WPIL: Buy: Business Line

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Even as large-sized pump manufacturers such as KSB Pumps and Kirloskar Brothers stagnated over the last five years, Kolkata-based pump maker WPIL bucked the industry trend.

Thanks to its strategic overseas acquisitions and tie-ups, revenue in key markets such as Africa, Australia and the UK grew at a robust pace. The company has doubled its revenues in the last three years to ₹511 crore (2013-14); the strong performance led the stock price to treble over the past year.

Despite the rally, the WPIL stock seems a good buy. The expected pick-up in India Inc’s capex cycle and the resultant increase in demand for water pumps, commissioning of the company’s engineered pump plant at Nagpur and acceleration in overseas operations should help WPIL sustain momentum.

At ₹610, the stock trades at less than 10 times its 2015-16 earnings; an over 50 per cent discount to peers such as KSB Pumps and Kirloskar Brothers.

WPIL is predominantly into water pumps and offers pumps and flow control solutions through three verticals — conventional pumps, engineered pumps and turnkey projects which contribute equally to its revenues.

While the conventional pump division sells centrifugal pumps used for irrigation and water treatment applications, its engineered pumps division designs, manufactures and installs pumps to suit client requirements. The turnkey services division provides end-to-end water handling solutions.

Clients include municipalities and companies in the power generation, infrastructure, water utilisation and irrigation space. WPIL accounts for less than a fifth of the domestic water pump market, valued at over ₹7,000 crore, implying immense headroom for growth. To improve profitability, WPIL plans to increase the share of higher-margin engineered pumps and turnkey division, as indicated by the changing order book mix.

These segments accounted for almost 93 per cent of the company’s outstanding order book of ₹630 crore as of September 2014.

Better product mix

To meet the growing demand for engineered pumps, WPIL has set up a facility at Nagpur, which should aid profitability. WPIL plans to increase the sale of spare parts, which enjoy high operating profit margin.

In addition to changing the revenue mix, improvement in profitability of its domestic and overseas acquisitions has boosted WPIL’s performance.

Its joint venture with the UK-based Clyde Pumps, acquisition of Australia-based Sterling Pumps, South-African entities - Mather & Platt, PSV Pumps and APE Pumps, and Mumbai-based Mody Industries has helped WPIL expand geographically and broaden its product offerings.

For instance, WPIL gained access to the technology-intensive process pump (oil and gas pumps) segment through the acquisition of APE pumps, South Africa. The company can leverage the technology for launching process pumps in India.

Improving margin

Pruning costs and changing product mix enabled operating profit margin expansion for key subsidiaries. For instance, the aggregate operating profit margin of WPIL’s South African business has grown five-fold over the last two years to 25.4 per cent in 2013-14.

This helped WPIL improve its overall operating profit margin by 2.2 percentage points over the last three years to 16 per cent. Improving product mix — both in the domestic and international markets — should help the company improve its profit margin over the next two-to-three years.

Backward integration through acquisition of foundries such as the Mather Foundries, UK (expected to turn profitable in 2014-15) should further boost WPIL’s profitability.

The company has raised over ₹100 crore by way of qualified institutional placement (QIP) in December 2014, which will be used to fund long-term working capital requirements and other inorganic initiatives.

Mutual fund houses held 15.4 per cent stake in the company as of end December.