The Hindu Business Line : Kirloskar Brothers: Buy

WE RECOMMEND investors to buy the stock of Kirloskar Brothers (KBL) at Rs 235. The stock has delivered a more than ten-fold return since our last recommendation, to buy, in June 2004. We believe the stock still has good upside potential considering the demand growth in the infrastructure, power and water management programmes, in both public and private sector, and the rising export potential. Industrial investments by way of capacity expansions will also aid growth.

The stock trades at 19 times its expected FY 06 consolidated EPS of Rs 12 per share. We expect an average EPS growth of 40 per cent year-on-year over the next three years.

KBL has been a major beneficiary of the government-sponsored irrigation and water management programmes. Having securedvarious orders for irrigation projects from the Andhra Pradesh Government, it has emerged as one of its major suppliers. The government plans to invest substantial sums in improving water supply, sewage treatment and irrigation projects over the next five years.

Having proved its track record, KBL is likely to secure more orders. These investments have now moved out of the drawing board and are in the implementation phase. This sector will be the biggest growth driver for the company, apart from exports.

KBL is also one of the main suppliers to players such as NTPC and NPCIL in the power sector. With India just ramping up its power capacities, this is another growth area with promise.

The growth prospects in the project execution sector look attractive. The orders on hand as of September 2005 are worth Rs 1200 crore, 1.6 times its FY05 turnover. KBL derived 59 per cent of its turnover in FY05 from project execution.

The industrial pumps business contributes about 18 per cent of the turnover. According to KBL's annual report, there will be industrial investments by way of capacity expansions to the tune of Rs 11-lakh crore. That throws up immense growth potential for KBL.

Exports have crossed the Rs 100-crore mark growing at 86 per cent in FY05. Having expanded its operations in African and South American countries, these geographies contribute about 39 per cent and 25 per cent respectively of the total exports.

The cash generated from operations has almost doubled in FY05. KBL has used the excess cash generated from operations to reduce debt substantially.

As a result, the free cash flows generated in the future will increase shareholder value either by way of higher dividends (the company has a track record of paying generous dividends) or more investments (acquisitions).

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