pranhita Project major stagnant order of Kirloskar Brothers

Pranhita
Project

Source: Company

Anand Rathi Research 17


03 February 2017 Kirloskar Brothers - Turnaround on the cards; initiating, with a Buy

Since the project is located at the border of Maharashtra and Telangana,


execution would most likely not take place. As per our industry
interaction, this project is not viable and would continue to be unexecuted
unless considered a national project. In any case, we believe that it would
be possible for the company to divert bank guarantees from the Pranhita
order for other forthcoming orders. Hence, we believe that 100-150bp
margin improvement is likely because of low provisioning in the next three
years.

Fig 9 Provisioning likely to continue at minimum levels


(`m) (%)
800 3.0

700
2.5
600
2.0
500

400 1.5

300
1.0
200
0.5
100

0 0.0
FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e
Provisioning % of sales (RHS)
Source: Company, Anand Rathi Research

Further, execution on slow-moving orders is expected to improve due to


the greater emphasis by Telangana and AP on irrigation projects. Hence,
overall provisioning is expected to be restricted.

Anand Rathi Research 18


03 February 2017 Kirloskar Brothers - Turnaround on the cards; initiating, with a Buy

SPP Pumps improving order-book


One of the market leaders in the oil & gas industry, SPP Pumps (a
subsidiary) was faced with major problems in order inflows in the last two
years due to the steep fall in prices of crude oil.

Fig 10 Subsidiaries order-books improving


(`m)
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
4QFY14

1QFY15

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17
Subsidiaries order book
Source: Company, Anand Rathi Research

Till FY15-end, oil- & gas-related sales were the major contributors to sales
(~45-50%). However, lower crude prices in the last two years affected
execution and order inflows for SPP Pumps especially in fire-fighting
pump-sets. The company supplies fire-fighting pumps, sea-water-lift
pumps, jockey pumps and seawater-injection pumps for the oil & gas
industry, with the greater contribution coming from fire-fighting pumps.

Fig 11 SPP Pumps sales likely to improve


(`m)
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
FY11

FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e

SPP Pumps
Source: Company, Anand Rathi Research

After having bottomed out in Q4 FY16, order inflows and the order book
have been improving in the last six months due to customers added in
other sectors such as buildings, and in industrial applications for fire-
fighting pumps. At present, the oil & gas industry accounts for ~25% of
the sales of SPP Pumps. With customers added and improving order
inflows, SPP Pumps is expected to grow strongly in the next three years.

Anand Rathi Research 19


03 February 2017 Kirloskar Brothers - Turnaround on the cards; initiating, with a Buy

Latest certification, improving rural


economy would lead to strong growth
Superior technology of SPP Pumps
SPP Pumps is a world leader in designing and manufacturing pumping
equipment for onshore and offshore applications. In-house expertise
ensures compliance with all applicable specifications and regulations. This
reputation has been built up since 1970 when the company on the Argyll
platform delivered the very first North Sea oil to come ashore. Since then,
experience in the North Sea has given it the expertise to supply equipment
for the most extreme environments around the world.
SPP Pumps was the first company to obtain the ISO/TS 29001
Certification, which defines quality-management-system requirements for
product and service supply organisations to international petroleum,
petrochemical and natural gas industries
Capable of catering to oil and gas orders
With the technology available in the last six years, Kirloskar Brothers is as
competent to cater to oil & gas orders as other operators such as KSB
Pumps and Sulzer. However, it did not have the requisite certifications to
cater to such orders. In Jun16, it finally received approval from Engineers
India. Hence, it would now be able to benefit from opportunities arising in
the oil & gas industry due to the change in emission norms expected in oil
& gas refineries and capacity additions.

Fig 12 Forthcoming projects in oil & gas


Potential orders in Anticipated
Company Forthcoming projects Value (` m)
pumps (` m) completion
Ennore LNG terminal 51,858 2,500-3,500 FY19
Paradip-Raipur-Ranchi pipeline 18,157 900-1,300 FY18
Paradip-Haldia-Durgapur LPG pipeline and extension to Muzaffarpur 18,425 950-1,400 FY20
Indian Oil Corp. Polypropylene unit at Paradip 31,825 1,600-2,200 FY18
Distillate yield improvement at Haldia 31,088 1,500-2,200 FY18
Paradip-Hyderabad pipeline 23,450 1,200-1,700 FY20
(1,150 km, 4.5m tpa)
Mumbai refinery 42,000 2,100-3,000 FY19
Visakh refinery 208,000 10,400-15,000 FY22
HPCL
MDPL phase-II - extension from Palanpur to Vadodara 19,000 950-1,400 FY19
VVSPL phase-II - refinery expansion 30,000 1,500-2,100 FY20
Bina refinery 200,000-250,000 10,000-14,000 FY22
BPCL
Mumbai refinery 150,000 7,500-10,500 FY22
Total capex `623bn -700bn 30,000-49,000
Source: IOC, HPCL, BPCL

Considering the potential capacity additions planned by Indian companies,


~`10bn-15bn orders a year are expected to be executed in the next 3-4
years. With the recent approvals, Kirloskar Brothers will participate in
forthcoming tenders, which in turn, as per industry interaction would help
procure at least 10-20% of order inflows, ie, `1bn-3bn a year over the next
three years.

Anand Rathi Research 20


03 February 2017 Kirloskar Brothers - Turnaround on the cards; initiating, with a Buy

Normal monsoon should lead to healthy pump sales


Agriculture contributes a large part (~35%) of the Indian pumps segment.

Fig 13 Contribution mix in the pumps sector


No. Sector % by value
1 Agriculture 35
2 Fossil fuels - oil and gas 6
3 Power - thermal 8
4 Power - nuclear 2
5 Public water supply and sanitation 8
6 Petrochemicals 8
7 Petroleum refining 4
8 Rural and domestic water supply 6
9 Metals and mining 4
10 Pharmaceuticals 4
11 Fertilisers, insecticides, pesticides 3
12 Coal 2
13 Health, hygiene & cosmetics products 2
14 Construction 0.5
15 Soaps, detergents and hygiene products 1
16 Fire-fighting 0.5
17 Sugar, beverages, dairies, food products 1.5
18 Textiles 0.5
19 Paper & pulp 0.5
20 Paints, dyes and dyestuffs 0.3
21 Cement 0.2
Others, including marine services, packaged systems
22 3
such as lubrication systems, petrol-dispensing, etc.
Total 100
Source: Anand Rathi Research

Hence, the monsoon plays an important role in the pumps segment. Over
the last two years, a drought-like situation kept pump sales sluggish.
However, with a normal monsoon in FY17 and improving rural income,
the pumps segment is expected to grow a healthy 10-12%.

Fig 14 Correlation of pumpset-sector sales with rainfall surplus / deficit


(`m) (%)
14,000 15.0

12,000 10.0

5.0
10,000
0.0
8,000
-5.0
6,000
-10.0
4,000
-15.0
2,000 -20.0

0 -25.0
FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17e

Pumpsets sales rainfall surplus/deficit (RHS)


Source: MOSPI, IMD

Kirloskar Brothers enjoys ~35-40% market-share in agriculture-related


pump-sets due to its wider market reach. Hence, it would largely benefit
from the good monsoon.
With oil-&-gas orders and healthy sales due to the good monsoon, we
believe that product sales would grow a strong ~15-20% in FY17.
Forthcoming capex in oil-and-gas and approvals for Kirloskar would
ensure healthy order inflows and ~10-12% growth in FY18 and FY19.

Anand Rathi Research 21


03 February 2017 Kirloskar Brothers - Turnaround on the cards; initiating, with a Buy

Financials
Order book
Old orders of `3.9bn are not included in the current order-book of
`14.45bn. Though the current order-book suggests 9-10 months revenue
assurance, opportunities in oil-&-gas and Defence would increase order
inflows in FY18. In the forthcoming order book, the execution cycle is
expected to improve because of higher product orders than project orders
even in the projects business.

Fig 15 Domestic order-book to revive


(`m) (%)
25,000 25.0
20.0
20,000 15.0
10.0
5.0
15,000
0.0
-5.0
10,000
-10.0
-15.0
5,000 -20.0
-25.0
0 -30.0
4QFY12
2QFY13
4QFY13
2QFY14
4QFY14
2QFY15
4QFY15
2QFY16
4QFY16
2QFY17
4QFY17
2QFY18
4QFY18
2QFY19
4QFY19
Order Book YoY (RHS)
Source: Company, Anand Rathi Research

Subsidiaries order-books expected to grow strongly


Lower crude prices led to a subdued order-book in FY15 and FY16. With
customers added in sectors such as construction and manufacturing
industries for fire-fighting pump-sets, the order book is improving.
Besides, SPP Pumps is securing more oil-and-gas orders, expected to
continue in FY18 and FY19.

Fig 16 Subsidiaries order-book trend


(`m) (%)
12,000 120.0

10,000 90.0

8,000 60.0

6,000 30.0

4,000 0.0

2,000 -30.0

0 -60.0
4QFY13

2QFY14

4QFY14

2QFY15

4QFY15

2QFY16

4QFY16

2QFY17

4QFY17

2QFY18

4QFY18

2QFY19

4QFY19

Sub's order book YoY (RHS)


Source: Company, Anand Rathi Research

Anand Rathi Research 22


03 February 2017 Kirloskar Brothers - Turnaround on the cards; initiating, with a Buy

Healthy sales growth


Domestic sales will be healthy
On the expectation of strong growth in oil-&-gas orders and on improving
rural income, we believe that domestic sales of products would clock 10-
15% growth in FY16-18. The projects business, however, would continue
under pressure. Hence, sales would grow ~6-10% in FY16-19.

Fig 17 Standalone sales growth would be healthy


(`m) (%)
25,000 15.0

20,000 10.0

15,000 5.0

10,000 0.0

5,000 -5.0

0 -10.0
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

FY18

FY19
Sales YoY (RHS)
Source: Company, Anand Rathi Research

Subsidiaries sales expected to improve


With a pick-up in order inflows, sales of subsidiaries are expected to
gradually improve in FY18 and FY19.

Fig 18 Subsidiaries sales to improve


(`m) (%)
14,000 30.0

12,000
20.0
10,000

8,000 10.0

6,000 0.0
4,000
-10.0
2,000

0 -20.0
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e

Subsidary sales YoY (RHS)


Source: Company, Anand Rathi Research

Anand Rathi Research 23


03 February 2017 Kirloskar Brothers - Turnaround on the cards; initiating, with a Buy

EBITDA margin expected to improve considerably


Provisioning is expected to contract in the next three years due to the
cancellation of the Pranhita project and stuck orders of `3.3bn. We expect
provisioning to come down from 1.5% to ~0.4%. Further, the higher
share of the products business would help toward greater profitability.

Fig 19 Project sales versus product sales


(`m)
25,000

20,000

15,000

10,000

5,000

0
FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e
Project sales Product sales

Source: Company, Anand Rathi Research

Other expenses would improve due to lower provisioning and consultancy


fees. Margins are expected to significantly improve due to more product
sales and lower project sales.

Fig 20 EBITDA-margin and cost-structure trend


`m FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e
Sales 26,589 26,699 25,545 26,125 26,823 27,279 25,944 26,509 29,959 33,941
Raw material cost 17,880 17,267 16,278 15,839 15,731 15,062 14,178 14,474 16,358 18,532
Employee cost 2,099 2,678 3,047 3,339 3,620 4,161 4,400 4,488 4,937 5,332
Other expenses 4,143 4,324 4,868 4,951 5,314 6,151 6,712 6,097 6,441 6,822
% of sales
Raw material cost 67.2 64.7 63.7 60.6 58.6 55.2 54.6 54.6 54.6 54.6
Employee cost 7.9 10.0 11.9 12.8 13.5 15.3 17.0 16.9 16.5 15.7
Other expenses 15.6 16.2 19.1 19.0 19.8 22.5 25.9 23.0 21.5 20.1
EBITDA margins 9.3 9.1 5.3 7.6 8.0 7.0 2.5 5.5 7.4 9.6
Source: Company, Anand Rathi Research

Anand Rathi Research 24


03 February 2017 Kirloskar Brothers - Turnaround on the cards; initiating, with a Buy

Fig 21 Income statement (Consolidated - ` m)


Y/E: March FY15 FY16 FY17e FY18e FY19e
Net revenues 27,279 25,944 26,509 29,959 33,941
Growth (%) 1.7 -4.9 2.2 13.0 13.3
Material Cost -15,062 -14,178 -14,474 -16,358 -18,532
Employee cost -4,161 -4,400 -4,488 -4,937 -5,332
Manufacturing cost -511 -537 -488 -515 -546
Marketing cost -860 -845 -768 -811 -859
Administrative cost -344 -350 -318 -335 -355
Energy cost -382 -408 -303 -392 -415
Other cost -4,054 -4,573 -4,222 -4,388 -4,647
EBITDA 1,904 653 1,450 2,223 3,255
Growth (%) -11.7 -65.7 122.0 53.4 46.4
EBITDA margin (%) 7.0 2.5 5.5 7.4 9.6
Other income 172 303 190 209 229
Operating profit 2,077 956 1,639 2,432 3,484
Depreciation -947 -771 -828 -885 -941
EBIT 1,130 186 811 1,547 2,543
Interest cost -505 -523 -488 -453 -418
PBT 625 -337 323 1,094 2,126
Tax -173 15 -90 -306 -595
Effective tax rate 27.6 4.5 28.0 28.0 28.0
PAT 453 -322 233 788 1,530
Minority interest -42 -11 8 -37 -71
Consol PAT 411 -332 240 751 1,459
Growth (%) -48.9 NM NM 212.4 94.3
PAT margin (%) 1.5 -1.3 0.9 2.5 4.3
Extraordinary income - - - - -
Dividends (incl. tax) -42 -71 -71 -71 -186
Transferred to reserves 369 -404 169 680 1,273
Per-share data
FDEPS (`) 5.2 -4.2 3.0 9.5 18.4
DPS (`) 0.5 0.7 0.7 0.7 1.7
Adj BV (`) 127.9 122.3 124.5 132.8 148.8
CEPS (`) 17.1 5.5 13.5 20.6 30.2
Valuation ratio
P/E (x) 44.3 NM 75.8 24.3 12.5
P/adj. BV (x) 1.8 1.9 1.8 1.7 1.5
P/C (x) 13.4 41.6 17.0 11.1 7.6
Dividend yield (%) 0.2 0.3 0.3 0.3 0.8
EV/S (x) 0.8 0.8 0.8 0.7 0.6
EV/E (x) 11.0 32.2 14.3 9.2 6.1
Quality ratio
Dividend payout (%) 10.3 NM 29.7 9.5 12.8
Other income / PBT (%) 27.6 NM 58.7 19.1 10.8
Interest cover (x) 2.2 0.4 1.7 3.4 6.1
Operating CF / EBITDA (x) 0.5 1.1 0.7 0.4 0.5
Source: Company, Anand Rathi Research

Anand Rathi Research 25


03 February 2017 Kirloskar Brothers - Turnaround on the cards; initiating, with a Buy

Fig 22 Balance sheet (Consolidated - ` m)


Y/E: March FY15 FY16 FY17e FY18e FY19e
Equity 159 159 159 159 159
Reserves 9,958 9,521 9,690 10,370 11,643
Minority interests 36 31 35 17 12
Less: Misc expenses - - - - -
Net worth 10,153 9,711 9,884 10,546 11,813
Equity (% of CE) 75.0 74.1 73.5 74.7 76.7
LT debt 515 455 455 455 455
ST debt 3,039 3,195 3,198 3,217 3,238
DTL (net) -163 -253 -98 -98 -98
Total debt 3,392 3,398 3,555 3,574 3,595
Net D/E (x) 0.3 0.3 0.3 0.2 0.1
Capital employed 13,544 13,109 13,440 14,119 15,408
Gross block 5,709 5,646 5,438 5,173 4,852
Acc. depreciation - - - - -
Net block 5,709 5,646 5,438 5,173 4,852
CWIP 121 70 80 80 80
Fixed assets 5,830 5,717 5,518 5,253 4,932
Investments 0 0 0 - -
Cash equivalents 637 613 1,027 1,258 2,045
Inventories 3,387 3,704 3,785 4,278 4,846
Debtors 7,877 6,544 6,686 7,557 8,561
Loans & Advances 3,038 3,410 3,483 3,937 4,460
Other current assets 5,314 5,256 5,340 5,851 6,440
Current assets 20,254 19,528 20,322 22,880 26,352
Creditors -6,255 -5,569 -5,690 -6,431 -7,286
Provisions -761 -918 -938 -1,060 -1,201
Other current liabilities -5,525 -5,649 -5,772 -6,523 -7,390
Current liabilities -12,540 -12,135 -12,400 -14,014 -15,876
Net current assets 7,714 7,392 7,922 8,866 10,476
Capital deployed 13,544 13,109 13,440 14,119 15,408
FA/CE (%) 43.0 43.6 41.1 37.2 32.0
Investments / CE (%) 0.0 0.0 0.0 - -
Liquid assets / CE (%) 4.7 4.7 7.6 8.9 13.3
Working Capital / CE (%) 52.2 51.7 51.3 53.9 54.7
Source: Company, Anand Rathi Research

Fig 23 Cash-flow statement (Consolidated - ` m)


Y/E: March FY15 FY16 FY17e FY18e FY19e
Cash Profit 1,358 438 1,069 1,636 2,400
Change in WC -500 297 -116 -713 -823
Operating CF 858 736 953 923 1,577
Capex -1,246 -657 -630 -620 -620
Free CF -388 79 323 303 957
Equity -211 -38 4 -18 -5
Debt 447 6 158 18 21
Investments 116 0 - 0 -
Dividends -42 -71 -71 -71 -186
Misc inflows - - - - -
Net change in cash -79 -24 413 231 787
Opening cash 716 638 614 1,027 1,258
Closing cash 638 614 1,027 1,258 2,045
Source: Company, Anand Rathi Research

Anand Rathi Research 26


03 February 2017 Kirloskar Brothers - Turnaround on the cards; initiating, with a Buy

Fig 24 Ratio analysis @ `230 ( Consolidated)


Y/E: March FY15 FY16 FY17e FY18e FY19e
Dupont Analysis
Margins (%) 4.1 0.7 3.1 5.2 7.5
Capital turn (x) 2.1 1.9 2.0 2.2 2.3
RoCE (%) 8.5 1.4 6.1 11.2 17.2
Leverage factor (x) 1.3 1.3 1.4 1.4 1.3
Interest burden (x) 0.6 -1.8 0.4 0.7 0.8
Tax burden (x) 0.7 1.0 0.7 0.7 0.7
Consol factor (x) 0.9 1.0 1.0 1.0 1.0
RoE (%) 4.1 -3.4 2.5 7.4 13.1
Working capital (days)
Inventories 45 52 52 52 52
Debtors 105 92 92 92 92
Loans & Advances 41 48 48 48 48
Other CA 71 74 74 71 69
Creditors -84 -78 -78 -78 -78
Provisions -10 -13 -13 -13 -13
Other CL -74 -79 -79 -79 -79
Net WC 95 95 95 93 91
Other ratios
Op CF / revenue (%) 3.1 2.8 3.6 3.1 4.6
FCF / revenue (%) -1.4 0.3 1.2 1.0 2.8
Intangibles / GB (%) 12.7 13.7 12.4 11.0 9.6
Intangibles / CE (%) 5.3 5.9 5.0 4.0 3.0
Revenue / GB (x) 4.8 4.6 4.9 5.8 7.0
Revenue / FA (x) 4.7 4.5 4.8 5.7 6.9
CWIP / GB (x) 0.0 0.0 0.0 0.0 0.0
Source: Company, Anand Rathi Research

Anand Rathi Research 27


03 February 2017 Kirloskar Brothers - Turnaround on the cards; initiating, with a Buy

Valuations
The stock trades at 24.3x FY18e and 12.5x FY19e. We believe that the
improving rural economy and the companys focus on greater profitability
would lead to a re-rating due to the greater assurance of profitability.
Hence, we initiate coverage on Kirloskar Brothers, with a Buy rating and a
price target of `357 (55% potential, 9x EV/EBITDA).

Fig 25 One year forward P/B Fig 26 One year forward EV/EBITDA
3.0 35.0

2.5 30.0
KBB
25.0
2.0

+1SD 20.0
1.5 +1SD
Mean 15.0
1.0 -1SD Mean
10.0

0.5 5.0 -1SD

0.0 0.0
Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Jul-16

Jan-17

Dec-10

Jul-11

Jan-12

Aug-12

Feb-13

Sep-13

Apr-14

Oct-14

May-15

Nov-15

Jun-16

Dec-16
Source: Company, Bloomberg Source: Company, Bloomberg

Key risks
40% of the pumps market depends on agriculture; hence, the
company is exposed to seasonality. The industrial market heavily
depends on capacity creation and, hence, is cyclical.
30% of the raw materials used are non-ferrous, copper or copper-
based alloys. Any rise in raw material prices would cut into
profitability.

Anand Rathi Research 28


03 February 2017 Kirloskar Brothers - Turnaround on the cards; initiating, with a Buy

Company Background & Management


Established in 1888 and incorporated in 1920, Kirloskar Brothers is the
flagship company of the $2.5bn Kirloskar Group. A market leader, it
provides complete fluid-management solutions for large infrastructure
projects in water supply, power plants, irrigation, oil & gas and for marine
& Defence applications. It engineers and manufactures industrial,
agricultural and domestic pumps, valves and hydro-turbines.
It is the only pump-manufacturing company in India and the ninth in the
world to be accredited with the N and NPT certification by The American
Society of Mechanical Engineers. It has one of Asia's largest hydraulic
research centres, with a facility to test pumps up to 50,000 m3/hour and
5,000kW motors at the manufacturing location at Kirloskarvadi. Being the
largest manufacturer and exporter of centrifugal pumps from India, it
exports to more than 80 countries across six continents.
Manufacturing facilities: The company has 14 manufacturing plants,
seven outside India.

Fig 27 Manufacturing facilities and locations


Manufacturing Plants Location Established (year)
Kirloskarvadi - Kirloskar Brothers Western India 1910
Dewas - Kirloskar Brothers Central India 1962
Shirwal - Kirloskar Brothers Western India
Kondhapuri - Kirloskar Brothers Western India 2001
Kolhapur - The Kolhapur Steel Co.. Western India 1965
Coimbatore - Kirloskar Brothers (Kaniyur) Southern India 2011
Ahmedabad - Kirloskar Brothers (Sanand) Western India 2012
Atlanta - SPP Pumps, Inc. USA 2003
Coleford - SPP Pumps UK 2003
Jebel Ali - SPP Pumps UAE 2012
Johannesburg - SPP Pumps Republic Of South Africa
VelsonNoord - Kirloskar Brothers Europe BV The Netherlands 2007
Johannesburg - Braybar Pumps (pty) Ltd. Republic Of South Africa 2010
Bangkok - Kirloskar Brothers (Thailand) Thailand 2008
Source: Company

Anand Rathi Research 29


03 February 2017 Kirloskar Brothers - Turnaround on the cards; initiating, with a Buy

Subsidiaries and joint ventures: The company has the following


domestic and international subsidiaries and joint ventures:

Fig 28 Subsidiaries
Subsidiaries / Joint Ventures Stake Works undertaken
Domestic subsidiaries %
Manufactures coatings for turnkey projects for the supply and application of coatings on a variety
Kirloskar Corrocoat Pvt. Ltd. 65
of equipment
Foundry for steel castings for various industries: power, mining, cement, heavy engineering
The Kolhapur Steel Co. 96
application, sugar, etc.
Karad Projects & Motors 100 Manufactures stators, rotors and electric motors
Kirloskar Systech 100 Systems engineering for various verticals: power, water, irrigation, industry
Kirloskar Brothers International BV subsidiaries (100%)
Leading market operations in fire pumps, packages business, lowest life-cycle-cost pump-range,
SPP Pumps (UK)
Assembly units in the USA and South Africa
Manufactures and sells high-head multi-stage pumps; rubber-lined slurry pumps and white-metal-
Braybar Pumps (Pty.) Ltd. (South Africa)
lined bearings
Kirloskar Brothers (Thailand). Sales and packaging of centrifugal pumps, focusing on south-east Asia
Kirloskar Brothers Europe B.V. Sales and packaging of centrifugal pumps, focusing on European markets
Formed in Egypt to assemble, package, test, service and repair various types of pumps and
SPP Pumps (MENA) L.L.C (Egypt)
pumping systems
Joint ventures
Manufactures and supplies rotary equipment: process pumps, steam turbines, fans, blowers, etc.,
Kirloskar Ebara Pumps 45
required for critical applications in hydrocarbon-processing industries and for power projects
Source: Company

Key Managerial Personnel and Board of Directors


Fig 29 Key managerial personnel
Sanjay Kirloskar Chairman & Managing Director B.Sc. (Mechanical Engineering) from The Illinois Institute of Technology, Chicago; associated with the Kirloskar
Group, Kulkarni Power Tools, etc.
Shrikrishna Inamdar Independent Director B.Com., LLB; senior advocate of the Bombay HC, in practice for more than three decades, specialisation in tax
and allied laws; associated with the Kirloskar Group, Finolex Industries, Sakal Papers Pvt. Ltd, etc.

Padmakar Jawadekar Independent Director B.E. (Electrical), Gujarat University; Fellow of The Institute of Engineers (India); four decades experience in
technology sourcing, development & management, structuring of business units, human resources & industrial
relations, marketing & quality management and leadership development; associated with the Kirloskar Group
and CMC Commutators Pvt. Ltd.
Lalita Gupte Independent Director B.A. (Hons), Economics, MA in Management Studies; associated with ICICI Venture Funds Management, ICICI
Bank; more than 15 years experience in setting up the international business of ICICI Bank

Pratap Shirke Independent Director Civil engineering degree from the College Of Engineering, Pune, Masters and MBA from Stanford University, ,
USA; associated with the Pan Gulf Group, Oak Group, Grand Havre Holdings, etc.
Alok Kirloskar Non-Executive Director B. Sc. in Business Administration (Finance) from Carnegie Mellon University, Pittsburgh, PA, USA; associated
with Sonasoft Corp., SPP Pumps, Braybar Pumps (Proprietary), etc.

Kishor Chaukar Independent Director B.A. (Economics) Karnataka University, PGDM, IIM, Ahmedabad, DEA in Rural Economics from the University
of Dijon, France; associated with the Tata Group for more than 15 years

Source: Company

Anand Rathi Research 30


Engineering & Capital goods
India I Equities
Initiating Coverage

03 February 2017

KSB Pumps Rating: Sell


Target Price: `521
Sales growth to be subdued; initiating, with a Sell Share Price: `616

A recovery in orders for KSB (on a pick-up in oil & gas industry orders)
is not expected before end-CY17. Hence, subdued sales growth is likely
Key data KSB IN / KSBP.BO
over CY16-18. Further, margins would only slightly improve because of `774 / `503
52-week high / low
the unfavourable sales mix. Hence, despite a consistent performance Sensex / Nifty 28241 / 8741
and prudent working-capital management, a 6.2% earnings CAGR over 3-m average volume $0.1m
CY15-18 would cap valuations at 22x CY18e. We initiate coverage on Market cap `21.8bn / $318bn
KSB Pumps, with a Sell and a price target of `521. Shares outstanding 34.8m
Late starter in pumps for power plants of more than 660 MW. With
major additions in power plants of over 660 MW in the last three years, the
parent was the major source for the pumps required. KSB started late to add, Shareholding pattern (%) Dec16 Sep16 Jun 16
through the Indian entity, capacity for future needs for such pumps. As Promoters 66.4 66.4 66.4
power-generation capex is likely to grow modestly due to the greater focus on - of which, Pledged - - -
improving grid-connectivity, capacity addition would not help the business Free Float 33.6 33.6 33.6
revive and, in fact, might dilute returns. - Foreign Institutions 3.5 3.3 3.3
- Domestic Institutions 14.9 14.8 15.0
Premium brand, low agriculture presence to keep small pump-sets - Public 15.2 15.5 15.3
under pressure. The company markets off-the-shelf pump-sets through
dealers, usually 15-20% more expensive than those of Kirloskar Brothers.
Hence, we believe that improving rural income would not greatly add to its
growth prospects.
Relative price performance
Oil & gas orders still a distant factor. Emission norms-related capex has 800
been declared in oil & gas. Actual capacity additions to comply with the 750 KSB
norms would take at least 12-18 months. Pumps and valves are installed at the 700
last
` stage of capex. Hence, most order inflows and execution would happen in 650
CY18 and CY19. Growth in CY17 would be modest. 600
Sensex
550
Valuation. We initiate coverage on KSB Pumps, with a Sell and a TP of `521 500
(~15% lower). Our analysis suggests that earnings-growth optimism has
Aug-16
Sep-16
Jan-16
Feb-16

Apr-16

Jun-16

Jan-17
Jul-16
May-16
Mar-16

Nov-16
Dec-16
Oct-16

already been priced into current valuations. Risk. More-than-expected orders


in power and oil & gas.
Source: Bloomberg

Key financials (YE Dec) CY14 CY15 CY16e CY17e CY18e


Sales (` m) 8,037 8,207 8,163 8,856 10,077
Net profit (` m) 684 687 665 709 824
EPS (`) 19.7 19.7 19.1 20.4 23.7
Growth (%) 2.6 0.5 -3.2 6.6 16.1
PE (x) 31.3 31.2 32.2 30.2 26.0
PBV (x) 3.8 3.6 3.3 3.1 2.8
RoE (%) 12.8 11.9 10.6 10.6 11.3 Bhalchandra Shinde
RoCE (%) 17.9 17.6 15.3 15.2 16.3 Research Analyst
Dividend yield (%) 0.9 0.9 0.9 0.9 0.9
Net debt/equity (x) -0.3 -0.4 -0.4 -0.3 -0.3
Source: Company, Anand Rathi Research

Anand Rathi Share and Stock Brokers Limited (hereinafter ARSSBL) is a full-service brokerage and equities-research firm and the views expressed therein are solely of
ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst
certifications are present in the Appendix.

Anand Rathi Research India Equities


03 February 2017 KSB Pumps - Sales growth to be subdued; initiating, with a Sell

Quick Glance Financials and Valuations


Fig 1 Income statement (` m) Fig 2 Balance sheet (` m)
Year-end: Dec CY14 CY15 CY16e CY17e CY18e Year-end: Dec CY14 CY15 CY16e CY17e CY18e
Net revenues 8,037 8,207 8,163 8,856 10,077 Share capital 348 348 348 348 348
Revenue growth (%) 9.7 2.1 -0.5 8.5 13.8 Reserves & surplus 5,224 5,680 6,124 6,611 7,212
- Oper. expenses 7,025 7,148 7,160 7,710 8,722 Net worth 5,572 6,028 6,472 6,959 7,560
EBIDTA 1,011 1,059 1,003 1,146 1,354 Total debt 244 13 13 13 13
EBITDA margins (%) 12.6 12.9 12.3 12.9 13.4 Minority interest - - - - -
- Interest 21 17 21 25 30 Def. tax liab. (net) -100 -128 -128 -128 -128
- Depreciation 276 278 306 364 422 Capital employed 5,716 5,914 6,357 6,844 7,445
+ Other income 229 241 241 219 235 Net fixed assets 2,008 2,083 2,573 3,297 3,564
- Tax 325 364 303 322 375 Intangible assets - - - - -
Effective tax rate (%) 34.4 36.2 33.0 33.0 33.0 Investments 499 514 514 514 514
+ Associates / (minorities) 66 46 51 56 61 - of which, Liquid - - - - -
Adjusted PAT 684 687 665 709 824 Working capital 1,422 1,034 982 1,042 1,159
+ Extraordinary items - - - - - Cash 1,787 2,283 2,288 1,991 2,208
Reported PAT 684 687 665 709 824 Capital deployed 5,716 5,914 6,357 6,844 7,445
Adj. FDEPS (` / sh) 19.7 19.7 19.1 20.4 23.7 W C turn (days) 65 46 44 43 42
Adj. FDEPS growth (%) 2.6 0.5 -3.2 6.6 16.1 Book value (` / sh) 160.1 173.2 185.9 199.9 217.2
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 3 Cash-flow statement (` m) Fig 4 Ratio analysis @ `616


Year-end: Dec CY14 CY15 CY16e CY17e CY18e Year-end: Dec CY14 CY15 CY16e CY17e CY18e
Adjusted PAT 684 687 665 709 824 P/E (x) 31.3 31.2 32.2 30.2 26.0
+ Non-cash items 276 278 306 364 422 Cash P/E (x) 22.3 22.2 22.1 20.0 17.2
Cash profit 960 965 972 1,073 1,246 EV / EBITDA (x) 19.7 18.1 19.1 17.0 14.2
- Incr. / (decr.) in WC 330 -388 -52 60 117 EV / sales (x) 2.5 2.3 2.3 2.2 1.9
Operating cash-flow 629 1,353 1,023 1,014 1,128 P/B (x) 3.8 3.6 3.3 3.1 2.8
- Capex 388 352 796 1,089 689 RoE (%) 12.8 11.9 10.6 10.6 11.3
Free cash-flow 241 1,001 227 -75 440 RoCE (%) 17.9 17.6 15.3 15.2 16.3
- Dividend 230 222 222 222 222 Dividend yield (%) 0.9 0.9 0.9 0.9 0.9
+ Equity raised 0 -9 -0 -0 -0 Dividend payout (%) 33.6 32.3 33.4 31.3 27.0
+ Debt raised 189 -258 - - - Net debt / equity (x) -0.3 -0.4 -0.4 -0.3 -0.3
- Investments 14 15 - - - Debtor days 81 79 79 78 77
- Misc. items - - - - - Inventory days 92 81 81 81 81
Net cash-flow 187 496 5 (297) 217 Payables days 70 69 69 69 69
+ Op. cash & bank bal. 1,600 1,787 2,283 2,288 1,991 Interest cover (x) 44.9 58.9 45.1 40.0 39.0
Cl. Cash & bank bal. 1,787 2,283 2,288 1,991 2,208 Fixed asset T/O (x) 4.0 3.9 3.2 2.7 2.8
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 5 Price movement Fig 6 Sales mix (9M CY16)


(`)
Agriculture
800 10%
KSB
700
Oil &Gas
600
30%
500
Dealers
400 30%
300

200

100
Chemicals &
0 paints
Industry
15%
Jul-12

Jul-13

Jul-14

Jul-15

Jul-16
Apr-12

Oct-12

Apr-13

Oct-13

Apr-14

Oct-14

Apr-15

Oct-15

Apr-16

Oct-16
Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

15%

Source: Bloomberg Source: Company

Anand Rathi Research 32


03 February 2017 KSB Pumps - Sales growth to be subdued; initiating, with a Sell

Late starter in pumps for supercritical


power plants
Power generation capacity addition had been strong in the last five years,
especially in thermal power generation.

Fig 7 Power generation capacity at 307,278 MW


(MW)
3,50,000

3,00,000

2,50,000

2,00,000

1,50,000

1,00,000

50,000

0
FY04

FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17
Thermal Nuclear Hydro Renewable

Source: CEA, till 1HFY17end

In the 11th and 12th Plans, capacity additions (excluding renewable


energy) were vigorous, at respectively ~50 GW and ~100 GW. Capacity
addition was higher in thermal, especially coal-based, power plants.

Fig 8 Power-generation capacity addition


(MW)
35,000

30,000

25,000

20,000

15,000

10,000

5,000

0
FY05

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17

Thermal Nuclear Hydro Renewable

Source: CEA, till 1H FY17 end

Demand for electricity is expected to rise at an 8% CAGR to 1,895 TWh


over FY17-22. Capacity, excluding for renewable energy, is expected to
add up to 100 GW in the 13th Plan.

Anand Rathi Research 33


03 February 2017 KSB Pumps - Sales growth to be subdued; initiating, with a Sell

Fig 9 Power-generation capacity addition, Plan-wise


(GW)
100.0 100.0
100
90
80
70
60 55.0
50
40
30
19.0 21.1
20 16.4
10
0

9th

10th

11th

12th

13th
8th
Generation Capacity addition
Source: CEA

In the last few years, supercritical units capacity additions have revived.
But supercritical power plants still constitute ~11% of generation capacity
added.

Fig 10 Generation-capacity addition


Supercritical
11%

Sub critical
89%

Source: CEA

We believe that capacity-addition plans would grow at a slower pace due to


near surplus power in the last two years because of lower power needs and
greater capacity additions.

Fig 11 Power surplus / deficit


(%)
0

-2

-4

-6

-8

-10

-12
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16

Source: CEA

Anand Rathi Research 34


03 February 2017 KSB Pumps - Sales growth to be subdued; initiating, with a Sell

Hence, capacity additions in super-critical power plants would be lower, at


least in the next three years.
In KSB Pumps, the parent (KSB AG) used to directly source from
Germany higher-pressure pumps for supercritical power units. KSB
Pumps, a listed entity, was largely utilised for servicing and maintenance.
In CY17, the parent plans to add capacity of the listed entity to cater to
forthcoming supercritical units. The parent has capex of ~`2.5bn planned
for the next two years in two phases.
Phase-1 capex would be ~`1bn and commence operations in H1 CY17,
but it would not add much capacity. This would be to replace existing
rented capacity.
We believe that the surplus power situation in India would keep power-
generation-capacity addition at a slower pace than earlier. Hence, capacity
addition by KSB Pumps for supercritical units is expected to be under-
utilised, thereby resulting in dilution in returns and profitability due to
lower utilisation over the next three years.

Anand Rathi Research 35


03 February 2017 KSB Pumps - Sales growth to be subdued; initiating, with a Sell

Premium brand, low agriculture


presence; product business to be
subdued
Sales only through dealers
KSB Pumps caters to retail markets through dealers only. There are no
direct retailers for sales in India. 30-35% of sales come through dealers.
Agriculture forms only 10% of sales and only through dealers.

Fig 12 Sales classification


Agriculture
10%

Oil &Gas
30%

Dealers
30%

Chemicals &
paints
Industry
15%
15%

Source: Company

KSB Pumps is considered one of the best companies for submersible


pumps. However, they are available at a premium of at least 20-25% to
others such as Kirloskar Brothers.

Fig 13 Pump-set industry sales correlated with rainfall surplus / deficit


(`m) (%)
14,000 15.0

12,000 10.0

5.0
10,000
0.0
8,000
-5.0
6,000
-10.0
4,000
-15.0
2,000 -20.0

0 -25.0
FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17e

Pumpsets sales rainfall surplus/deficit (RHS)


Source: MOSPI, IMD

Hence, the monsoon will not benefit KSB Pumps. Though a favourable
monsoon and higher farm income might lead to healthy growth in pumps,
the company is likely to see modest growth in agri pump-sets. KSB Pumps
is largely preferred by platinum customers ie, ~1-2% of rich farmers.
Hence, we do not see any major sales growth in pumpsets for agriculture.
Similarly, in forthcoming projects in irrigation, KSB Pumps does not
participate directly. Its participation is only through dealers. Hence, its
growth would be restricted to irrigation projects.

Anand Rathi Research 36


03 February 2017 KSB Pumps - Sales growth to be subdued; initiating, with a Sell

Oil & gas orders still a distant factor


to matter
KSB Pumps order book at 1x TTM sales
KSB Pumps order book has been flattish, at ~1x TTM sales. Oil & gas
orders comprise ~25-30% of its order book.

Fig 12 Forthcoming projects in oil & gas


Potential orders in Anticipated
Company Forthcoming projects Value (` m)
pumps (` m) completion
Ennore LNG terminal 51,858 2,500-3,500 FY19
Paradip-Raipur-Ranchi pipeline 18,157 900-1,300 FY18
Paradip-Haldia-Durgapur LPG pipeline and extension to Muzaffarpur 18,425 950-1,400 FY20
Indian Oil Corp. Polypropylene unit at Paradip 31,825 1,600-2,200 FY18
Distillate yield improvement at Haldia 31,088 1,500-2,200 FY18
Paradip-Hyderabad pipeline 23,450 1,200-1,700 FY20
(1,150 km, 4.5m tpa)
Mumbai refinery 42,000 2,100-3,000 FY19
Visakh refinery 208,000 10,400-15,000 FY22
HPCL
MDPL phase-II - extension from Palanpur to Vadodara 19,000 950-1,400 FY19
VVSPL phase-II - refinery expansion 30,000 1,500-2,100 FY20
Bina refineries 200,000-250,000 10,000-14,000 FY22
BPCL
Mumbai refinery 150,000 7,500-10,500 FY22
Total capex `623bn -700bn 30,000-49,000
Source: IOC, HPCL, BPCL

Considering the potential capacity additions planned by Indian oil


companies, orders of ~`10bn-15bn a year are expected to be executed in
the next 3-4 years. KSB Pumps is one of the market leaders in oil-&-gas-
related orders and is expected to see strong growth in order inflows.
However, most of them would happen in CY18 and CY19. Hence, most
of the execution would take place in the latter half of CY18 and CY19.

Fig 15 Oil & gas refinery schematic diagram

Source: Company

As seen in the above flow-chart, most pump-related capex takes place at


the end stage. Hence, we believe that sales growth would be modest in
CY16 and CY17 due to greater execution only in CY18.

Anand Rathi Research 37


03 February 2017 KSB Pumps - Sales growth to be subdued; initiating, with a Sell

Financials
Sales growth expected to be modest
Few orders from the chemicals and oil & gas industries would temper sales
growth. Slower capex in power generation would also keep sales subdued.
Other industries such as paints and manufacturing are also showing
sluggish capacity addition due to lower utilisation. Hence, realisations are
expected to be flattish in the next three years.

Fig 16 Sales and sales-growth trends


(`m) (%)
12,000 25.0

10,000 20.0

15.0
8,000
10.0
6,000
5.0
4,000
0.0
2,000 -5.0

0 -10.0
CY09

CY10

CY11

CY12

CY13

CY14

CY15

CY16

CY17e

CY18e
Sales YoY (RHS)
Source: Company, Anand Rathi Research

Growth in pump volumes is expected to be subdued due to the gradually


improving order book. Intense competition has led to realisations
declining in the last 3-4 years.

Fig 17 Pumps: volumes and realisation trends


(m) (%)
250 45.0

200 40.0

150 35.0

100 30.0

50 25.0

0 20.0
CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17e
CY18e

Number of Pumps Realizations (RHS)


Source: Company, Anand Rathi Research

MIL Controls, an associate company of KSB (with a 49% share) and a


subsidiary of the parent (KSB AG, with a 51% share), manufactures high-
precision critical industrial control valves in India. These are utilised in
thermal/nuclear power plants, exploration/production of oil, gas & oil
products (petrochemicals) and the chemicals industry, including fertilisers.
On subdued order inflows, we expect restrained growth in valve volumes.

Anand Rathi Research 38


03 February 2017 KSB Pumps - Sales growth to be subdued; initiating, with a Sell

Fig 18 Valves: volume and realiaation trend


(m) (%)
250 10.0

200 8.0

150 6.0

100 4.0

50 2.0

0 0.0

CY01
CY02
CY03
CY04
CY05
CY06
CY07
CY08
CY09
CY10
CY11
CY12
CY13
CY14
CY15
CY16
CY17e
CY18e
Number of Valves Realizations (RHS)
Source: Company, Anand Rathi Research

EBITDA margins would be flattish


An unfavourable sales mix would only slowly improve margins.

Fig 19 Cost-structure trend


CY10 CY11 CY12 CY13 CY14 CY15 CY16e CY17e CY18e
Sales 6,102 7,490 7,154 7,327 8,037 8,207 8,163 8,856 10,077
Raw material cost 3,022 3,984 3,581 3,443 3,815 3,888 3,755 4,074 4,635
Employee cost 918 1,044 1,037 1,101 1,271 1,249 1,490 1,698 1,902
Other expenses 1,376 1,743 1,609 1,763 1,939 2,012 1,915 1,938 2,185

% of sales

Raw material cost 49.5 53.2 50.1 47.0 47.5 47.4 46.0 46.0 46.0
Employee cost 15.0 13.9 14.5 15.0 15.8 15.2 18.2 19.2 18.9
Other expenses 22.5 23.3 22.5 24.1 24.1 24.5 23.5 21.9 21.7
EBITDA margins 12.9 9.6 13.0 13.9 12.6 12.9 12.3 12.9 13.4
Source: Company, Anand Rathi Research

The gross margin would improve ~100bps due to execution of product


orders. But a slower execution cycle for project orders would lead to
higher other expenses, resulting in only a gradual improvement in margins.

Anand Rathi Research 39


03 February 2017 KSB Pumps - Sales growth to be subdued; initiating, with a Sell

Fig 20 Income statement (` m)


Y/E: Dec CY14 CY15 CY16e CY17e CY18e
Net revenues 8,037 8,207 8,163 8,856 10,077
Growth (%) 9.7 2.1 -0.5 8.5 13.8
Material cost -3,815 -3,888 -3,755 -4,074 -4,635
Employee cost -1,271 -1,249 -1,490 -1,698 -1,902
Manufacturing cost -195 -213 -212 -230 -262
Marketing cost -234 -238 -223 -237 -263
Administrative cost -669 -664 -603 -517 -582
Energy cost -173 -176 -171 -186 -212
Other cost -669 -721 -706 -767 -867
EBITDA 1,011 1,059 1,003 1,146 1,354
Growth (%) -0.7 4.7 -5.3 14.2 18.2
EBITDA margin (%) 12.6 12.9 12.3 12.9 13.4
Other income 229 241 241 219 235
Operating profit 1,240 1,300 1,244 1,365 1,590
Depreciation -276 -278 -306 -364 -422
EBIT 965 1,022 938 1,001 1,168
Interest cost -21 -17 -21 -25 -30
PBT 943 1,005 918 976 1,138
Tax -325 -364 -303 -322 -375
Effective tax rate 34.4 36.2 33.0 33.0 33.0
PAT 618 641 615 654 762
Minority interest - - - - -
Consol PAT 684 687 665 709 824
Growth (%) 2.6 0.5 -3.2 6.6 16.1
PAT margin (%) 8.5 8.4 8.2 8.0 8.2
Extraordinary income - - - - -
Dividends (incl. tax) -230 -222 -222 -222 -222
Transferred to reserves 454 465 443 487 601
Per-share data
FDEPS (`) 19.7 19.7 19.1 20.4 23.7
DPS (`) 5.5 5.5 5.5 5.5 5.5
Adj BV (`) 160.1 173.2 185.9 199.9 217.2
CEPS (`) 27.6 27.7 27.9 30.8 35.8
Valuation ratio
P/E (x) 31.3 31.2 32.2 30.2 26.0
P / adj. BV (x) 3.8 3.6 3.3 3.1 2.8
P/C (x) 22.3 22.2 22.1 20.0 17.2
Dividend yield (%) 0.9 0.9 0.9 0.9 0.9
EV/S (x) 2.5 2.3 2.3 2.2 1.9
EV/E (x) 19.6 18.0 19.0 16.9 14.1
Quality ratio
Dividend payout (%) 33.6 32.3 33.4 31.3 27.0
Other income / PBT (%) 24.2 23.9 26.3 22.4 20.7
Interest cover (x) 44.9 58.9 45.1 40.0 39.0
Operating CF / EBITDA (x) 0.6 1.3 1.0 0.9 0.8
Source: Company, Anand Rathi Research

Anand Rathi Research 40


03 February 2017 KSB Pumps - Sales growth to be subdued; initiating, with a Sell

Fig 21 Balance sheet (` m)


Y/E: Dec CY14 CY15 CY16e CY17e CY18e
Equity 348 348 348 348 348
Reserves 5,224 5,680 6,124 6,611 7,212
Minority interests - - - - -
Less: Misc expenses - - - - -
Net worth 5,572 6,028 6,472 6,959 7,560
Equity (% of CE) 97.5 101.9 101.8 101.7 101.5
LT debt - - - - -
ST Debt 244 13 13 13 13
DTL (net) -100 -128 -128 -128 -128
Total debt 144 -115 -115 -115 -115
Net D/E (x) -0.3 -0.4 -0.4 -0.3 -0.3
Capital employed 5,716 5,914 6,357 6,844 7,445
Gross block 1,909 1,941 2,323 3,047 3,314
Accu. depreciation - - - - -
Net block 1,909 1,941 2,323 3,047 3,314
CWIP 100 142 250 250 250
Fixed assets 2,008 2,083 2,573 3,297 3,564
Investments 499 514 514 514 514
Cash equivalents 1,788 2,284 2,288 1,991 2,208
Inventories 2,018 1,826 1,812 1,965 2,236
Debtors 1,790 1,784 1,767 1,892 2,126
Loans & advances 875 847 843 914 1,040
Other current assets 60 42 60 60 60
Current assets 6,530 6,783 6,769 6,823 7,670
Creditors -1,537 -1,546 -1,543 -1,674 -1,905
Provisions -640 -774 -816 -886 -1,008
Other current liabilities -1,144 -1,146 -1,140 -1,231 -1,390
Current liabilities -3,321 -3,465 -3,499 -3,790 -4,303
Net current assets 3,209 3,317 3,270 3,033 3,367
Capital deployed 5,716 5,914 6,357 6,844 7,445
FA/CE (%) 35.1 35.2 40.5 48.2 47.9
Investments / CE (%) 8.7 8.7 8.1 7.5 6.9
Liquid assets / CE (%) 31.3 38.6 36.0 29.1 29.7
Working capital / CE (%) 24.9 17.5 15.4 15.2 15.6
Source: Company, Anand Rathi Research

Fig 22 Cash-flow statement (` m)


Y/E: Dec CY14 CY15 CY16e CY17e CY18e
Cash Profit 960 965 972 1,073 1,246
Change in WC -330 388 52 -60 -117
Operating CF 629 1,353 1,023 1,014 1,128
Capex -388 -352 -796 -1,089 -689
Free CF 241 1,001 227 -75 440
Equity 0 -9 -0 -0 -0
Debt 189 -258 - - -
Investments -14 -15 - - -
Dividends -230 -222 -222 -222 -222
Misc inflows - - - - -
Net change in cash 187 496 5 -297 217
Opening cash 1,600 1,787 2,283 2,288 1,991
Closing cash 1,787 2,283 2,288 1,991 2,208
Source: Company, Anand Rathi Research

Anand Rathi Research 41


03 February 2017 KSB Pumps - Sales growth to be subdued; initiating, with a Sell

Fig 23 Ratio analysis @ 616


Y/E: Dec CY14 CY15 CY16e CY17e CY18e
Dupont Analysis
Margins (%) 12.0 12.5 11.5 11.3 11.6
Capital turn (x) 1.5 1.4 1.3 1.3 1.4
RoCE (%) 17.9 17.6 15.3 15.2 16.3
Leverage factor (x) 1.0 1.0 1.0 1.0 1.0
Interest burden (x) 1.0 1.0 1.0 1.0 1.0
Tax burden (x) 0.7 0.6 0.7 0.7 0.7
Consol factor (x) 1.1 1.1 1.1 1.1 1.1
RoE (%) 12.8 11.9 10.6 10.6 11.3
Working capital (days)
Inventories 92 81 81 81 81
Debtors 81 79 79 78 77
Loans & Advances 40 38 38 38 38
Other CA 3 2 3 2 2
Creditors -70 -69 -69 -69 -69
Provisions -29 -34 -37 -37 -37
Other CL -52 -51 -51 -51 -50
Net WC 65 46 44 43 42
Other ratios
Op CF / revenue (%) 7.8 16.5 12.5 11.4 11.2
FCF / revenue (%) 3.0 12.2 2.8 -0.8 4.4
Intangibles / GB (%) - - - - -
Intangibles / CE (%) - - - - -
Revenue / GB (x) 4.2 4.2 3.5 2.9 3.0
Revenue / FA (x) 4.0 3.9 3.2 2.7 2.8
CWIP / GB (x) 0.1 0.1 0.1 0.1 0.1
Source: Company, Anand Rathi Research

Anand Rathi Research 42


03 February 2017 KSB Pumps - Sales growth to be subdued; initiating, with a Sell

Valuations
A recovery in orders for KSB Pumps (on a pick-up in oil & gas industry
orders) is not expected before end-CY17. Hence, subdued sales growth is
likely over CY16-18. Further, margins would only slightly improve because
of the unfavourable sales mix. Hence, despite a consistent performance
and prudent working-capital management, a 6.2% earnings CAGR over
CY15-18 would cap valuations at 22x CY18e. We initiate coverage on KSB
Pumps, with a Sell and a target price of `521.

Fig 24 One-year-forward P/E Fig 25 One-year-forward EV/EBITDA


45 25.0

40
20.0
35

30 +1SD +1SD
15.0
25

20 Mean Mean
10.0
15

10 -1SD -1SD
5.0
5

0 0.0
Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Jul-16

Jan-17

Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Jul-16

Jan-17
Source: Company, Bloomberg Source: Company, Bloomberg

Key risks
40% of the pumps market being for agriculture, the company is
exposed to seasonality. The industrial market heavily depends on
capacity creation; hence, is cyclical.
30% of the raw materials used are non-ferrous, copper or copper-
based alloys. Any rise in raw material prices would cut into
profitability.

Anand Rathi Research 43


03 February 2017 KSB Pumps - Sales growth to be subdued; initiating, with a Sell

Company Background & Management


Founded in 1960, KSB Pumps, India, (promoted by Klein Schanzlin &
Becker AG (Germany)), a leading international manufacturer of pumps
and valves, is headquartered in Pune, Maharashtra, with plants at Pimpri,
Chinchwad, Vambori, Coimbatore and Sinnar. With a ~15% market
share, it is the second-largest manufacturer of pumps in India. One of its
technical collaborators, Canadian Kay Pumps, is the main shareholder,
with a 40.54% stake; the Indian promoters hold 25.87%, taking total
promoter holding to 66.41%.
KSB Pumps manufactures a comprehensive range of standard industrial
end-suction and high-pressure multi-stage, submersible motor and mono-
bloc pumps and necessary spare parts. Its pumps and valves are used in
the energy and oil industry, water, water & waste water, process industries,
construction, etc.
Locations: The company has four manufacturing plants in Maharashtra:
at Pimpri and Chinchwad, Pune; Vambori, Ahmednagar; Sinnar, Nashik;
and one in Tamil Nadu, NSN Palayam, Coimbatore. The plants cover
50,000 sq.m. While zonal sales offices are located at Noida, Kolkata,
Mumbai and Chennai, service stations are at Noida, Raipur, Odhav
and Chennai.

Fig 26 Manufacturing plants


Manufacturing Plants Products
Irrigation and process pumps Pumps in this division include chemical process, multi-stage high pressure,
division at Pimpri non-clog pumps and special pumps for refineries
Products manufactured include primary heat-transport pumps, primary
Power projects division at system-feed pumps, residual-heat-removal pumps; primary pressurising
Chinchwad pumps; main boiler-feed pumps; multi-stage condensate-extraction pumps;
re-heater drain pumps and auxiliary boiler-feed pumps
Foundry division at Vambhori Manufacturing steel & iron castings, including for captive consumption
Products: standard bore-well submersible pump-sets ranging from 100 to
Nashik unit (Sinnar)
350 mm, sewage-handling pumps, and standard industrial pumps
Valves division at Coimbatore Manufacturing valves (globe, gate, check, butterfly and ball valves)
Source: Company

Fig 27 Key Managerial Personnel and Board of Directors


Name Designation Qualification
B.E. (Mechanical Engineering) Jadavpur University, Kolkata; MBA, Harvard University, USA; associated with Paharpur
Gaurav Swarup Chairman
Cooling Towers and TIL
Mechanical engineer, business management and international trade; MD of KSB in Indonesia and Singapore and
Rajeev Jain Managing Director
regional executive officer for south-east Asia
B.Com., Sydenham College, Mumbai, FCA; founder, chairman of the JM Financial group; over four decades
Nimesh N. Kampani Independent Director
experience; contributed in developing capital markets, including capital-raising, mergers and acquisitions, etc.
Engineer, University of Braunschweig, Germany; associated with the KSB Group since 1993, Burckhardt Compression
Dr Stephan Bross Director
AG, etc.
B.Com, AICWA, ACA, MBA (Harvard); partner at Pravin P. Shah & Co. since 1980; founder of CRISIL and IndAsia;
Pradip P. Shah Director associated with ICICI, HDFC, Grindwell Norton, etc.; four decades experience in financial consultancy, corporate re-
structuring, funding, taxation, accounting, law and FEMA matters, etc.
B.Com., Madras University, CA; associated with HUL for 17 years and the Bosch Group; on the board of KSB since
V. K. Viswanathan Independent Director
Jan15
Ms Sulajja Firodia MBA (Marketing and Finance), Carnegie Mellon University; associated with Kinetic Motors, the Firodia Group, BARRA,
Independent Director
Motwani etc.; featured as a business 'Face of the Millennium' by India Today
Werner Stegmuller Director Partner, Horvath & Partner GmbH; associated with KSB Aktiengesellschaft (AG) and KSB Pumps since Jul14
Source: Company

Anand Rathi Research 44


Engineering & Capital goods
India I Equities
Initiating Coverage

03 February 2017

Shakti Pumps Rating: Buy


Target Price: `214
Energy-efficient pumps, exports the key; initiating, with a Buy Share Price: `160

We initiate coverage on Shakti Pumps, with a Buy rating and a target of


`214 (~33% potential). Expecting greater demand for energy-efficient
Key data SKPI IN / SHPU.BO
pumps, Shakti is confident of attaining to strong growth in the next `184 / `95
52-week high / low
three years. Similarly, industrial products are expected to improve Sensex / Nifty 28241 / 8741
considerably. Added markets such as the US and south-east Asia are 3-m average volume $0.2m
expected to compensate for West Asian markets. Strong sales growth Market cap `3bn / $44.5bn
and margin expansion would lead to a re-rating. Shares outstanding 18m

Preferred vendor in energy-efficient pumps. Shakti Pumps is one of the


preferred vendors in the energy-efficient-pump drive for Energy Efficiency
Services. With the governments emphasis on greater energy efficiency, bulk Shareholding pattern (%) Dec 16 Sep 16 Jun 16
orders are expected in the pump industry as with LEDs. Shakti Pumps is Promoters 45.6 45.6 50.1
likely to be one of the major beneficiaries of such tenders in bulk. - of which, Pledged 25.9 25.9 25.9
Free Float 54.4 54.4 49.9
Industry applications, promising prospects. At present, the companys - Foreign Institutions - - -
products have few industrial applications. With products introduced, it would - Domestic Institutions 3.3 4.0 5.1
51.1 50.3 44.9
obtain access to commercial and industrial capex in India in the next three - Public
years.

Greater emphasis on the US and African markets. Political crises have led
to the company reducing its exposure to West Asia in the last two years. The Relative price performance
relentless focus on the US and African markets has helped it compensate for 180
the sales decline in West Asian markets. A pick-up in US and African sales 170 Sensex
160
would result in strong growth in exports. 150
140
` 130
Valuation. We initiate coverage on Shakti Pumps with a Buy rating and a 120 SKPI
`214 target (~33% potential). The stock trades at 21x FY18e and 15x FY19e 110
100
earnings. We believe that bulk tenders and the greater emphasis on the US 90
and other markets would result in healthy growth for the company. Risks.
Aug-16
Sep-16
Jan-16
Feb-16

Apr-16

Jun-16

Jan-17
Jul-16
May-16
Mar-16

Nov-16
Dec-16
Oct-16

Lower-than-expected capex in energy-conservation programmes and a


slowdown in the US and African markets Source: Bloomberg

Key financials (YE Mar) FY15 FY16 FY17e FY18e FY19e


Sales (` m) 2,966 2,642 2,890 3,201 3,600
Net profit (` m) 263 11 82 128 179
EPS (`) 15.7 0.6 4.9 7.6 10.7
Growth (%) -4.2 -95.9 672.4 55.4 40.0
PE (x) 10.2 251.8 32.6 21.0 15.0
PBV (x) 1.3 1.3 1.3 1.2 1.2
RoE (%) 15.4 0.5 4.0 6.1 8.0
Bhalchandra Shinde
RoCE (%) 18.2 5.6 8.7 10.7 12.6
Research Analyst
Dividend yield (%) 1.2 0.9 0.9 0.9 0.9
Net debt/equity (x) 0.4 0.4 0.4 0.5 0.5
Source: Company, Anand Rathi Research

Anand Rathi Share and Stock Brokers Limited (hereinafter ARSSBL) is a full-service brokerage and equities-research firm and the views expressed therein are solely of
ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst
certifications are present in the Appendix.

Anand Rathi Research India Equities


03 February 2017 Shakti Pumps - Energy-efficient pumps, exports the key; initiating, with a Buy

Quick Glance Financials and Valuations


Fig 1 Income statement (` m) Fig 2 Balance sheet (` m)
Year-end: Mar FY15 FY16 FY17e FY18e FY19e Year-end: Mar FY15 FY16 FY17e FY18e FY19e
Net revenues 2,966 2,642 2,890 3,201 3,600 Share capital 167 167 167 167 167
Revenue growth (%) 1.5 -10.9 9.4 10.8 12.5 Reserves & surplus 1,904 1,852 1,899 1,992 2,137
- Oper. expenses 2,495 2,441 2,586 2,813 3,116 Net worth 2,072 2,019 2,067 2,160 2,304
EBIDTA 472 201 304 388 485 Total debt 870 889 966 1,089 1,257
EBITDA margins (%) 15.9 7.6 10.5 12.1 13.5 Minority interest - - - - -
- Interest 132 143 151 167 191 Def. tax liab. (net) 63 70 70 70 70
- Depreciation 98 121 136 152 167 Capital employed 3,004 2,978 3,102 3,319 3,631
+ Other income 115 88 96 106 119 Net fixed assets 1,106 1,183 1,138 1,160 1,165
- Tax 93 15 30 47 66 Intangible assets - - - - -
Effective tax rate (%) 26.1 57.7 27.0 27.0 27.0 Investments 0 0 0 0 0
+ Associates / (minorities) - - - - - - of which, Liquid - - - - -
Adjusted PAT 263 11 82 128 179 Working capital 1,827 1,719 1,869 2,070 2,328
+ Extraordinary items - - - - - Cash 72 76 96 89 138
Reported PAT 263 11 82 128 179 Capital deployed 3,004 2,978 3,102 3,319 3,631
Adj. FDEPS (` / sh) 15.7 0.6 4.9 7.6 10.7 W C turn (days) 225 237 236 236 236
Adj. FDEPS growth (%) -4.2 -95.9 672.4 55.4 40.0 Book value (` / sh) 123.7 120.6 123.4 129.0 137.6
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 3 Cash-flow statement (` m) Fig 4 Ratio analysis @ `160


Year-end: Mar FY15 FY16 FY17e FY18e FY19e Year-end: Mar FY15 FY16 FY17e FY18e FY19e
Adjusted PAT 263 11 82 128 179 P/E (x) 10.2 251.8 32.6 21.0 15.0
+ Non-cash items 98 121 136 152 167 Cash P/E (x) 7.4 20.5 12.3 9.6 7.7
Cash profit 361 131 218 280 347 EV / EBITDA (x) 7.4 17.4 11.7 9.5 7.8
- Incr. / (decr.) in WC 460 -108 150 202 258 EV / sales (x) 1.2 1.3 1.2 1.2 1.1
Operating cash-flow -99 239 68 78 88 P/B (x) 1.3 1.3 1.3 1.2 1.2
- Capex 293 198 91 173 173 RoE (%) 15.4 0.5 4.0 6.1 8.0
Free cash-flow -392 42 -23 -95 -85 RoCE (%) 18.2 5.6 8.7 10.7 12.6
- Dividend 42 35 35 35 35 Dividend yield (%) 1.2 0.9 0.9 0.9 0.9
+ Equity raised 520 -28 -0 -0 -0 Dividend payout (%) 15.9 326.4 42.3 27.2 19.4
+ Debt raised -83 26 77 124 168 Net debt / equity (x) 0.4 0.4 0.4 0.5 0.5
- Investments - - - - - Debtor days 124 96 96 96 96
- Misc. items - - - - - Inventory days 120 149 149 149 149
Net cash-flow 3 4 19 (6) 48 Payables days 33 34 33 33 33
+ Op. cash & bank bal. 68 72 76 95 89 Working capital days 3.7 1.2 1.7 2.0 2.3
Cl. Cash & bank bal. 72 76 95 89 138 Fixed asset T/O (x) 2.7 2.2 2.5 2.8 3.1
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 5 Price movement Fig 6 US market will compensate for the Gulf business
(`) (%)
300 100%
90%
250
SKPI 80%
200 70%
60%
150 50%
40%
100
30%
50 20%
10%
0
0%
Jul-12

Jul-13

Jul-14

Jul-15

Jul-16
Apr-12

Oct-12

Apr-13

Oct-13

Apr-14

Oct-14

Apr-15

Oct-15

Apr-16

Oct-16
Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e

Gulf US EU RoW
Source: Bloomberg
Source: Anand Rathi Research

Anand Rathi Research 46


03 February 2017 Shakti Pumps - Energy-efficient pumps, exports the key; initiating, with a Buy

Preferred vendor for energy-efficient


pumps
Agriculture requires pumps for water transportation from river to land. In
the retail segment, small farmers contribute most to sales. Also,
commercial buildings and residential complexes constitute the greater
portion of the companys retail sales.

Fig 7 Sector-wise demand for pumps in India

Miscellaneous
8%
Industrial
13%

Agriculture
43%

Retail
30%

Irrigation
6%

Source: IPMA, Anand Rathi Research

The greater portion of demand for pump-sets in India arises from


agriculture. Submersible and centrifugal pumps are the most used category
in India

Fig 8 State-wise potential for the pump sector


REGION STATE POTENTIAL (no. of pumps)
Haryana 175,000
Uttar Pradesh 150,000
Punjab 137,500
NORTH INDIA
Himachal Pradesh 25,000
Jammu and Kashmir 12,500
TOTAL - A 500,000
Andhra Pradesh 150,000
Karnataka 125,000
SOUTH INDIA TamilNad 87,500
Kerala 25,000
TOTAL - B 387,500
Rajasthan 150,000
Madhya Pradesh 137,500
Gujarat 137,500
WEST INDIA
Maharashtra 125,000
Chhattisgarh 75,000
TOTAL C 625,000
West Bengal 112,500
Jharkhand 75,000
Bihar 75,000
Odisha 75,000
EAST INDIA
Asom 25,000
Tripura / Sikkim 12,500
Nagaland / Meghalaya 12,500
TOTAL - D 387,500
TOTAL A+B+C+D 1,900,000
Source: EESL, Anand Rathi Research

Anand Rathi Research 47


03 February 2017 Shakti Pumps - Energy-efficient pumps, exports the key; initiating, with a Buy

The North and West are expected to generate higher demand than the
East and the South.
Most of the pumps installed in India are less energy efficient

Fig 9 Current versus potential energy-efficiency ratings

Source: EESL, Anand Rathi Research

Of the 16 short-listed entities for energy-efficient pumps, Shakti Pumps,


with 146 varieties, is one of the preferred brands.

Fig 10 Current preferred vendors for energy-efficient pumps


Sr. No. Company Total Star-rated models
1 VARUNA 328
2 PLUGA 239
3 WATERMAN 229
4 U-NEEL 227
5 CROMPTON GREAVES 191
6 AMRUT 181
7 C.R.I.PUMPS 170
8 TEXMO 167
9 MBH PUMPS 148
10 SHAKTI 146
11 FALCON 138
12 OSWAL 135
13 CHETAN 124
14 SILVER 121
15 UNNATI 107
16 ANGEL 100
Source: EESL, Anand Rathi Research

Energy Efficient Services is expected to float tenders for ~300,000-


500,000 pumps in Maharashtra and Gujarat. Shakti Pumps expects to
obtain a substantial number of such orders for energy-efficient pumps. We
expect this to account for 15-20% of its sales, ie, `500m-700m because of
the forthcoming tenders in energy efficiency from EES.

Anand Rathi Research 48


03 February 2017 Shakti Pumps - Energy-efficient pumps, exports the key; initiating, with a Buy

Industrial applications, promising


prospects
Demand for pumps in India will increase due to rising standards of living.
With mounting demand for potable water and for sanitation facilities,
ageing water infrastructure would have to be repaired and upgraded
quicker. Demand in the oil and gas market would benefit from greater
worldwide production volumes. Industrial valve and pump revenues would
be spread evenly across industries such as power, refining, municipal water
and wastewater, chemicals, food, mining and pharmaceuticals.
The bulk of the demand for industrial pumps (24%) comes from the oil
and gas vertical. Water and wastewater, power, petrochemicals and other
industries account for the balance. The decline in oil prices has compelled
operators in the sector to consolidate and deploy innovative operational
procedures to improve energy efficiency. The state of global oil prices is
still uncertain and is expected to have a significant impact on end-user
industries across the globe. This, along with developments in subsea oil
exploration, is opening up lucrative opportunities for pump
manufacturers.
Till FY13, Shakti Pumps catered largely only to the agricultural sector.
Over the last three years, it has introduced pressure-booster, sewage and
slurry pumps.

Fig 11 Sales mix


(`m)
2,500

2,000

1,500

1,000

500

0
FY11

FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e

Agriculture Industrial

Source: Company, Anand Rathi Research

Over the next three years, industrial pumps will not form the major chunk
of its sales. But improving capex investment in the economy would result
in it achieving significant growth in industrial pumps in the long run.

Anand Rathi Research 49


03 February 2017 Shakti Pumps - Energy-efficient pumps, exports the key; initiating, with a Buy

Greater focus on US, African markets


Gulf sales affected due to geopolitical issues
Shakti Pumps was the market leader, with strong operations in West Asia.
Geopolitical issues there began affecting its markets. The biggest challenge
that it faced through FY15 was finding new export markets and deepening
and widening its geographical presence.

Fig 12 Export sales likely to improve


(`m) (%)
2,500 60.0

2,000 40.0

1,500 20.0

1,000 0.0

500 -20.0

0 -40.0
FY11

FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e
Export sales YoY(RHS)
Source: Company, Anand Rathi Research

Its earlier focus on taking out higher shop shares has now shifted to
higher country shares.
Shakti succeeded in some markets such as the US, Poland, Algeria and
Mexico. Its US revenues increased from `90m to `180m in the last two
years. The other markets targeted were Africa, Asia Pacific, Europe and
Latin America. Improving lifestyles, increasing urbanisation and
infrastructural development are expected to result in a considerably
improved product off-take in these areas.

Fig 13 US market will compensate for the Gulf business


(%)
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e

Gulf US EU RoW

Source: Company, Anand Rathi Research

The drop in sales to Gulf countries is expected to be compensated for by


sales to the US and to countries in Africa, the Asia Pacific and other parts
of the world. The company is working on adding more regions to diversify
and mitigate the risk of concentrating on one country alone.

Anand Rathi Research 50


03 February 2017 Shakti Pumps - Energy-efficient pumps, exports the key; initiating, with a Buy

Financials
Domestic sales to grow strongly
Energy Efficiency Services (EES) is likely to come out with tenders in
coming years for energy-efficient pumps. As a front-runner for such
substantial orders, energy-efficient pumps are expected to generate
~`500m-700m sales over the next 2-3 years. Further, healthy growth is
expected in stainless steel pumps for industrial applications and to meet
forthcoming demand in agriculture.

Fig 14 Domestic sales likely to be strong


(`m) (%)
2,500 60.0

2,000
40.0

1,500
20.0
1,000

0.0
500

0 -20.0
FY11

FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e
Domestic sales YoY(RHS)
Source: Company, Anand Rathi Research

Exports expected to revive


In exports, the US, Africa and the Asia Pacific are expected to compensate
for the decline in West Asia. The companys policy has changed from
penetrating particular markets to diversifying its operations. Hence, in the
next three years, the sales mix is expected to change significantly with
lower exposure to the Gulf countries.

Fig 15 Exports will gradually improve


(`m) (%)
2,500 60.0

2,000 40.0

1,500 20.0

1,000 0.0

500 -20.0

0 -40.0
FY11

FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e

Export sales YoY(RHS)


Source: Company, Anand Rathi Research

Anand Rathi Research 51


03 February 2017 Shakti Pumps - Energy-efficient pumps, exports the key; initiating, with a Buy

EBITDA margins to improve considerably


Pressure on exports led to lower margins. Higher exports in the next three
years would help the company significantly improve its margins

Fig 16 Cost structure


FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e
Sales 1,349 1,915 2,088 2,921 2,966 2,642 2,890 3,201 3,600
Material costs 679 948 981 1,256 1,298 1,304 1,341 1,473 1,656
Employee costs 83 147 211 257 351 420 462 508 559
Other expenses 340 514 594 975 846 717 783 832 900
% of sales
Material costs 50.3 49.5 47.0 43.0 43.8 49.4 46.4 46.0 46.0
Employee cost 6.1 7.7 10.1 8.8 11.8 15.9 16.0 15.9 15.5
Other expenses 25.2 26.8 28.5 33.4 28.5 27.1 27.1 26.0 25.0
EBITDA margins (%) 18.4 16.0 14.4 14.8 15.9 7.6 10.5 12.1 13.5
Source: Company, Anand Rathi Research

Lower discounts would reduce other expenses over the next three years.

Anand Rathi Research 52


03 February 2017 Shakti Pumps - Energy-efficient pumps, exports the key; initiating, with a Buy

Fig 17 Income statement (` m)


Y/E: March FY15 FY16 FY17e FY18e FY19e
Net revenues 2,966 2,642 2,890 3,201 3,600
Growth (%) 1.5 -10.9 9.4 10.8 12.5
Material Cost -1,298 -1,304 -1,341 -1,473 -1,656
Employee Cost -351 -420 -462 -508 -559
Manufacturing cost -99 -128 -140 -149 -161
Marketing cost -226 -174 -190 -202 -219
Administrative cost -61 -68 -74 -79 -85
Energy cost -20 -22 -24 -25 -27
Other cost -440 -325 -355 -377 -408
EBITDA 472 201 304 388 485
Growth (%) 8.8 -57.3 50.8 27.8 25.0
EBITDA margin (%) 15.9 7.6 10.5 12.1 13.5
Other income 115 88 96 106 119
Operating profit 586 289 400 494 604
Depreciation -98 -121 -136 -152 -167
EBIT 488 168 264 343 437
Interest cost -132 -143 -151 -167 -191
PBT 356 25 113 175 245
Tax -93 -15 -30 -47 -66
Effective tax rate 26.1 57.7 27.0 27.0 27.0
PAT 263 11 82 128 179
Minority interest - - - - -
Consol PAT 263 11 82 128 179
Growth (%) 5.2 -95.9 672.4 55.4 40.0
PAT margin (%) 8.9 0.4 2.9 4.0 5.0
Extraordinary income - - - - -
Dividends (incl. tax) -42 -35 -35 -35 -35
Transferred to reserves 221 -24 48 93 144
Per-share data
FDEPS (`) 15.7 0.6 4.9 7.6 10.7
DPS (`) 2.0 1.5 1.5 1.5 1.5
Adj BV (`) 123.7 120.6 123.4 129.0 137.6
CEPS (`) 21.6 7.8 13.0 16.7 20.7
Valuation ratio
P/E (x) 10.2 251.8 32.6 21.0 15.0
P / adj. BV (x) 1.3 1.3 1.3 1.2 1.2
P/C (x) 7.4 20.5 12.3 9.6 7.7
Dividend Yield (%) 1.2 0.9 0.9 0.9 0.9
EV/S (x) 1.2 1.4 1.3 1.2 1.1
EV/E (x) 7.5 17.7 11.9 9.7 8.0
Quality ratio
Dividend Payout (%) 15.9 326.4 42.3 27.2 19.4
Other income / PBT (%) 32.3 348.2 85.1 60.6 48.5
Interest cover (x) 3.7 1.2 1.7 2.0 2.3
Operating CF / EBITDA (x) -0.2 1.2 0.2 0.2 0.2
Source: Company, Anand Rathi Research

Anand Rathi Research 53


03 February 2017 Shakti Pumps - Energy-efficient pumps, exports the key; initiating, with a Buy

Fig 18 Balance sheet (` m)


Y/E: March FY15 FY16 FY17e FY18e FY19e
Equity 167 167 167 167 167
Reserves 1,904 1,852 1,899 1,992 2,137
Minority interests - - - - -
Less: Misc Exp - - - - -
Net worth 2,072 2,019 2,067 2,160 2,304
Equity (% of CE) 69.0 67.8 66.6 65.1 63.5
LT Debt 166 65 65 91 134
ST Debt 704 824 901 998 1,123
DTL (net) 63 70 70 70 70
Total debt 933 958 1,036 1,159 1,327
Net D/E (x) 0.4 0.4 0.5 0.5 0.5
Capital Employed 3,004 2,978 3,102 3,319 3,631
Gross block 1,060 1,101 1,138 1,160 1,165
Acc Depreciation - - - - -
Net block 1,060 1,101 1,138 1,160 1,165
CWIP 46 82 - - -
Fixed assets 1,106 1,183 1,138 1,160 1,165
Investments 0 0 0 0 0
Cash Equivalents 72 76 96 89 138
Inventories 971 1,080 1,181 1,309 1,472
Debtors 1,012 694 759 841 946
Loans & Advances 352 355 389 430 484
Other Current Assets 198 276 271 301 338
Current Assets 2,605 2,481 2,696 2,970 3,377
Creditors -267 -245 -264 -293 -329
Provisions -187 -115 -115 -128 -143
Other Current Liabilities -253 -327 -352 -390 -439
Current Liabilities -707 -686 -731 -810 -911
Net Current Assets 1,899 1,795 1,964 2,160 2,466
Capital Deployed 3,004 2,978 3,102 3,319 3,631
FA / CE (%) 36.8 39.7 36.7 34.9 32.1
Investments / CE (%) 0.0 0.0 0.0 0.0 0.0
Liquid assets / CE (%) 2.4 2.6 3.1 2.7 3.8
Working Capital / CE (%) 60.8 57.7 60.2 62.4 64.1
Source: Company, Anand Rathi Research

Fig 19 Cash-flow statement (` m)


Y/E: March FY15 FY16 FY17e FY18e FY19e
Cash Profit 361 131 218 280 347
Chg in WC -460 108 -150 -202 -258
Operating CF -99 239 68 78 88
Capex -293 -198 -91 -173 -173
Free CF -392 42 -23 -95 -85
Equity 520 -28 -0 -0 -0
Debt -83 26 77 124 168
Investments - - - - -
Dividends -42 -35 -35 -35 -35
Misc inflows - - - - -
Net change in cash 3 4 19 -6 48
Opening cash 68 72 76 95 89
Closing cash 72 76 95 89 138
Source: Company, Anand Rathi Research

Anand Rathi Research 54


03 February 2017 Shakti Pumps - Energy-efficient pumps, exports the key; initiating, with a Buy

Fig 20 Ratio analysis @ `160


Y/E: March FY15 FY16 FY17e FY18e FY19e
Du Pont analysis
Margins (%) 16.5 6.4 9.1 10.7 12.1
Capital turn (x) 1.1 0.9 1.0 1.0 1.0
RoCE (%) 18.2 5.6 8.7 10.7 12.6
Leverage factor (x) 1.6 1.5 1.5 1.5 1.6
Interest burden (x) 0.7 0.1 0.4 0.5 0.6
Tax burden (x) 0.7 0.4 0.7 0.7 0.7
Consol factor (x) 1.0 1.0 1.0 1.0 1.0
RoE (%) 15.4 0.5 4.0 6.1 8.0
Working capital (days)
Inventories 120 149 149 149 149
Debtors 124 96 96 96 96
Loans & Advances 43 49 49 49 49
Other CA 24 38 34 34 34
Creditors -33 -34 -33 -33 -33
Provisions -23 -16 -15 -15 -15
Other CL -31 -45 -44 -44 -44
Net WC 225 237 236 236 236
Other ratios
Op CF / revenue (%) -3.3 9.1 2.4 2.4 2.5
FCF / revenue (%) -13.2 1.6 -0.8 -3.0 -2.3
Intangibles / GB (%) - - - - -
Intangibles / CE (%) - - - - -
Revenue / GB (x) 2.8 2.4 2.5 2.8 3.1
Revenue / FA (x) 2.7 2.2 2.5 2.8 3.1
CWIP / GB (x) 0.0 0.1 - - -
Source: Company, Anand Rathi Research

Anand Rathi Research 55


03 February 2017 Shakti Pumps - Energy-efficient pumps, exports the key; initiating, with a Buy

Valuations
The stock trades at 21x FY18e and 15x FY19e. We believe that the
increased domestic sales due to the energy-efficiency drive and greater
exposure to industrial pumps would lead to strong sales growth at home.
The sharper focus on the US and Asia Pacific would help compensate for
the decline in sales to West Asia. The better operating leverage would lead
to margin expansion. Hence, we initiate coverage on Shakti Pumps, with a
Buy rating and a price target of `214 (34% potential).

Fig 21 One-year-forward P/B Fig 22 One-year-forward EV/EBITDA


2.5 25.0

2.0 20.0

1.5 15.0
+1SD
+1SD

1.0 Mean 10.0


Mean

0.5 -1SD 5.0


-1SD

0.0 0.0
Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16
Jan-17

Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16
Jan-17
Source: Company, Bloomberg Source: Company, Bloomberg

Key risks
Competition from MNCs in solar pumps could significantly dent the
companys prospects.
The relentless sales push could strike at profitability and cash-flow
generation.
Agricultural power subsidies and concessions to farmers pose a major
hindrance to market growth.
Rise in cost of inputs could upset the cost structure.

Anand Rathi Research 56


03 February 2017 Shakti Pumps - Energy-efficient pumps, exports the key; initiating, with a Buy

Company Background & Management


Situated at Pithampur (Madhya Pradesh), Shakti Pumps specialises in
manufacturing a broad range of submersible pumps and motors for a
variety of applications. Products range from submersible pumps and
motors, vertical multistage centrifugal (SRN) pumps, pressure-booster
(SH) pumps, open-well pumps, end-suction (SNB, SNK) pumps and solar
pumps.
Set up in an SEZ in 2007 in the Pithampur, Central India, region of India,
it produces 100% stainless-steel submersible pumps for export across the
globe. The unit in Sector III of the Pithampur Industrial Area has a 4-,
6-, 8- and 10-inch motor manufacturing plant, and a submersible- and
industrial- pump-manufacturing plant.
Company structure: The company has the following international
subsidiaries.

Fig 23 Subsidiaries and their locations


Company Location Stake
Shakti Pumps LLC, USA Longwood, USA Wholly-owned subsidiary
Shakti Pumps FZE, UAE UAE Wholly-owned subsidiary
Shakti Pump Pty Ltd.
Sydney, NSW, Australia Wholly-owned subsidiary
Australia
Source: Company

Fig 24 Key managerial personnel and Board of Directors


Name Designation Qualification
Graduate; three decades experience in manufacturing &
Dinesh Patidar Managing director marketing stainless steel pumps, associated with the company
for the last thirty years
Rajkumar Jain Independent director MBA, MCA; information technology
B.E. (Hons.) civil engineering; completed major water supply
S. Raghuwansi Independent director
projects: Indore, Ujjain, Gwalior, Jabalpur
Graduate; expert in human-resource management, industrial
Sunil Patidar Whole-time director
relations.
MBA; More than 15 years experience, engaged in
Ramesh Patidar Whole-time director international business development, exploring and expanding
business opportunities across the world
Navin S Patwa Independent director ACS, LLB; corporate law
Independent woman
Ms Nishtha Neema CA; over 12 years experience in accounts & taxation
director
Source: Company

Anand Rathi Research 57


Engineering & Capital goods
India I Equities
Initiating Coverage

03 February 2017

Transformers & Rectifiers (India) Rating: Buy


Target Price: `539
Strong growth factored into valuations; initiating, with a Buy Share Price: `413

We initiate coverage on Transformers & Rectifiers, with a Buy rating


and a target of `539 (30% potential). Its strong order book, forthcoming
Key data TRIL IN / TRNF.BO
capex in state transcos and greater profitability would keep earnings- `472 / `195
52-week high / low
growth strong in the next three years. A pick-up in transmission capex Sensex / Nifty 28241 / 8741
from state transcos would lead to further betterment in the order book. 3-m average volume $0.4m
Market cap `6bn / $82.3m
SEBs and utilities still a major part. The company primarily supplies Shares outstanding 13.3m
transformers to SEBs, accounting for ~70-80% of its revenue (excl. exports);
industrial users make up the rest. With SEBs as its customers, it is to an
extent insulated from fluctuation in raw-material prices as, owing to the built-
in price-variation clause (according to a price-variation formula), higher prices Shareholding pattern (%) Dec-16 Sep-16 Jun-16
are passed on to SEBs. Moreover, the company is protected from any Promoters 74.9 74.9 74.9
slowdown in investment in the private sector. - of which, Pledged - - -
Free Float 25.1 25.1 25.1
Healthy order book to persist. On 1st Nov16, its order book was 29,622 - Foreign Institutions - - -
MVA, valued at `9.48bn. On completion of the Algerian order, the company - Domestic Institutions 5.5 5.5 5.3
19.6 19.6 19.8
is expecting repeat orders over the next 2-3 years. In India, capex to improve - Public
grid connectivity would lead to strong orders from Power Grid and state
transmission utilities. Hence, we expect its order book to hold at present
levels.
Relative price performance
Joint venture with Jinke; potential `2bn sales. The company entered into a 490
joint-venture agreement with a Chinese company, Jiangsu Jingke Smart 440
390
Electric, to manufacture and market GIS/HGIS/TGISs. It expects `2bn in 340
sales
` in FY18 290 Sensex
240 TRIL
190
Valuation. The stock trades at 19.9x FY18e and 15.3x FY19e. We initiate 140
coverage on Transformers and Rectifiers, India, with a Buy rating and a target 90
of `539 (30% potential). Risks. Overcapacity in the industry denting
Aug-16
Sep-16
Jan-16
Feb-16

Apr-16

Jun-16

Jan-17
Jul-16
May-16
Mar-16

Nov-16
Dec-16
Oct-16

realisations; price volatility of CRGO steel and copper.


Source: Bloomberg

Key financials (YE Mar) FY15 FY16 FY17e FY18e FY19e


Sales (` m) 5,537 5,949 8,937 10,133 11,364
Net profit (` m) -80 -75 226 275 357
EPS (`) -6.1 -5.7 17.0 20.7 26.9
Growth (%) NM NM NM 21.6 30.0
PE (x) NM NM 24.3 19.9 15.3
PBV (x) 1.6 1.7 1.6 1.5 1.3 Bhalchandra Shinde
RoE (%) NM NM 6.7 7.6 9.0 Research Analyst
RoCE (%) 3.5 5.0 14.1 15.4 16.8
Dividend yield (%) - - - - -
Net debt/equity (x) 0.3 0.3 0.3 0.4 0.4
Source: Company, Anand Rathi Research

Anand Rathi Share and Stock Brokers Limited (hereinafter ARSSBL) is a full-service brokerage and equities-research firm and the views expressed therein are solely of
ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst
certifications are present in the Appendix.

Anand Rathi Research India Equities


03 February 2017 Transformers and Rectifiers - Strong growth factored into valuations; initiating, with a Hold

Quick Glance Financials and Valuations


Fig 1 Income statement (` m) Fig 2 Balance sheet (` m)
Year-end: Mar FY15 FY16 FY17e FY18e FY19e Year-end: Mar FY15 FY16 FY17e FY18e FY19e
Net revenues 5,537 5,949 8,937 10,133 11,364 Share capital 133 133 133 133 133
Revenue growth (%) -24.3 7.4 50.2 13.4 12.1 Reserves & surplus 3,210 3,135 3,360 3,635 3,992
- Oper. expenses 5,253 5,604 8,130 9,191 10,247 Net worth 3,342 3,267 3,493 3,768 4,125
EBIDTA 283 345 807 943 1,116 Total debt 1,445 1,475 1,569 1,812 2,011
EBITDA margins (%) 5.1 5.8 9.0 9.3 9.8 Minority interest 47 53 53 53 53
- Interest 292 343 369 426 473 Def. tax liab. (net) 63 26 26 26 26
- Depreciation 132 147 155 166 177 Capital employed 4,896 4,821 5,141 5,659 6,214
+ Other income 28 44 48 53 58 Net fixed assets 2,031 1,964 1,969 1,987 1,994
- Tax -38 -32 106 129 168 Intangible assets 2 2 2 2 2
Effective tax rate (%) 33.7 31.6 32.0 32.0 32.0 Investments 1 1 - - -
+ Associates / (minorities) -6 -6 - - - - of which, Liquid - - - - -
Adjusted PAT -80 -75 226 275 357 Working capital 2,528 2,503 2,817 3,304 3,701
+ Extraordinary items - - - - - Cash 335 351 352 366 518
Reported PAT -80 -75 226 275 357 Capital deployed 4,896 4,821 5,141 5,659 6,214
Adj. FDEPS (` / sh) -6.1 -5.7 17.0 20.7 26.9 W C turn (days) 167 154 115 119 119
Adj. FDEPS growth (%) NM NM NM 21.6 30.0 Book value (` / sh) 252.1 246.5 263.5 284.2 311.1
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 3 Cash-flow statement (` m) Fig 4 Ratio analysis @ `413


Year-end: Mar FY15 FY16 FY17e FY18e FY18e Year-end: Mar FY15 FY16 FY17e FY18e FY19e
Adjusted PAT -80 -75 226 275 357 P/E (x) NM NM 24.3 19.9 15.3
+ Non-cash items 132 147 155 166 177 Cash P/E (x) 106.7 76.2 14.4 12.4 10.3
Cash profit 51 72 380 440 534 EV / EBITDA (x) 23.2 19.1 8.3 7.3 6.2
- Incr. / (decr.) in WC -700 -25 314 487 397 EV / sales (x) 1.2 1.1 0.7 0.7 0.6
Operating cash-flow 751 96 66 -46 137 P/B (x) 1.6 1.7 1.6 1.5 1.3
- Capex 358 80 160 184 184 RoE (%) NM NM 6.7 7.6 9.0
Free cash-flow 393 16 -93 -230 -47 RoCE (%) 3.5 5.0 14.1 15.4 16.8
- Dividend - - - - - Dividend yield (%) - - - - -
+ Equity raised -11 6 -0 0 0 Dividend payout (%) - - - - -
+ Debt raised -253 -6 94 243 199 Net debt / equity (x) 0.3 0.3 0.3 0.4 0.4
- Investments -2 - -1 - - Debtor days 158 189 151 155 155
- Misc. items - - - - - Inventory days 112 119 119 119 119
Net cash-flow 132 15 2 13 152 Payables days 118 161 159 159 159
+ Op. cash & bank bal. 203 335 350 352 366 Interest cover (x) 0.6 0.7 1.9 1.9 2.1
Cl. Cash & bank bal. 335 350 352 366 517 Fixed asset T/O (x) 2.7 3.0 4.5 5.1 5.7
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 5 Price movement Fig 6 Sales and sales growth


(`) (`m) (%)
500 11,000 60.0

450 10,000 50.0


400 9,000 40.0
350 8,000 30.0
TRIL
300
7,000 20.0
250
6,000 10.0
200
5,000 0.0
150
4,000 -10.0
100
50 3,000 -20.0
0 2,000 -30.0
FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e
Jul-12

Jul-13

Jul-14

Jul-15

Jul-16
Apr-12

Oct-12

Apr-13

Oct-13

Apr-14

Oct-14

Apr-15

Oct-15

Apr-16

Oct-16
Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

Sales YoY (RHS)

Source: Bloomberg Source: Anand Rathi Research

Anand Rathi Research 59


03 February 2017 Transformers and Rectifiers - Strong growth factored into valuations; initiating, with a Hold

SEBs and utilities still a major portion


SEBs and utilities, the major contributor
TRIL is the preferred supplier to SEBs and power utilities in India, for its
timely delivery of transformers, regularly. This has helped it receive repeat
orders from power generation, transmission and distribution entities, many
of whom are among its top-ten customers.

Fig 7 Sales mix skewed toward utilities


(`m)
8,000

7,000

6,000

5,000

4,000

3,000

2,000

1,000

0
FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16
Utilities (SEBs, PGCIL, NTPC) Industrial

Source: Company, Anand Rathi Research

Excluding the Algerian order of `4.1bn, SEBs and utilities continue to


constitute a major part of the order book.
Revenue from SEBs and PSUs are steady and based on volumes because
of vigorous capacity addition plans by the government of India in the
power sector during the various Five-year Plans. This protects the
companys revenue (volume-wise) even in an economic slowdown.
With SEBs as its customers, TRIL is insulated to an extent from
fluctuations in raw-material prices as, owing to a built-in price-variation
clause, price rises are passed on to SEBs. Moreover, it is protected from
any slowdown in investment in the private sector.
The power-generation situation in the country has improved substantially,
with some work needed in transmission. However, distribution of
electricity is a challenge in many states. The financial condition of many
distribution companies is alarming, bordering on financial distress. Thus,
schemes which aim at 100% village electrification, 24x7 power supply and
clean energy cannot be turned into reality without first financially
strengthening the discoms.
The UDAY programme announced by the government would lead to a
financial turnaround and revival of discoms. UDAY seeks to help loss-
suffering discoms break even in 2-3 years by improving their operational
efficiencies (compulsory smart metering, upgrading transformers,
popularising LED bulbs), reducing the cost of power (greater supply of
cheaper domestic coal, liberal coal swaps from inefficient to efficient
plants, supply of washed and crushed coal, faster completion of
transmission lines), minimising interest costs. With the revival in discoms,
the transformer segment is expected to pick up and lead to greater order
inflows for TRIL.

Anand Rathi Research 60


03 February 2017 Transformers and Rectifiers - Strong growth factored into valuations; initiating, with a Hold

Healthy order book to continue


Order book will be healthy
The order book is expected to clock ~7-10% CAGR in the next three
years. The company received a large order of 300 transformers (worth
`4.7bn) from Algeria. The order is likely to be completed in H2 FY17.
However, the company indicated that it would get repeat orders. The
scope of the work was largely to supply industrial transformers. Hence, the
order book and sales mix was largely skewed toward industrial
transformers.

Fig 8 Order book has improved significantly


(`m)
10,000
9,000
8,000
7,000
6,000
5,000
4,000
3,000
2,000
1,000
0
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Order book
Source: Company, Anand Rathi Research

Excluding the orders from Algeria, orders are expected to grow strongly
due to a pick-up in intra-state transmission capex. Below 220 kVA,
transformer orders are expected to grow ~15-20%. Below 220 kVA,
transformers are expected to account for ~55% of the order book. TRIL is
expected to gain major traction in interstate transmission orders due to
orders for above-765kVA transformers.

Fig 9 Order inflows have improved in the last six quarters


(`m)
6,000

5,000

4,000

3,000

2,000

1,000

0
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17

Order inflow
Source: Company, Anand Rathi Research

Furnace and specialty transformers are further expected to lead to healthy


order inflows in the next three years.

Anand Rathi Research 61


03 February 2017 Transformers and Rectifiers - Strong growth factored into valuations; initiating, with a Hold

Joint venture with Jingke


JV with Jingke will open up further opportunities
The company entered into a joint venture with a Chinese company, Jiangsu
Jingke Smart Electric Co. to start manufacturing and marketing
GIS/HGIS/ TGISs and products for 220 kV and below, and distribution
products of 40.5 kV and below in India.
TRIL will hold a majority 60% of the equity of the joint venture, 40% will
be with Jingke.
Jingke not only manufactures power transmission and distribution
equipment, but is the main contractor for power production and solutions.
The chief products are: 40.5kV, 72.5kV, 126/145kV, 252kV gas-insulated
metal-enclosed/semi-enclosed switchgear (GIS/HGIS), 40.5-252 kV pre-
fabricated vehicle-mounted mobile substations, 40.5-550 kV transformers,
isolators, wall bushings, box-type sub-stations and high- and low-voltage
switchgear. These would include accessories, installation, service and
testing.
TRIL would provide the infrastructure within an existing plant to install a
gas-insulated sub-station, SF6, switchgear and hybrid switchgear gas-
insulated sub-stations. It would initially assemble them, then gradually start
manufacturing them in India. Critical components required would come
from China till manufacturing starts in India.
In India, overall substation capex is expected at `980bn in the 13th Plan
(32% more than in the 12th Plan), driven by spending on HV DC and 220
kV sub-stations. Spending on 220kV sub-stations is likely to be `400bn
(111% more than in the 12th Plan), while HV DC sub-station spending is
pegged at `195bn in the 13th Plan (39% more than in the 12th Plan).

Fig 10 Transformer-capex plans


Transmission 12th Plan 12th Plan 13th Plan 13th Plan
Voltage (kV) level Unit
system type target addition target addition
AC sub-station 765 MVA 174,000 129,500 253,000 98,500
transformer 400 MVA 196,027 74,360 245,027 19,640
capacity 220 MVA 299,774 77,848 459,774 158,152
Source: Company, Anand Rathi Research

Fig 11 Substation-capex trend


Substation spending (MVA) 11th Plan addition 12th Plan addition 13th Plan addition
HVDC Bipole / Back-to-back 19,250 140,250 195,000
765kV 75,000 298,000 237,000
400kV 145,213 112,500 147,000
220kV 168,193 190,000 400,000
Total 407,656 740,750 979,000
Source: Company, Anand Rathi Research

Hence, we believe that, because of its joint venture with Jingke, the
company would be enabled to take up opportunities in substations, which
it was unable to because of a limited number of products.
This JV is meant to tap the gas-insulator-substation market, which only a
few companies in India manufacture. This is likely to bring in ~`2bn in
revenue in FY18.

Anand Rathi Research 62


03 February 2017 Transformers and Rectifiers - Strong growth factored into valuations; initiating, with a Hold

Financials
Order book likely to hold at healthy levels
On the receipt of a large order from Algeria for industrial transformers, the
order book in Q3 FY15 almost doubled to `8bn. The execution of large
orders would be complete in Q3 FY17. We believe that transmission capex
in India is likely to keep the companys order book at a healthy ~`9bn-
10bn in the next three years.

Fig 12 Order-book trend


(`m)
12,000

10,000

8,000

6,000

4,000

2,000

0
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Q1FY12
Q2FY12
Q3FY12
Q4FY12
Q1FY13
Q2FY13
Q3FY13
Q4FY13
Q1FY14
Q2FY14
Q3FY14
Q4FY14
Q1FY15
Q2FY15
Q3FY15
Q4FY15
Q1FY16
Q2FY16
Q3FY16
Q4FY16
Q1FY17
Q2FY17
Q3FY17
Q4FY17
Q1FY18
Q2FY18
Q3FY18
Q4FY18
Q1FY19
Q2FY19
Q3FY19
Q4FY19
Order book
Source: Company, Anand Rathi Research

Sales expected to be healthy


The strong order book would keep sales at a healthy 19.8% CAGR over
FY16-19. Also, a pick-up in steel-industry capex may lead to further sales
growth in FY18 and FY19 due to orders for induction transformers.

Fig 13 Sales and sales growth


(`m) (%)
11,000 60.0
10,000 50.0
9,000 40.0
8,000 30.0
7,000 20.0
6,000 10.0
5,000 0.0
4,000 -10.0
3,000 -20.0
2,000 -30.0
FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e

Sales YoY (RHS)


Source: Company, Anand Rathi Research

EBITDA margin likely to improve significantly


Better operating leverage is expected to significantly improve the margin,
from 5.9% to 9.1%. Better execution would lead to lower provisioning. A
drop in copper and CRGO prices has led to an expanded gross margin.

Anand Rathi Research 63


03 February 2017 Transformers and Rectifiers - Strong growth factored into valuations; initiating, with a Hold

Fig 14 Cost-structure trend


FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e
Sales 5,175 5,124 7,316 5,537 5,949 8,937 10,133 11,364
Material cost 4,182 4,154 5,913 4,241 4,590 6,925 7,854 8,809
Employee cost 173 203 251 251 252 277 304 335
Other expenses 581 554 758 761 762 929 1,032 1,103
% of sales
Material cost 80.7 81.0 80.7 76.5 77.1 77.4 77.4 77.4
Employee cost 3.3 4.0 3.4 4.5 4.2 3.1 3.0 2.9
Other expenses 11.2 10.8 10.4 13.7 12.8 10.4 10.2 9.7
EBITDA margins (%) 4.7 4.2 5.5 5.2 5.9 9.1 9.4 9.9
Source: Company, Anand Rathi Research

Fig 15 Income statement (` m)


Y/E: March FY15 FY16 FY17e FY18e FY19e
Revenues 5,537 5,949 8,937 10,133 11,364
Growth (%) -24.3 7.4 50.2 13.4 12.1
Material cost -4,241 -4,590 -6,925 -7,854 -8,809
Employee cost -251 -252 -277 -304 -335
Manufacturing cost -146 -119 -145 -161 -172
Marketing cost -69 -77 -94 -105 -112
Administrative cost -57 -42 -51 -56 -60
Energy cost -95 -82 -100 -111 -118
Other cost -394 -443 -540 -600 -641
EBITDA 283 345 807 943 1,116
Growth (%) -28.0 21.7 134.0 16.8 18.4
EBITDA margin (%) 5.1 5.8 9.0 9.3 9.8
Other income 28 44 48 53 58
Operating profit 311 389 856 996 1,175
Depreciation -132 -147 -155 -166 -177
EBIT 179 242 701 830 998
Interest cost -292 -343 -369 -426 -473
PBT -113 -101 332 404 525
Tax 38 32 -106 -129 -168
Effective tax rate 33.7 31.6 32.0 32.0 32.0
PAT -75 -69 226 275 357
Minority interest -1 -6 - - -
Consol PAT -80 -75 226 275 357
Growth (%) NM NM NM 21.6 30.0
PAT margin (%) -1.5 -1.3 2.5 2.7 3.1
Dividends (incl Tax) - - - - -
Transferred to reserves - - - - -
Per-share data -80 -75 226 275 357
FDEPS (`)
DPS (`) -6.1 -5.7 17.0 20.7 26.9
Adj BV (`) - - - - -
CEPS (`) 255.7 250.4 267.5 288.2 315.1
Valuation ratio 3.9 5.4 28.7 33.2 40.3
P/E (x)
P/adj. BV (x) -68.1 -72.8 24.3 19.9 15.3
P/C (x) 1.6 1.6 1.5 1.4 1.3
Dividend yield (%) 106.7 76.2 14.4 12.4 10.3
EV/S (x) - - - - -
EV/E (x) 1.2 1.1 0.8 0.7 0.6
Quality ratio 23.4 19.2 8.3 7.4 6.3
Dividend payout (%)
Other income / PBT (%) - - - - -
Interest cover (x) -24.5 -43.3 14.5 13.2 11.1
Operating CF / EBITDA (x) 0.6 0.7 1.9 1.9 2.1
Source: Company, Anand Rathi Research

Anand Rathi Research 64


03 February 2017 Transformers and Rectifiers - Strong growth factored into valuations; initiating, with a Hold

Fig 16 Balance sheet (` m)


Y/E: March FY15 FY16 FY17e FY18e FY19e
Equity 133 133 133 133 133
Reserves 3,210 3,135 3,360 3,635 3,992
Minority interests 47 53 53 53 53
Less: Misc Exp - - - - -
Net worth 3,389 3,320 3,546 3,820 4,177
Equity (% of CE) 69.2 68.9 69.0 67.5 67.2
LT Debt 186 448 448 448 448
ST Debt 1,258 1,026 1,121 1,364 1,562
DTL (net) 63 26 26 26 26
Total debt 1,507 1,501 1,595 1,838 2,037
Net D/E (x) 0.3 0.3 0.4 0.4 0.4
Capital Employed 4,896 4,821 5,141 5,659 6,214
Gross block 1,920 1,852 1,851 1,869 1,876
Acc Depreciation - - - - -
Net block 1,920 1,852 1,851 1,869 1,876
CWIP 113 114 120 120 120
Fixed assets 2,033 1,966 1,971 1,989 1,996
Investments 1 1 - - -
Cash Equivalents 335 351 352 366 518
Inventories 1,705 1,946 2,910 3,301 3,702
Debtors 2,401 3,083 3,690 4,307 4,839
Loans & Advances 438 387 584 663 743
Other Current Assets 312 157 184 195 206
Current Assets 5,192 5,923 7,721 8,831 10,008
Creditors -1,790 -2,627 -3,900 -4,423 -4,962
Provisions -13 -15 -15 -17 -19
Other Current Liabilities -526 -427 -636 -721 -809
Current Liabilities -2,329 -3,069 -4,551 -5,162 -5,790
Net Current Assets 2,863 2,854 3,170 3,670 4,219
Capital Deployed 4,896 4,821 5,141 5,659 6,214
FA/CE (%) 41.5 40.8 38.3 35.1 32.1
Investments/CE (%) 0.0 0.0 - - -
Liquid assets/CE (%) 6.8 7.3 6.9 6.5 8.3
Working Capital/CE (%) 51.6 51.9 54.8 58.4 59.6
Source: Company, Anand Rathi Research

Fig 17 Cash-flow statement (` m)


Y/E: March FY15 FY16 FY17e FY18e FY19e
Cash Profit 51 72 380 440 534
Chg in WC 700 25 -314 -487 -397
Operating CF 751 96 66 -46 137
Capex -358 -80 -160 -184 -184
Free CF 393 16 -93 -230 -47
Equity -11 6 -0 0 0
Debt -253 -6 94 243 199
Investments 2 - 1 - -
Dividends - - - - -
Misc inflows - - - - -
Net change in cash 132 15 2 13 152
Opening cash 203 335 350 352 366
Closing cash 335 350 352 366 517
Source: Company, Anand Rathi Research

Anand Rathi Research 65


03 February 2017 Transformers and Rectifiers - Strong growth factored into valuations; initiating, with a Hold

Fig 18 Ratio analysis @ `413


Y/E: March FY15 FY16 FY17e FY18e FY19e
Dupont Analysis
Margins (%) 3.2 4.1 7.8 8.2 8.8
Capital turn (x) 1.1 1.2 1.8 1.9 1.9
RoCE (%) 3.5 5.0 14.1 15.4 16.8
Leverage factor (x) 1.5 1.5 1.5 1.5 1.5
Interest burden (x) -0.6 -0.4 0.5 0.5 0.5
Tax burden (x) 0.7 0.7 0.7 0.7 0.7
Consol factor (x) 1.1 1.1 1.0 1.0 1.0
RoE (%) -2.4 -2.3 6.7 7.6 9.0
Working capital (days)
Inventories 112 119 119 119 119
Debtors 158 189 151 155 155
Loans & Advances 29 24 24 24 24
Other CA 21 10 8 7 7
Creditors -118 -161 -159 -159 -159
Provisions -1 -1 -1 -1 -1
Other CL -35 -26 -26 -26 -26
Net WC 167 154 115 119 119
Other ratios
Op CF/Rev (%) 13.6 1.6 0.7 -0.5 1.2
FCF/Rev (%) 7.1 0.3 -1.0 -2.3 -0.4
Intangibles/GB (%) 0.1 0.1 0.1 0.1 0.1
Intangibles/CE (%) 0.0 0.0 0.0 0.0 0.0
Revenue/GB (x) 2.9 3.2 4.8 5.4 6.1
Revenue/FA (x) 2.7 3.0 4.5 5.1 5.7
CWIP/GB (x) 0.1 0.1 0.1 0.1 0.1
Source: Company, Anand Rathi Research

Anand Rathi Research 66


03 February 2017 Transformers and Rectifiers - Strong growth factored into valuations; initiating, with a Hold

Valuations
The stock trades at 19.9x FY18e and 15.3x FY19e. We initiate coverage on
TRIL with a Buy rating and a target of `539 (30% potential). Its strong
order book, forthcoming capex in state transcos and greater profitability
would keep earnings growth strong in the next three years. A pick-up in
transmission capex from state transcos would lead to further improvement
in the order book.

Fig 19 One-year-forward P/B Fig 20 One-year-forward EV/EBITDA


18.0
1.8
16.0
1.6

1.4
14.0
+1SD
1.2 12.0

1.0 +1SD 10.0 Mean

0.8 8.0
Mean -1SD
0.6 6.0

0.4 -1SD 4.0

0.2 2.0

0.0 0.0
Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jul-13

Jan-14

Jul-14

Jan-15

Jul-15

Jan-16

Jul-16

Jan-17
Dec-10

Jun-11

Dec-11

Jun-12

Dec-12

Jun-13

Dec-13

Jun-14

Dec-14

Jun-15

Dec-15

Jun-16

Dec-16

Source: Bloomberg, Company Source: Bloomberg, Company

Key risks
Slowdown in power sector reforms. The bulk of demand for
transformers arises from the power sector. Any slowdown in
infrastructure spending by the government would affect the
performance of transformer companies.
Rising cost of raw materials. The rising cost of raw materials
(copper and CRGO steel) could impact profitability if not passed on to
customers.

Anand Rathi Research 67


03 February 2017 Transformers and Rectifiers - Strong growth factored into valuations; initiating, with a Hold

Company Background & Management


Originally incorporated as Triveni Electric Co., Transformers & Rectifiers
(India) is one of the leading manufacturers of power transformers, with
~8% market share. Its business mainly comprises manufacturing and
selling power and distribution furnaces, rectifierr and specialised
transformers.

Fig 21 Product portfolio


Product classification range Type
Generator transformers, unit auxiliary transformers, station auxiliary
Power transformers up to 1,200kV transformers, power transformers, auto transformers, trackside
transformers for the Railways
Hermitically sealed and conservator type of construction, step-down
From 500 kVA transformers, step-up transformers, energy-efficient transformers,
Distribution transformers
to 88 kVA transformers meant for solar and wind applications, transformers
meant for mine applications
Transformers for arc, induction, ladle, DC arc and submerged arc
Furnace transformers Up to 100 MVA
furnaces
Up to 160 KA Six-pulse transformers with IPT, twelve-pulse with IPT (double-deck
Rectifier transformers
DC construction), bridge connection, for railway traction
Reactors Up to 765 kV Shunt and series reactors
Specialty transformers Testing transformers, transformers with multiple secondaries
Source: Company

Fig 22 Company structure


TRIL

Transweld Mechanical Engineering


Works (a 100% stake) (transformer
tanks and core channels

Savas Engineering Co. Pvt. Ltd.


Transpares (a 51% stake)
(a 100% stake) (transformer TARIL Infrastructure (a
(pressed-steel radiators for
equipment such as vapour phase 100% stake)t
transformers)
drying machines)

Source: Company

Locations and capacities. TRIL has three manufacturing units located at


Changodar, Odhav and Moraiya (all in Gujarat). The Odhav unit was
acquired in 2006 as part of expansion plans. The recently-commissioned
Moraiya plant manufactures transformers up to 1,200 kV. Capacities of
each unit are:

Fig 23 Manufacturing capacity and locations


Location Capacity (MVA) Capability
Odhav 1,200 up to 66 kV
Changodar 12,000 up to 245 kV
Moraiya 20,000 220 kV, 400 kV and 765 kV
Total 33,200
Source: Company

Anand Rathi Research 68


03 February 2017 Transformers and Rectifiers - Strong growth factored into valuations; initiating, with a Hold

Fig 24 Key Managerial Personnel and Board of Director


Name Designation Qualification
Chairman & B.E. (Electrical), Jalpaiguri Government Engineering College; over four
Jitendra Mamtora whole-time decades experience in manufacturing transformers and the transformer
director industry; associated with the company since 2001
Diploma holder in electrical engineering, from Uxbridge College of
Managing Engineering, London, UK; over a decade experience in transformers, in
Satyen Mamtora
director projects, production and marketing; associated with the company since
2007; responsible for overall operations of the Changodar unit
B.A., Gujarat University; associated with the company since 1997,
Ms Karuna Executive
instrumental in undertaking corporate social responsibility activities of
Mamtora director
the company
BE (Electrical), VJTI, Mumbai; four decades experience in the power
Executive
Vinod Masson sector in Indian and global markets; was associated with Crompton
director
Greaves, Avantha Power & Infrastructure
B.E. (Mechanical), Jadavpur University; over four decades experience
Independent
Bhaskar Sen in overall management of business related to switchgear, transformers,
director
motor projects, REC equipment
Harish R. Independent B.E. (Mechanical). LE Engineering College, Morbi; associated with Tata
Rangwala director Chemicals, Harsha Engineers
Independent B.E. (Mechanical), LE Engineering College, Morbi; over 35 years
Rajendra S. Shah
director experience, founder-promoter of Harsha Engineers
B.E. (Hons.) Mechanical, Agra University; over three decades
Suresh Chandra Independent
experience in metal recovery and petroleum refining; associated with
Agarwal director
Maha Gujarat Smelting
Source: Company

Anand Rathi Research 69


Engineering & Capital goods
India I Equities
Initiating Coverage

03 February 2017

Voltamp Transformers Rating: Buy


Target Price: `1,433
Healthy order book; initiating, with a Buy Share Price: `973

We initiate coverage on Voltamp Transformers, with a Buy rating and a


target of `1,433 (47% potential). Its strong order book, healthy balance
Key data VAMP IN / VOLT.BO
sheet and better profitability would keep earnings growth strong in the `962 / `647
52-week high / low
next three years. Earnings would record a 24% CAGR over FY16-19. A Sensex / Nifty 28241 / 8741
pick-up in power distribution capex and in investment in 3-m average volume $0.5m
manufacturing would lead to the companys better order book. Market cap `10bn / $146m
Shares outstanding 10.1m
Healthy order book Voltamps `3.8bn order-book on 5th Nov16 is for
transformers of ~6,642 MVA, more than 81% from private operators, the
rest from SEBs and utilities. Of the order book, ~1,857 MVA is for power
transformers, 1,950 MVA for distribution transformers. Shareholding pattern (%) Sep-16 Jun-16 Mar-16
Promoters 47.5 47.5 47.5
Diversified business model. During FY16 the companys top-10 clients - of which, Pledged
brought 35% to revenue. Power projects bring ~22%. Other sectors such as Free Float 52.5 52.5 52.5
oil and gas, buildings, steel & minerals each bring ~4-6% to sales. Long-term - Foreign Institutions 24.3 25.5 28.8
relationships developed with industrial clients have helped in repeat business. - Domestic Institutions 12.6 11.4 11.4
- Public 15.6 15.6 12.3
Strong balance sheet. Being debt-free and with good working-capital
management has enabled Voltamp to manage its cash flows better and
command healthy return ratios. Prudent payment terms and a diversified
clientele with more private clients help it maintain healthy working capital. Relative price performance
1,050
Valuation. The stock trades at 15.6x FY18e and 11.9x FY19e earnings. We 1,000 Sensex
950
believe that the order book would improve with capex revival and greater 900
distribution capex. More sales would ensure better profitability due to 850
` 800
improving utilisations Risks. Intense competition might affect profitability 750 VAMP
and delay in capex would lead to subdued order inflows. 700
650
600
Jan-16
Feb-16

Apr-16

Jun-16

Aug-16
Sep-16

Jan-17
Jul-16
May-16
Mar-16

Nov-16
Dec-16
Oct-16

Source: Bloomberg

Key financials (YE Mar) FY15 FY16 FY17e FY18e FY19e


Sales (` m) 5,169 5,633 6,627 8,114 10,404
Net profit (` m) 285 440 512 632 824
EPS (`) 28.2 43.6 50.7 62.6 81.6
Growth (%) 8.5 54.5 16.4 23.4 30.4
PE (x) 34.5 22.3 19.2 15.6 11.9
PBV (x) 2.2 2.1 2.0 1.8 1.6
RoE (%) 6.6 9.7 10.5 12.1 14.4 Bhalchandra Shinde
RoCE (%) 7.8 13.2 14.7 17.2 20.9 Research Analyst
Dividend yield (%) 1.2 1.5 1.8 2.2 2.9
Net debt/equity (x) -0.0 -0.1 -0.1 -0.1 -0.2
Source: Company, Anand Rathi Research

Anand Rathi Share and Stock Brokers Limited (hereinafter ARSSBL) is a full-service brokerage and equities-research firm and the views expressed therein are solely of
ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst
certifications are present in the Appendix.

Anand Rathi Research India Equities


03 February 2017 Voltamp Transformers - Healthy order book; initiating, with a Buy

Quick Glance Financials and Valuations


Fig 1 Income statement (` m) Fig 2 Balance sheet (` m)
Year-end: Mar FY15 FY16 FY17e FY18e FY19e Year-end: Mar FY15 FY16 FY17e FY18e FY19e
Net revenues 5,169 5,633 6,627 8,114 10,404 Share capital 101 101 101 101 101
Revenue growth (%) 16.2 9.0 17.6 22.4 28.2 Reserves & surplus 4,307 4,595 4,930 5,344 5,883
- Oper. expenses 4,971 5,259 6,145 7,422 9,383 Net worth 4,408 4,696 5,031 5,445 5,984
EBIDTA 197 374 482 692 1,021 Total debt - - - - -
EBITDA margins (%) 3.8 6.6 7.3 8.5 9.8 Minority interest - - - - -
- Interest 3 4 4 4 4 Def. tax liab. (net) -20 -22 -22 -22 -22
- Depreciation 72 60 61 66 73 Capital employed 4,389 4,675 5,010 5,423 5,962
+ Other income 212 283 291 270 240 Net fixed assets 425 395 378 405 456
- Tax 50 153 196 259 359 Intangible assets - - - - -
Effective tax rate (%) 14.9 25.8 27.6 29.1 30.4 Investments 2,107 2,196 2,210 2,029 1,791
+ Associates / (minorities) - - - - - - of which, Liquid 165 379 625 750 850
Adjusted PAT 285 440 512 632 824 Working capital 1,824 2,065 2,391 2,943 3,660
+ Extraordinary items - - - - - Cash 33 18 31 45 55
Reported PAT 285 440 512 632 824 Capital deployed 4,389 4,675 5,010 5,423 5,962
Adj. FDEPS (` / sh) 28.2 43.6 50.7 62.6 81.6 W C turn (days) 129 134 132 132 128
Adj. FDEPS growth (%) 8.5 54.5 16.4 23.4 30.4 Book value (` / sh) 436.5 465.0 498.2 539.1 592.4
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 3 Cash-flow statement (` m) Fig 4 Ratio analysis @ `973


Year-end: Mar FY15 FY16 FY17e FY18e FY19e Year-end: Mar FY15 FY16 FY17e FY18e FY19e
Adjusted PAT 285 440 512 632 824 P/E (x) 34.5 22.3 19.2 15.6 11.9
+ Non-cash items 72 60 61 66 73 Cash P/E (x) 27.5 19.7 17.2 14.1 11.0
Cash profit 357 500 573 698 897 EV / EBITDA (x) 48.8 25.2 19.0 13.1 8.7
- Incr. / (decr.) in WC 254 241 326 552 717 EV / sales (x) 1.9 1.7 1.4 1.1 0.9
Operating cash-flow 103 259 247 146 181 P/B (x) 2.2 2.1 2.0 1.8 1.6
- Capex 22 30 44 94 124 RoE (%) 6.6 9.7 10.5 12.1 14.4
Free cash-flow 81 229 203 52 57 RoCE (%) 7.8 13.2 14.7 17.2 20.9
- Dividend 122 152 177 219 285 Dividend yield (%) 1.2 1.5 1.8 2.2 2.9
+ Equity raised -2 0 - - - Dividend payout (%) 42.8 34.6 34.6 34.6 34.6
+ Debt raised -13 -2 - - - Net debt / equity (x) -0.0 -0.1 -0.1 -0.1 -0.2
- Investments -78 90 13 -181 -238 Debtor days 102 96 96 95 91
- Misc. items - - - - - Inventory days 58 61 61 60 60
Net cash-flow 22 -14 13 14 9 Payables days 9 3 4 4 4
+ Op. cash & bank bal. 11 33 19 31 45 Interest cover (x) 112.4 136.0 162.2 203.9 270.5
Cl. Cash & bank bal. 33 19 31 45 55 Fixed asset T/O (x) 12.2 14.3 17.6 20.0 22.8
Source: Company, Anand Rathi Research Source: Company, Anand Rathi Research

Fig 5 Price movement Fig 6 Sales mix trend


(`) (%)
1,200 100
90
1,000 VAMP
80
70
800
60
600 50
40
400
30

200 20
10
0 0
Jul-12

Jul-13

Jul-14

Jul-15

Jul-16
Apr-12

Oct-12

Apr-13

Oct-13

Apr-14

Oct-14

Apr-15

Oct-15

Apr-16

Oct-16
Jan-12

Jan-13

Jan-14

Jan-15

Jan-16

Jan-17

FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Power Transformers Distribution Trasnformers Dry type Transformers

Source: Bloomberg Source: Company, Anand Rathi Research

Anand Rathi Research 71


03 February 2017 Voltamp Transformers - Healthy order book; initiating, with a Buy

Healthy order book


Order book likely to improve
The government is aiming at 100% village electrification by May18.
Projects such as a green-energy corridor for power generation through
renewable energy would play an important role in the 100% electrification.
Considering the governments emphasis, transmission- and distribution-
related capex are expected to vastly increase.
Hence, we believe that the transformer segment would grow a strong ~15-
20%. In manufacturing industries, capacity utilisation is ~60-65%. Hence,
industrial capex is expected to be sluggish, at least over the next 2-3 years.
We expect Voltamp to be one of the major beneficiaries and see healthy
growth in its order book, especially in power and distribution
transformers.

Fig 7 Order-book trend


(`m) (%)
4,500 30.0
4,000
20.0
3,500
3,000 10.0
2,500
0.0
2,000
1,500 -10.0
1,000
-20.0
500
0 -30.0
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e
Order book YoY (RHS)
Source: Company, Anand Rathi Research

Realisations to stabilise
Competitive pricing by new entrants from China and MNCs has led to
pricing pressure in the transformer segment. Further, declining raw-
material prices have led to a drop in realisations in the last two years.
Because of intense competition, most of the softening in raw-material
costs has been passed on to customers. However, we believe that
realisations have stabilised in the past one year and are likely to hold at
those levels, and perhaps improve with greater demand in the transformers
sector.

Anand Rathi Research 72


03 February 2017 Voltamp Transformers - Healthy order book; initiating, with a Buy

Fig 8 Realisation trend


(`/MVA)
6,40,000

6,20,000

6,00,000

5,80,000

5,60,000

5,40,000

5,20,000

5,00,000

FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e
Source: Company, Anand Rathi Research

In MVA terms, volumes are likely to grow a strong 15-20%, in line with
growth in value. We expect realisations to be flat. But greater demand
would provide a cushion for better realizations in the next three years.
With increasing capex in T&D, we see limited shrinking in transformer
demand in the next three years.

Fig 9 Order-book trend in volume terms


(`m)
7,000

6,000

5,000

4,000

3,000

2,000

1,000

0
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e

Order book (MVA terms)


Source: Company, Anand Rathi Research

Power and distribution transformers would continue to constitute the


major chunk of the order book. The large number of clients in the private
sector would help the company sustain realisations at present levels.
Interaction with the management suggests that the company would
continue to seek profitable orders over the next three years and not
compromise on profitability to achieve volume growth.

Anand Rathi Research 73


03 February 2017 Voltamp Transformers - Healthy order book; initiating, with a Buy

Diversified business model


Diversified dependence
The company operates in three different segments: power transformers
(40% of sales), distribution transformers (42%) and dry transformers
(18%). Oil-filled transformers constitute 81% of sales, dry transformers
~19%.

Fig 10 Sales-mix trend


(%)
100
90
80
70
60
50
40
30
20
10
0
FY06

FY07

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16
Power Transformers Distribution Trasnformers Dry type Transformers

Source: Company, Anand Rathi Research

Optimal mix
Dependence on three segments allows the company to diversify into
different kinds of transformers. Power-generation capex and utilities
companies are the major growth drivers in power transformers.
Distribution capex is the major growth driver for distribution
transformers. Industrial capex and commercial construction are the major
growth drivers for dry transformers.
Exhaustive clientele
Voltamp is the trusted vendor for leading business houses across
industries, well-known PSUs and large co-operatives. Its clients include
GETCO, BPC, Grasim, KSEB and Reliance Industries, as well as EPC
contractors such as ABB, Siemens, BHEL, L&T and Schneider.
Voltamp has long-term relations with most clients and secures a large part
of its business (up to ~70%) in repeats from large clients.
The top-10 clients account for ~34-35% of sales.

Anand Rathi Research 74


03 February 2017 Voltamp Transformers - Healthy order book; initiating, with a Buy

Fig 11 Top-ten clients contribution in sales


(%)
50%
45%
40%
35%
30%
25%
20%
15%
10%
5%
0%

FY08

FY09

FY10

FY11

FY12

FY13

FY14

FY15

FY16
Top 10 client contribution
Source: Company, Anand Rathi Research

Top-10 clients
The Gujarat Energy Transmission Corp.
Siemens
BPC
L&T
Suzlon Power Infrastructure
ABB India
Sterling and Wilson
Reliance Industries
The Kerala State Electricity Board
BHEL
Strong marketing and service network
The company has a well-established nationwide network of 13 offices,
more than 65 marketing professionals and 20 service executives in all
major industrial cities and metros.

Fig 12 Sector-wise dependence


Power projects
Others 22%
30%

Consumer
products SEB
2% 16%
Cement
2%
Infrastructure
3% Utilities
Chemical & 8%
Petrochem Oil & Gas
3% Steel, Metals & Building 6%
Minerals 4%
4%
Source: Company

Anand Rathi Research 75


03 February 2017 Voltamp Transformers - Healthy order book; initiating, with a Buy

Strong balance sheet


Prudent working-capital management
Reduced exposure to SEBs and increasing business with industrial clients
has enabled Voltamp to curtail retention money. Strict payment terms
make working capital more comfortable due to healthy cash-flows. This,
together with zero debt and healthy return ratios, renders the balance sheet
healthier than those of similar manufacturers.
The company maintains prudent working-capital levels. Despite
challenging conditions, it has maintained decent payment terms.

Fig 13 Prudent working capital


(Days)
200
180
160
140
120
100
80
60
40
20
0
FY11

FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e
Receivable days Inventory days Payable days Cash covnersion cycle
Source: Company, Anand Rathi Research

Timely collection of receivables has been its prime concerns. However, it


has maintained a better cash-conversion cycle. It maintains low creditor days
for competitive pricing and preference in delivery for timely execution.
Debt-free since FY08, Voltamp is cash surplus, which meets the working-
capital required and capex programmes through internal accruals, which in
turn strengthen its bottom line.

Fig 14 Improving return ratios


(%) (x)
30.0 1.7

1.5
25.0
We believe that improving sales 1.3
and profitability would allow the 20.0

company to generate healthy return 1.1


15.0
ratios over the next three years. 0.9

10.0
0.7

5.0 0.5
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e

Return on equity Net margin


Asset turnover (RHS) Leverage factor (RHS)
Source: Company, Anand Rathi Research

Anand Rathi Research 76


03 February 2017 Voltamp Transformers - Healthy order book; initiating, with a Buy

Financials
Strong growth in order book and sales to persist
With forthcoming capex in the T&D segment, the transformer sub-
segment is expected to see healthy growth in the next three years.
Manufacturers such as Voltamp are expected to have good orders in the
next three years, resulting in a healthy 13% CAGR over FY16-19.

Fig 15 Order-book and sales trend


(`m) (%)
12,000 40.0

10,000 30.0

20.0
8,000
10.0
6,000
0.0
4,000
-10.0
2,000 -20.0

0 -30.0
FY10

FY11

FY12

FY13

FY14

FY15

FY16

FY17e

FY18e

FY19e
Order book Sales YoY (RHS) YoY (RHS)
Source: Company, Anand Rathi Research

With the shortening execution cycle, the sales-to-order-book ratio has


risen from 1.7x to 2.9x. We expect the execution cycle to persist at the
present ~3x.

EBITDA margin to improve


Raw-materials consumed constitute ~79% of sales. Most industrial
projects undertaken by Voltamp do not carry price-escalation clauses.
However, the price quoted has a validation period of from seven to 30
days (depending on clients), by which the company has the right to revise,
beyond the stated period, the price quoted and firm up prices on the
order-closing date.
The company has a back-to-back hedging mechanism along with a
centralised purchasing system, by which prices of copper are hedged in
real time on the LME on receipt of an order, reducing the risk of
fluctuating copper prices.

Fig 16 Cost-structure trend (`m)


FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17e FY18e FY19e
Sales 5,420 5,263 5,698 5,155 4,448 5,169 5,633 6,627 8,114 10,404
Material cost 3,811 3,915 4,563 4,130 3,670 4,255 4,433 5,216 6,386 8,188
Employee cost 155 159 188 198 184 212 212 244 281 323
Other expense 396 521 529 486 444 504 613 686 755 872
% of sales
Material cost 70.3 74.4 80.1 80.1 82.5 82.3 78.7 78.7 78.7 78.7
Employee cost 2.9 3.0 3.3 3.8 4.1 4.1 3.8 3.7 3.5 3.1
Other expense 7.3 9.9 9.3 9.4 10.0 9.7 10.9 10.3 9.3 8.4
EBITDA margin (%) 19.5 12.7 7.3 6.6 3.4 3.8 6.6 7.3 8.5 9.8
Source: Company, Anand Rathi Research

Anand Rathi Research 77


03 February 2017 Voltamp Transformers - Healthy order book; initiating, with a Buy

Due to intense competition, lower raw material prices are passed on to


customers. The slight benefit in FY16 was due to fixed-price contracts and
commodity prices softening. However, more execution and faster recovery
would reduce other expenses. Hence, we believe that margins would
gradually improve over FY16-19.

Fig 17 Income statement (` m)


Y/E: March FY15 FY16 FY17e FY18e FY19e
Net revenues 5,169 5,633 6,627 8,114 10,404
Growth (%) 16.2 9.0 17.6 22.4 28.2
Material Cost -4,255 -4,433 -5,216 -6,386 -8,188
Employee Cost -212 -212 -244 -281 -323
Manufacturing cost - - - - -
Marketing cost -161 -220 -246 -272 -313
Administrative cost -8 -8 -9 -10 -11
Energy cost -38 -36 -40 -44 -51
Other cost -296 -349 -391 -430 -497
EBITDA 197 374 482 692 1,021
Growth (%) 31.9 89.5 28.7 43.6 47.6
EBITDA margin (%) 3.8 6.6 7.3 8.5 9.8
Other income 212 283 291 270 240
Operating profit 410 657 773 962 1,261
Depreciation -72 -60 -61 -66 -73
EBIT 338 597 712 895 1,188
Interest cost -3 -4 -4 -4 -4
PBT 335 593 708 891 1,183
Tax -50 -153 -196 -259 -359
Effective tax rate 14.9 25.8 27.6 29.1 30.4
PAT 285 440 512 632 824
Minority interest - - - - -
Consol PAT 285 440 512 632 824
Growth (%) 8.3 54.5 16.4 23.4 30.4
PAT margin (%) 5.5 7.8 7.7 7.8 7.9
Extra-ordinary income - - - - -
Dividends (incl Tax) -122 -152 -177 -219 -285
Transferred to reserves 163 288 335 413 539
Per-share data
FDEPS (`) 28.2 43.6 50.7 62.6 81.6
DPS (`) 12.1 15.1 17.5 21.6 28.2
Adj BV (`) 436.5 465.0 498.2 539.1 592.4
CEPS (`) 35.3 49.5 56.7 69.1 88.9
Valuation ratio
P/E (x) 34.5 22.3 19.2 15.6 11.9
P/adj. BV (x) 2.2 2.1 2.0 1.8 1.6
P/C (x) 27.5 19.7 17.2 14.1 11.0
Dividend Yield (%) 1.2 1.5 1.8 2.2 2.9
EV/S (x) 1.9 1.7 1.4 1.1 0.9
EV/E (x) 48.7 25.1 19.0 13.0 8.7
Quality ratio
Dividend Payout (%) 42.8 34.6 34.6 34.6 34.6
Other income / PBT (%) 63.4 47.7 41.2 30.3 20.3
Interest cover (x) 112.4 136.0 162.2 203.9 270.5
Operating CF / EBITDA (x) 0.5 0.7 0.5 0.2 0.2
Source: Company, Anand Rathi Research

Anand Rathi Research 78


03 February 2017 Voltamp Transformers - Healthy order book; initiating, with a Buy

Fig 18 Balance sheet (` m)


Y/E: March FY15 FY16 FY17e FY18e FY19e
Equity 101 101 101 101 101
Reserves 4,307 4,595 4,930 5,344 5,883
Minority interests - - - - -
Less: Misc Exp - - - - -
Net worth 4,408 4,696 5,031 5,445 5,984
Equity (% of CE) 100.5 100.5 100.4 100.4 100.4
LT Debt - - - - -
ST Debt - - - - -
DTL (net) -20 -22 -22 -22 -22
Total debt -20 -22 -22 -22 -22
Net D/E (x) -0.0 -0.1 -0.1 -0.2 -0.2
Capital Employed 4,389 4,675 5,010 5,423 5,962
Gross block 411 390 378 405 456
Acc Depreciation - - - - -
Net block 411 390 378 405 456
CWIP 14 5 - - -
Fixed assets 425 395 378 405 456
Investments 2,107 2,196 2,210 2,029 1,791
Cash Equivalents 33 18 31 45 55
Inventories 816 946 1,104 1,341 1,702
Debtors 1,445 1,489 1,735 2,108 2,584
Loans & Advances 107 141 161 195 248
Other Current Assets - - - - -
Current Assets 2,401 2,594 3,032 3,689 4,588
Creditors -132 -44 -70 -85 -107
Provisions -218 -264 -281 -301 -322
Other Current Liabilities -194 -203 -259 -315 -444
Current Liabilities -544 -511 -610 -701 -873
Net Current Assets 1,857 2,083 2,422 2,988 3,715
Capital Deployed 4,389 4,674 5,009 5,422 5,962
FA / CE (%) 9.7 8.4 7.5 7.5 7.6
Investments / CE (%) 44.2 38.9 31.6 23.6 15.8
Liquid assets / CE (%) 4.5 8.5 13.1 14.7 15.2
Working Capital / CE (%) 41.6 44.2 47.7 54.3 61.4
Source: Company, Anand Rathi Research

Fig 19 Cash-flow statement (` m)


Y/E: March FY15 FY16 FY17e FY18e FY19e
Cash Profit 357 500 573 698 897
Chg in WC -254 -241 -326 -552 -717
Operating CF 103 259 247 146 181
Capex -22 -30 -44 -94 -124
Free CF 81 229 203 52 57
Equity -2 0 - - -
Debt -13 -2 - - -
Investments 78 -90 -13 181 238
Dividends -122 -152 -177 -219 -285
Misc inflows - - - - -
Net change in cash 22 -14 13 14 9
Opening cash 11 33 19 31 45
Closing cash 33 19 31 45 55
Source: Company, Anand Rathi Research

Anand Rathi Research 79


03 February 2017 Voltamp Transformers - Healthy order book; initiating, with a Buy

Fig 20 Ratio analysis @ `973


Y/E: March FY15 FY16 FY17e FY18e FY19e
Dupont Analysis
Margins (%) 6.5 10.6 10.7 11.0 11.4
Capital turn (x) 1.2 1.2 1.4 1.6 1.8
RoCE (%) 7.8 13.2 14.7 17.2 20.9
Leverage factor (x) 1.0 1.0 1.0 1.0 1.0
Interest burden (x) 1.0 1.0 1.0 1.0 1.0
Tax burden (x) 0.9 0.7 0.7 0.7 0.7
Consol factor (x) 1.0 1.0 1.0 1.0 1.0
RoE (%) 6.6 9.7 10.5 12.1 14.4
Working capital (days)
Inventories 58 61 61 60 60
Debtors 102 96 96 95 91
Loans & Advances 8 9 9 9 9
Other CA - - - - -
Creditors -9 -3 -4 -4 -4
Provisions -15 -17 -16 -14 -11
Other CL -14 -13 -14 -14 -16
Net WC 129 134 132 132 128
Other ratios
Op CF / revenue (%) 2.0 4.6 3.7 1.8 1.7
FCF / revenue (%) 1.6 4.1 3.1 0.6 0.5
Intangibles / GB (%) - - - - -
Intangibles / CE (%) - - - - -
Revenue / GB (x) 12.6 14.5 17.6 20.0 22.8
Revenue / FA (x) 12.2 14.3 17.6 20.0 22.8
CWIP/GB (x) 0.0 0.0 - - -
Source: Company, Anand Rathi Research

Anand Rathi Research 80


03 February 2017 Voltamp Transformers - Healthy order book; initiating, with a Buy

Valuations
The stock trades at 15.6x FY18e and 11.9x FY19e. We believe that
forthcoming capex in power distribution would lead to a pick-up in the
transformers segment. Voltamp Transformers will see strong orders in oil-
filled power and distribution transformers Hence, we initiate coverage on
the stock, with a Buy rating and a price target of `1,433 (47% potential).

Fig 21 One year forward P/E Fig 22 One year forward EV/EBITDA
25 35.0

30.0
20
25.0
+1SD
+1SD
15 Mean 20.0
-1SD Mean
15.0
10 -1SD

10.0
5
5.0

0 0.0
Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16
Jan-17

Dec-10
Apr-11
Aug-11
Dec-11
Apr-12
Aug-12
Dec-12
May-13
Sep-13
Jan-14
May-14
Sep-14
Jan-15
May-15
Sep-15
Jan-16
May-16
Sep-16
Jan-17
Source: Source:

Key risks
Slowdown in power-sector reforms. Demand for transformers
chiefly arises from the power sector. Any slowdown in infrastructure
spending by the government would affect the performance of
transformer manufacturers.
Rising cost of raw materials. The rising cost of raw materials
(copper and CRGO steel) could impact the profitability of the
company if it is unable to pass it on to customers.

Anand Rathi Research 81


03 February 2017 Voltamp Transformers - Healthy order book; initiating, with a Buy

Company Background & Management


Initially incorporated as a private limited company on converting a
partnership firm, Voltamp Corp., established in 1963 by Lalit Kumar,
Babubhai and Navin Chandra Patel, Voltamp Transformers manufactures
oil-filled power and distribution transformers. It has capacity for 13,000
MVA per annum (three shifts), catering to the wide spectrum of
transformer users in varied industries such as BHEL, Siemens, ABB, L&T,
Reliance Energy, Crompton Greaves and General Electric. Besides India,
the company has operations in Nepal, Bhutan, Indonesia, Sri Lanka and
West Asia.

Fig 23 Product range


Power
Oil Filled
Transformers

Voltamp
Transformer Oil Filled

Distribution
Transformers Resin Impregnated

Dry Type
Cast Resin
Source: Company, Anand Rathi Research

Fig 24 Product classification


Product
Range Description
Classification
up to 160 MVA,
Oil-filled transformers Power and distribution transformers
220 KV class
Resin-impregnated, dry up to 5 MVA, 11 In technical collaboration with a leading German company, Mora
transformers KV class Transformatoren GmbH, Usingen
Manufactures cast-resin power and distribution transformers,
Cast resin, dry up to 12.5 MVA, converter transformers, transformers with on-load tap-changers,
transformers 33 KV class motor-starting transformers, testing transformers, in technical
collaboration with a leading German company HTT, HannMunden
HT switchgear, transformers and LT switchgear and associated
Unitised sub-station
equipment for a composite compartmentalised unitised sub-station
Induction furnaces Induction furnaces with coils constructed from heavy copper tubing
Source: Company, Anand Rathi Research

Locations: The company has two plants at Vadodara, Gujarat:

Fig 25 Manufacturing locations


Location Type of Transformer
Makarpura Power transformers
Vadadla (Savli) Oil-filled distribution transformers and dry transformers
Source: Company, Anand Rathi Research

Fig 26 Key Managerial Personnel and Board of Directors


Name Designation Qualification
Chairman & managing B.Com., M.S. University, Vadodara, Gujarat; CA and CS; wide experience in general management;
Kanubhai S. Patel
director associated with Atul Products, Bombay Dyeing & Manufacturing and Cadbury India
Electrical engineer, M.S. University, Vadodara, Gujarat; 11 years experience in production, marketing and
Kunjalbhai L. Patel Vice-chairman & MD
general management
B. Com., LL.B; diploma in taxation, CS; over 17 years experience in company law, banking, fund management
Vallabh N. Madhani Director / CFO
and legal compliance; with SN Mehta & Associates, Vadilal Industries, Gujarat Fluorochemicals
Mechanical & chemical engineer, Gujarat University, experience in materials management and engineering
Vasantlal L. Patel Director
services; associated with Gujarat State Fertilizers & Chemicals, and Effluent Channel Projects
Source: Company, Anand Rathi Research

Anand Rathi Research 82


Appendix
Analyst Certification
The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the
compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research
analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange
Board of India (hereinafter SEBI) and the analysts compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have
no bearing whatsoever on any recommendation that they have given in the Research Report.

Anand Rathi Ratings Definitions


Analysts ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described
in the Ratings Table below:
Ratings Guide (12 months)
Buy Hold Sell
Large Caps (>US$1bn) >15% 5-15% <5%
Mid/Small Caps (<US$1bn) >25% 5-25% <5%

Research Disclaimer and Disclosure inter-alia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014
Anand Rathi Share and Stock Brokers Ltd. (hereinafter refer as ARSSBL) (Research Entity) is a subsidiary of Anand Rathi Financial Services Ltd. ARSSBL is a
corporate trading and clearing member of Bombay Stock Exchange Ltd, National Stock Exchange of India Ltd. (NSEIL), Multi Stock Exchange of India Ltd (MCX-
SX), United Stock Exchange and also depository participant with National Securities Depository Ltd (NSDL) and Central Depository Services Ltd. ARSSBL is
engaged in the business of Stock Broking, Depository Participant and Mutual Fund distributor.
The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi research have received compensation based
upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues.
General Disclaimer: This Research Report (hereinafter called Report) is meant solely for use by the recipient and is not for circulation. This Report does not
constitute a personal recommendation or take into account the particular investment objectives, financial situations, or needs of individual clients. The
recommendations, if any, made herein are expression of views and/or opinions and should not be deemed or construed to be neither advice for the purpose of
purchase or sale of any security, derivatives or any other security through ARSSBL nor any solicitation or offering of any investment /trading opportunity on behalf
of the issuer(s) of the respective security (ies) referred to herein. These information / opinions / views are not meant to serve as a professional investment guide for
the readers. No action is solicited based upon the information provided herein. Recipients of this Report should rely on information/data arising out of their own
investigations. Readers are advised to seek independent professional advice and arrive at an informed trading/investment decision before executing any trades or
making any investments. This Report has been prepared on the basis of publicly available information, internally developed data and other sources believed by
ARSSBL to be reliable. ARSSBL or its directors, employees, affiliates or representatives do not assume any responsibility for, or warrant the accuracy,
completeness, adequacy and reliability of such information / opinions / views. While due care has been taken to ensure that the disclosures and opinions given are
fair and reasonable, none of the directors, employees, affiliates or representatives of ARSSBL shall be liable for any direct, indirect, special, incidental,
consequential, punitive or exemplary damages, including lost profits arising in any way whatsoever from the information / opinions / views contained in this Report.
The price and value of the investments referred to in this Report and the income from them may go down as well as up, and investors may realize losses on any
investments. Past performance is not a guide for future performance. ARSSBL does not provide tax advice to its clients, and all investors are strongly advised to
consult with their tax advisers regarding taxation aspects of any potential investment.
Opinions expressed are our current opinions as of the date appearing on this Research only. We do not undertake to advise you as to any change of our views
expressed in this Report. Research Report may differ between ARSSBLs RAs and/ or ARSSBLs associate companies on account of differences in research
methodology, personal judgment and difference in time horizons for which recommendations are made. User should keep this risk in mind and not hold ARSSBL,
its employees and associates responsible for any losses, damages of any type whatsoever.
ARSSBL and its associates or employees may; (a) from time to time, have long or short positions in, and buy or sell the investments in/ security of company (ies) mentioned
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involved in, or related to computing or compiling the information have any liability for any damages of any kind.
Details of Associates of ARSSBL and Brief History of Disciplinary action by regulatory authorities & its associates are available on our website i.e. www.rathionline.com
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Statements on ownership and material conflicts of interest, compensation - ARSSBL and Associates
Answers to the Best of the knowledge and belief of ARSSBL/ its Associates/ Research Analyst who is preparing this report
ARSSBL/its Associates/ Research Analyst/ his Relative have actual/beneficial ownership of one per cent or more securities of the subject company, at the end of No
the month immediately preceding the date of publication of the research report?
ARSSBL/its Associates/ Research Analyst/ his Relative have actual/beneficial ownership of one per cent or more securities of the subject company No
ARSSBL/its Associates/ Research Analyst/ his Relative have any other material conflict of interest at the time of publication of the research report? No
ARSSBL/its Associates/ Research Analyst/ his Relative have received any compensation from the subject company in the past twelve months No
ARSSBL/its Associates/ Research Analyst/ his Relative have managed or co-managed public offering of securities for the subject company in the past twelve No
months
ARSSBL/its Associates/ Research Analyst/ his Relative have received any compensation for investment banking or merchant banking or brokerage services from No
the subject company in the past twelve months
ARSSBL/its Associates/ Research Analyst/ his Relative have received any compensation for products or services other than investment banking or merchant No
banking or brokerage services from the subject company in the past twelve months
ARSSBL/its Associates/ Research Analyst/ his Relative have received any compensation or other benefits from the subject company or third party in connection No
with the research report
ARSSBL/its Associates/ Research Analyst/ his Relative have served as an officer, director or employee of the subject company. No

Other Disclosures pertaining to distribution of research in the United States of America


This report was prepared, approved, published and distributed by the Anand Rathi Share and Stock Brokers Limited (ARSSBL) located outside of the United States (a non-
US Group Company). This report is distributed in the U.S. by Enclave Capital LLC, a U.S. registered broker dealer, on behalf of ARSSBL only to major U.S. institutional
investors (as defined in Rule 15a-6 under the U.S. Securities Exchange Act of 1934 (the Exchange Act)) pursuant to the exemption in Rule 15a-6 and any transaction
effected by a U.S. customer in the securities described in this report must be effected through Enclave Capital. ARSSBL accepts responsibility for its contents. Any US
customer wishing to effect transactions in any securities referred to herein or options thereon should do so only by contacting a representative of Enclave Capital LLC at 646-
454-8600
Neither the report nor any analyst who prepared or approved the report is subject to U.S. legal requirements or the Financial Industry Regulatory Authority, Inc. (FINRA) or
other regulatory requirements pertaining to research reports or research analysts. No non-US Group Company is registered as a broker-dealer under the Exchange Act or is a
member of the Financial Industry Regulatory Authority, Inc. or any other U.S. self-regulatory organization.
This material was produced by ARSSBL, solely for information purposes and for the use of the recipient. It is not to be reproduced under any circumstances and is not to be
copied or made available to any person other than the recipient. It is distributed in the United States of America by Enclave Capital LLC (19 West 44th Street, Suite 1700, New
York, NY 10036) and elsewhere in the world by ARSSBL or an authorized affiliate of ARSSBL (such entities and any other entity, directly or indirectly, controlled by ARSSBL,
the Affiliates). This document does not constitute an offer of, or an invitation by or on behalf of ARSSBL or its Affiliates or any other company to any person, to buy or sell
any security. The information contained herein has been obtained from published information and other sources, which ARSSBL or its Affiliates consider to be reliable. None
of ARSSBL or its Affiliates accepts any liability or responsibility whatsoever for the accuracy or completeness of any such information. All estimates, expressions of opinion
and other subjective judgments contained herein are made as of the date of this document. Emerging securities markets may be subject to risks significantly higher than more
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ability to assess such risks may also be limited due to significantly lower information quantity and quality. By accepting this document, you agree to be bound by all the
foregoing provisions.
1. ARSSBL or its Affiliates may or may not have been beneficial owners of the securities mentioned in this report.
2. ARSSBL or its affiliates may have or not managed or co-managed a public offering of the securities mentioned in the report in the past 12 months.
3. ARSSBL or its affiliates may have or not received compensation for investment banking services from the issuer of these securities in the past 12 months and do not expect
to receive compensation for investment banking services from the issuer of these securities within the next three months.
4. However, one or more of ARSSBL or its Affiliates may, from time to time, have a long or short position in any of the securities mentioned herein and may buy or sell those
securities or options thereon, either on their own account or on behalf of their clients.
5. As of the publication of this report, ARSSBL does not make a market in the subject securities.
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Additional information on recommended securities/instruments is available on request.
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