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India I Equities
Sector Report
03 February 2017
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.
03 February 2017
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.
Capital Goods
Transformers and pumps look promising
KSB Pumps................................................................................................. 31
Voltamp Transformers................................................................................. 70
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.
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
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.
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).
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.
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.
Company Section
03 February 2017
Apr-16
Jun-16
Jan-17
Jul-16
May-16
Mar-16
Nov-16
Dec-16
Oct-16
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.
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
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.
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.
Pranhita
Project
Source: Company
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
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.
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.
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%.
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
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.
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
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
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
20,000
15,000
10,000
5,000
0
FY12
FY13
FY14
FY15
FY16
FY17e
FY18e
FY19e
Project sales Product sales
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
0.0 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.
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
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
03 February 2017
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
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.
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%
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
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
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.
Sub critical
89%
Source: CEA
-2
-4
-6
-8
-10
-12
FY01
FY02
FY03
FY04
FY05
FY06
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Source: CEA
Oil &Gas
30%
Dealers
30%
Chemicals &
paints
Industry
15%
15%
Source: Company
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
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.
Source: Company
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.
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
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
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
% 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
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.
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.
03 February 2017
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
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.
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
Miscellaneous
8%
Industrial
13%
Agriculture
43%
Retail
30%
Irrigation
6%
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
2,000
1,500
1,000
500
0
FY11
FY12
FY13
FY14
FY15
FY16
FY17e
FY18e
FY19e
Agriculture Industrial
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.
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.
FY14
FY15
FY16
FY17e
FY18e
FY19e
Gulf US EU RoW
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.
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
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
Lower discounts would reduce other expenses over the next three years.
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).
2.0 20.0
1.5 15.0
+1SD
+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.
03 February 2017
Apr-16
Jun-16
Jan-17
Jul-16
May-16
Mar-16
Nov-16
Dec-16
Oct-16
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.
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
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
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.
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
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.
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.
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
FY13
FY14
FY15
FY16
FY17e
FY18e
FY19e
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.
1.4
14.0
+1SD
1.2 12.0
0.8 8.0
Mean -1SD
0.6 6.0
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
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.
Source: Company
03 February 2017
Apr-16
Jun-16
Aug-16
Sep-16
Jan-17
Jul-16
May-16
Mar-16
Nov-16
Dec-16
Oct-16
Source: Bloomberg
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.
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
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.
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.
6,000
5,000
4,000
3,000
2,000
1,000
0
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17e
FY18e
FY19e
FY07
FY08
FY09
FY10
FY11
FY12
FY13
FY14
FY15
FY16
Power Transformers Distribution Trasnformers Dry type Transformers
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.
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.
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
FY12
FY13
FY14
FY15
FY16
FY17e
FY18e
FY19e
Receivable days Inventory days Payable days Cash covnersion cycle
Source: Company, Anand Rathi Research
1.5
25.0
We believe that improving sales 1.3
and profitability would allow the 20.0
10.0
0.7
5.0 0.5
FY10
FY11
FY12
FY13
FY14
FY15
FY16
FY17e
FY18e
FY19e
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.
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
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.
Voltamp
Transformer Oil Filled
Distribution
Transformers Resin Impregnated
Dry Type
Cast Resin
Source: Company, Anand Rathi Research
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
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