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Shakti Pumps

Company Brief from their website
Shakti Pumps (I) Ltd. is an Indian pump manufacturer and exporter with a formidable presence in over 100 countries of the globe. It possesses an enviable product-portfolio comprising of a wide range of stainless steel pumps and motors. Every product coming out of the Shakti stable is defined by premium quality and supreme energy efficiency. The company has recently launched Shakti Solar Pumps, an innovative answer to the energy needs of today and tomorrow. Equipped with the best of world technology and a commitment to bring about a positive difference in the lives of people, Shakti is pumping progress and happiness.


Indian Market for Pumps
Indian market for pumps is about 8500crore and is expected to grow to 14000 crore by 2017
Unorganized sector still accounts for 80% of Indias pump market
Agri industry which consumes a quarter of the countries power is the largest user of pumps and are currently using ineficient low quality of pumps
Govt regulation is pushing for cetified star rated pumps
India produces approx 50,00,000 pumps annually
80% of the demand of submersible pumps comes from the agriculture sector
95% of Indias demand for pumps is met by local manufacturers


Global Market for pumps
In the developed markets (global market expected to be $45 billion by 2017) 50% of demand comes to manage water and rest 50% from various other sectors
In the future 33% of the demand is going to come from Asia because of the huge infrastructure spending in India and China.
Chinas market has already crossed approx $10 billion
Key Financials
Turnover - 300 crores
EBITDA and PAT margins at 19% and 9% respectively
Last 3 years sales and profit growth - 30%
ROCE (3 year avg) - 20%
ROCE (10 year avg) - 18.5%
Working Capital days - 150 (steadily improved from 200 days 3 years back)
Debtor days is high at about 90
Debt Equity ratio stands at 0.7
Domestic sales stand at about 40% of total turnover (last quarter growth for domestic sales was 92% on the back of promotion by Amitabh bachchan
EBITDA Margin in exports is 20% and Domestic is about 15%
The company has a 33% market share in export of submersible pumps from India
Competition Analysis
There are a lot of players in the listed pump industry but some of them are highly diversified example Kirloskar, Crompton and Vguard. I have made a comparison of players only producing pumps
KSB Pumps Roto Pumps Shakti Pumps
Sales Growth 10 year 10% 22.80% 23%
5 year 4% 17.20% 23%
3 year 6% 21.20% 30%
Profit Growth 10 year 8% 37%
5 year -1% 21.50% 29%
3 year 8% 22.50% 28%
Dividend Yield 0.90% 0.60% 0.80%
PE 27.0 13.00 11
PB 3.6 2.60 2.3
OPM 13.80% 18.00% 15.10%
NPM 8.20% 9.00% 9%
DE Ratio 0.01 0.50 0.72
Working Capital Days 60 115.00 157
Debtor Days 68 89.00 97
ROCE 10 year 27% 24.20% 18.50%
5 year 22% 26.80% 19.50%
3 year 19% 27.40% 20.50%
The main difference I find is the working capital efficiency between the players. This is having a major impact on the return ratios of Shakti as compared to its competition. Margins of all players are more or less similar
Shareholding analysis
Promoter holding is only 45% out of which 60% of shares are pledged
Institutional holding is very low at less than 1% and this presents an opportunity
Investment Arguments
Growing market - The market for pumps is growing rapidly in india with increased urbanization and focus on agriculture. Most of the demand is met through the unorganized sector but this is likely to change over the coming years since users have started realizing that 80% of the life cycle cost of the pump comes from O&M. This is where highly energy efficient Shakti pumps come in as they help saving more than 40% electricity as compared to the traditional pumps.

Management thinking differently - the management has clearly demonstrated their ability to think differently as compared to the rest of the players in the market. The company was the first company to make pumps made of SS and also the first company to be 5 star BEE certified for energy efficiency. Also they seem to be the only players making an investment in the branding of pumps and reaching out to the farmer with a brand identity through TV and print ads. They have appointed Amitabh Bachchan which is a bold move for a small company like Shakti but this has paid off well not only in terms of higher margins but also rapidly increasing volumes (92% growth in domestic market)
Brand Identity - Shakti pumps have definitely started creating a brand recall in the mind of their customers through their big promotional and branding exercise with Amitabh Bachchan. This is evident in the fact that customers have now started asking their distributors for Shakti pumps specifically. This has allowed the company to revamp their distribution strategy and unlike other players Shakti has exclusive distributors who only stock Shakti Pumps. This would only be possible because of demand pull from the customer. This also allows Shakti to charge higher prices and dealers are unlikely to negotiate for discounts.

Rapid Growth - the company is growing rapidly and has been clocking 30% + sales and profit growth in the last 3 years led by the superior quality of their pumps and brand promotion excercises. The company reduced the number of distributors because they moved from common to exclusive distributors and now have a total of about 450 across india. The management has indicated that this is likely to rise to 800 over the next 2 years. The management has indicated they are confident of doing 25-30% over the next 2-3 years. They have guided for 400 crore turnover and 44 crore net profit in 2015 which is more than a 30% jump

Solar pumps opportunity - the government has announced a scheme of whereby it will subsidize the purchase of solar pumps by farmers to the tune of 30%. The total amount of subsidy will be 500 crores and hence a total business of 1500 crores for the pump industry. This is going to happen over the next 9 months and presents a huge opportunity for Shakti. Shakti has recently developed this type of pump and is one of the few players who are going to be participating in this program. Out of 72 channel partners who have registered to supply this solution, 58 channel partners have registered with Shakti as their pump supplier. Shakti has also indicated that margins for this product is likely to be higher at around 22%
Profitability and Capital Efficiency - despite a huge working capital base, the company has been able to grow efficiently without heavy use of debt and has demonstrated good capital efficiency. (ROCE at 20%) The management has been working on improving working capital management and this is evident in working capital days improving from 200 to 150 over the last 3 years. Their capacity utilization is only 55% and the management has indicated that they dont need to incur any more CAPEX until their sales reach 500 crores.

Management communication - for a small company like Shakti, the management has been very forthcoming in its communication in holding conference calls, giving sales and profit guidance which has been fairly accurate in the past and clear communication in the annual report. Some big brokerage houses like ICICI and HDFC have started participating in conference calls.
Negatives
High promoter pledging - and no near term plans to reduce the amount of pledging (currently at 60% of total promoter holding of 45%)

High Working capital - working capital is 150 days and debtor days stand in excess of 95. While they have been working to improve this, debtor days have only gone up in the last 3 years and I would be more comfortable if management starts giving more emphasis to this part of the balance sheet in their communication

Low promoter holding - promoter holding is only 45%

Management salary - the CEO has decided to raise his salary from 35 lakhs to 1.2 odd crores in single year which I think is a negative. This salary will be almost 5% of the net profits of the company. Moreover, the jump is rather sudden

Related Party transactions - the company has given out loans of 17 crores to 2 promoter group entities and is has also purchased a large amount of materials - tools and rubber components to be precise from these companies (total 13 crores last year), which made me a little uncomfortable.

Roll out of GST - the company operates from an SEZ which exempts Excise duty. As a result the net ED rate of the company is barely 1%. This is going to change with the roll out of GST as the minimum slab for GST will be 8% and this may adversely impact the demand of products as prices rise

Competitive industry with large number of players - there are over 800 players in the pump industry many of whom are unorganized. It seems like the barriers to entry are not too high


Valuation
PE ratio - 11
P/B - 2.6
Div Yield - 0.9%
The company has run up sharply in the last 6 months going from a price of 40 odd to 200 odd in a very short period of time. Given the size of the opportunity and the competitive position of the company, I think it deserves a deeper look for potentially higher levels in the future
1 Like

Good reportage …

I exited the stock recently (> 5% of allocation and entry was around Rs. 40 - 50 in May - June 2012) … Just one information, it is not an unexplored stock by institutions and institutional holding reduced from 10% to less than 1% in last few quarters.

Promoter pledge, WC requirement was a concern for me at the time of entry and thought the market discounts it. After the run up, the pledge is still there. I feel, in Shakti, for me “Stress per Share (!)” is higher compared to other opportunities.

However, your macro story remains intact.

Dear Aveek,

Where can I check history of institutional holding. I might be wrong but moneycontrol provides data till March 2013 and there were was no institutional participation till then. Even if you look at the block deals carried out, there is no evidence of large institutions buying shares even upto 2011.

Also, did you manage to get in touch with investor relations or anyone in the management before buying?

Abhishek.

Its stunning to see how promoter gives out earnings guidances not just for a year’s performance but also for each of the 4 qtrs down the line. Not at all comfortable.

Dea Jatin,

As a novice investor, I looked at this as a plus that they have been giving guidance and in the past these have turned out to be pretty accurate. Perhaps they have some sort of forward order book? Would love to know why you feel this is a bad thing?

Abhishek.

Abhishek,

Check BSE data … Here giving the links for June 2014 and June 2013 holdings by institutions.

June 2014

http://www.bseindia.com/corporates/ShareholdingPattern.aspx?scripcd=531431&flag_qtr=1&qtrid=82.00&Flag=New

June 2013

http://www.bseindia.com/corporates/ShareholdingPattern.aspx?scripcd=531431&flag_qtr=1&qtrid=79.00&Flag=New

Hope it helps…

And lastly, in this specific case, I didn’t contact IR or anyone from management.

Aveek

Thanks for the info Aveek. This had me wondering because volumes in the counter indicate that it is not undiscovered as I first thought it to be. Also, any info about who was holding that 10% share as part of institutional holding?

I know Subhkam Ventures used to own it. At some point they had a significant holding. They have exited.

MFs had also some holding in small quantities … Probably they also exited.

But I don’t think who is buying / selling is of major concern if you are convinced about value / safety margin / business / promoter etc…

had a brief look at shakti pump and skipped it due to following reasons.

  1. profit of 24 cr. was recorded in FY14 with rise in trade receivable at 23.9 cr. so it is not able to collect money or someting is wrong.

2)could not understand Deferred Expenditure (11 cr.) which is not included in P & L account . the item has been there in cash flow.

if anyone has more clarity please explain…

thanks

Kunal Shah

1 Like

Aveek/Abhishek

What are your thoughts on the competitive advantage of the company ? Interesting point is that they seem to be growing faster than the other listed players in India. Whats driving tha t?

Kunal

On receivables- I think this may not be a worry … yet… smaller players do need to provide better credit terms and the change has been inline with the sales growth.Note the growth in payables as well

Kunal, regarding the deferred expenditures, I had gone through one of the conf call reports where the management mentions that they are nothing but capitalized expenses on account of branding activities - in other words payments to Amitabh Bachchan. Since payments are made right away but sales through these activities accrue over a period of time, they are capitalised.

Varun, regarding competitive advantage - I had downloaded a sheet which mentions the efficiency of all BEE rated pumps in India and it seemed Shakti pumps was in the upper quartile along with other non-listed companies like CRI when it came to pump efficiency. Since running costs form a bulk of the life cycle cost, a more efficient pump will always be preferred even at a higher price. The management is very vocal in saying their products are better than their competition but this is something that needs to be tested out by doing some scuttlebutt.

@ varun

  1. my point was entire profit was not earned in cash … in past i have seen this paper profit which is due to some wrong billing or salesrigging is a major corp.governanceissueand dues over six month is 13 cr.

2)any thoughts aboutdeferredexpenditurein cash flow . could not understood it so gave it a pass. can u throw some light on it . it is in cash flowstatementon page 51 of annual report for FY14.

thanks

@Abhishek… Thanks.

Do you or anyone else have any contacts on the agri side ? Will be helpful to try and get some info.

Valuepickr experts- Hitesh, Donald, Ayush, Gaurav. Any thoughts here ?

Dear Varun,

Unfortunately Im in a different business and have little by the way of contacts in the agri sector. I would need help of seniors to dig a little deeper.

I did a Reverse DCF and applying a 22% discount rate, if the business grows at 30% for the first 3 years, then 20% for the next 3 and 10% for the following 4 (with the first year profit of 44 and cash conversion of net profit at 80% for all 10 years), and then applying a terminal growth of 5% for the following years after these 10 years gives us a value of approximately 320 crores which is the current market cap of the company. Given the high pledging, the fact that the company is so small in size and the high working capital requirements, I thought 22% is a fair rate? This makes you wonder if the business at the current price is fairly valued or are my calculations or any of my assumptions wrong?

Varun, I have been trying to reach out to the management but havent been able to elicit a response yet. However, I am trying to reach out to someone from within the promoter family and hope they may respond soon. I have also reached out to one of their investors. If you have any specific queries do let me know!

good detailed write up.

Company seems to be showing good consistent growth and looks set to post good numbers going forward also.

The big negative for me is high promoter pledging.

Hi Abhishek

Excellent. A few elementary questions that I have. (

a) Whats their competitive advantage ? How do they compare vs Kirloskar and KSB and the others on products/distribution. Have heard that their products are at par with Grunford but much cheaper. Any truth there ?How is it that they have been growing ahead of competition over the last few years

b) Why is WC so high ? (Is higher credit a reason that they are getting more sales)

c) How easy is it for a new player to enter this space ?

d) Whats the biggest risk in this business. What can severely impact Shakti pumps

e) Whats the typical profile of a consumer of Shakti Pumps. How does he go about deciding his pump purchase decision. Who does he consult/ who influences him. How ? Why does he eventually narrow down to a particular brand/set of brands. Do the Indian users really value the ‘energy efficiency’ or are they really fine with lower energy efficiency if capital cost is significantly lower ?

Will let u know if I can think of any more questions. When do u expect to chat with them ?

Hi Varun, I have made contact with one of the promoters who is open to help with understanding the story better. Also, that investor I was trying to reach has also responded. If I can request you to post any other questions you may have, it will be very helpful. Some of the things I had in my mind are:

Impact of GST - what is the likely tax slab and what is likely to be the impact on growth and profitability
What is the unique competitive advantage of Shakti over competition
What are the import duties that protect against China
Certified BEE sheets shows many competition in 60%+ efficiency - exampleâ
Working capital reduction plans?
Related party transactions
Reduction of pledging
Pricing of Shakti Pumps as compared to competition
Over how much time 500 crore of solar pumps will be spent
What share is Shakti pumps likely to garner?
Any new type of technology that can replace submersible pumps?
What is the difference between wet water type and water filled pumps
Who are the other players in solar pumps?
58 out of 72 channel partners registered with Shakti, are they exclusively going to source with Shakti?
Main raw materials - payment terms, pricing power,
Pricing power in export markets
Other players also have exclusive distributors?

oops, sorry for that! Is there no way to delete?

Based on values you have given why not look into roto pumps?