Investor's Eye

KSB Pumps
Cluster: Emerging Star
Recommendation: Buy
Price target: Rs625
Current market price: Rs520

Low-key performance

Result highlights

• KSB Pumps' Q2CY2007 results were below expectations, both on the top line and the profitability front. The net sales for the quarter rose by just 1% to Rs112.4 crore. We believe that a lower contribution from the project business to the overall sales led to this slower growth. Also, the last years' base was high considering that Q2CY2006 was one of the best quarters in the company's history.
• The profitability took a substantial beating during this quarter as the overall margin declined by 1,090 basis points to 12%. On a segmental basis, the profit before interest and tax (PBIT) margin of the pump division fell to 9.5% (from 23.3% last year) while that of the valve division dropped to 15.9% (from 21.8% last year).
• We believe that the profitability of the company was affected in the quarter mainly because of the higher sales through dealers during the quarter and lesser contribution of the project business. We understand that the order book of the company in the project business is growing at about 40% year on year (yoy). Considering this, we expect higher revenue booking on account of the project business (which carries higher margins) in the subsequent quarters.
• The company continues to spend towards its capacity expansions. It spent about Rs50 crore in CY2006 towards capacity expansion and modernisation. It is expected to spend a similar amount this year.
• In view of the slower growth in the first half, we are downgrading our earnings estimates for CY2007 and CY2008 by 18.9% and 5% to Rs28.2 and Rs39.7 respectively. However, considering the buoyancy in its user segments (eg refineries and the power sector), we maintain our positive outlook on the company.
• At the current market price of Rs520, the stock is trading at 13.2x its CY2008E earnings and is available at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 7.5x. We maintain our Buy recommendation on the stock with a price target of Rs625.

WS Industries India
Cluster: Vulture's Pick
Recommendation: Buy
Price target: Rs108
Current market price: Rs75

Price target revised to Rs108

Result highlights

• In Q1FY2008 WS Industries' (WSI) top line grew by 21% to Rs.47.7 crore, which was slightly above our expectation.
• The operating profit increased by 52.5% to Rs7.1 crore, resulting in an expansion in the operating profit margin (OPM) by 310 basis points to 14.9% as against 11.8% in Q1FY2007. The margin improved mainly due to a change in the product mix and a reduction in the power and fuel cost on account of a higher utilisation rate and improved efficiency.
• The profit after tax (PAT) increased by 142.4% to Rs3.95 crore; the PAT growth was higher mainly due to a decrease in both the interest cost, which dropped by 9% year on year (yoy) to Rs1.72 crore, and the depreciation cost, which fell by 4.6% to Rs9 crore yoy.
• The order book of the company stood at Rs190 crore at the end of the quarter.
• A healthy order book of Rs190 crore, which is about 1.15x its FY2007 revenues, and increased production capacity indicate the high earnings capability of the company. Thus WSI is sure to benefit from the large investments lined up in the power sector, especially the transmission and distribution segments, during 2007-2012. We have valued WSI using the sum-of-the-parts (SOTP) method wherein we have valued its core insulator business at 9x its FY2009E earnings per share (EPS). This gives the fair value of Rs78.7 per share. Further, we have valued WSI's realty subsidiary at the current realisable value of Rs3,500 per square feet. Taking WSI's current 59% stake in the realty venture, we arrive at a value of Rs29 per share, which gives us a fair value of Rs108 per share of WSI. We remain positive on the stock and maintain our Buy recommendation with a revised price target of Rs108.

Wipro
Cluster: Apple Green
Recommendation: Buy
Price target: Rs648
Current market price: Rs462

Infocrossing acquisition earnings dilutive

Key points

• Wipro's acquisition of US-based Infocrossing in an all-cash deal of $600 million is important strategically as it would considerably boost the company's capabilities in the infrastructure management service business. The acquisition would enhance Wipro's positioning in terms of bagging large-sized total outsourcing deals.
• On the flip side, the deal appears to be expensive and would also dilute the earnings per share (EPS) over the next couple of years. Infocrossing has been valued at over 70x CY2006 reported net income and 52.2-55.6x CY2007 guided net income. Moreover, the incremental contribution to the consolidated earnings would be much lower than the yield on cash ($600 million outgo) and consequently result in a net negative impact of Rs22 crore and Rs81.5 crore in FY2008 and FY2009 respectively.
• To factor in the impact of the acquisition of Infocrossing, we have revised downward the earnings estimates for FY2008 and FY2009 by 0.6% and 2.1% respectively. At the current market price the stock trades at 20.1x and 16.7x FY2008 and FY2009 earnings estimates. We maintain our Buy recommendation on the stock with a price target of Rs648.