Brokerage firm Sharekhan by BNP Paribas has reiterated its positive stance on Kirloskar Brothers Ltd due to the company's ability to expand its business thanks to strong underlying demand from important domestic industries, a favourable order mix in the international market, and the expansion of its services portfolio.
The company's strong position in the retail sector with a market share of 10–14% and green energy products in the form of energy-efficient pumps, according to the report, augur well for its future expansion.
As indicated by its international order book of ₹840 crore for 9MFY2023, the company is effectively leveraging its brand and presence across multiple industries to profit from the recovery in key global markets.
"The company has minimal exposure to low-margin and working capital-intensive engineering, procurement, and construction (EPC) business now, which has helped in improving its working capital cycle and cash flows. Thus, promising outlook on the overall business environment and multiple growth triggers make us positive on the stock," said the brokerage in its report.
Further, the brokerage expects profitability to increase on the back of an improved business mix of international operations, steady commodity prices, calibrated price increases, and an increase in the proportion of high-margin and reliable services businesses.
Given the strong performance in 9MFY23, the brokerage's revenue growth estimates are built in taking into consideration the higher base of FY2023.
"Going forward, we believe growth will be driven by a healthy standalone/consolidated order book of ₹1,922 crore/ ₹2,845 crore for made-to-order and engineered-to-order products. Further, any surge in pumps demand in oil and gas, irrigation and agriculture, power, and building and construction would drive demand for small standard pumps. Declining commodity prices, improvement in global supply chain as well as some of the cost-rationalisation measures and increasing share of services revenue in the total overseas business would lead to an increase in gross and earnings before interest, taxes, depreciation, and amortisation (EBITDA) margins," added the brokerage.
The expansion of margins and greater volume operating performance will be the primary drivers of profit after taxes (PAT) growth. The brokerage firm therefore projects a revenue/PAT compound annual growth rate (CAGR) of 11%/27% over FY2023-FY2025E.
"The company trades at an attractive valuation of around 13x its FY2024E/ about 11x its FY2025E earnings per share (EPS) – lower than its listed peer, KSB Ltd. Hence, we see an upside potential of 23% from current price levels," said the brokerage in its report.
Increased competition in the pumps sector, changes in the price of raw materials, and foreign exchange rate fluctuations are major risks, according to the brokerage.