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Shakti Pumps - Lacking in Power

By Kaustubh Ghotikar | 1/31/2011 9:44 AM Monday

Shakti Pumps (India) (Shakti), a fairly unknown scrip, down by about 64 per cent from its peak price six months back, is available at a single digit PE and EV/EBIDTA of 6.10x and 5.9x its FY11 estimates. In a volatile market, a company available at single digit valuations certainly looks up for grabs. But after such a sharp correction in its price and the valuation froth coming off, does it make sense to recommend this scrip at its current levels? We spoke to Shakti’s B R Patidar, Director-Finance, about industry, competition, management initiatives, and financials.

Shakti is a manufacturer of stainless steel submersible pumps and motors ranging from 0.5 HP to 255 HP used in domestic, industrial, irrigation, and fire-fighting. The company is mainly focused on the export market and sup-plies its products to around 50 countries, such as US, UK, Turkey, Spain, Netherlands, Germany, France, Italy, Australia, Sri Lanka, etc. Nearly 58 per cent of its revenues are from exports. Of the balance 42 per cent of domestic revenues, 60 per cent come from supply to farmers, 20 per cent from domestic demand, 12 per cent from government institutions, and the balance 8 per cent from various industrial sectors.

Shakti currently has an installed capacity of 6 lakh pumps and according to Patidar was the first company to get a 5-star rating for its pumps from the Bureau of Energy Efficiency (BEE) for being 40 per cent more energy-efficient than other substitutes in the market. The company is also currently expand-ing its product line and is realigning its focus on the domestic market.

Having said that, there are reasons we believe this scrip may not perform as per the expectations on the bourses. First and foremost, one should note that Shakti is in a business domain that has low entry barriers and the products can be easily manufactured. Currently, Shakti manufactures only steel sub-mersible pumps and though it posi- tions itself as an energy-efficient pump manufacturer, there are other players too who manufacture such energy-effi-cient pumps.

However, the company is increas-ing its product line by adding boost-er pumps, mono-block, and open well pumps to its portfolio. “Shakti is installing a new 65,000 unit per annum capacity for booster pumps at a cost of Rs 35 crore, which is being funded through a combination of debt (Rs 25 crore) and internal accruals (Rs 10 crore). This expansion is expected to come on stream and start generat-ing revenues from FY12 onwards,” Patidar informed. The other expansion for mono-block and open well pump is still at the initial stages, though the management is confident about commissioning these capacities too by FY12.

Besides, to drive its domestic growth, Shakti has already strength-ened its marketing team and domestic dealer network to 650 from 192 just two years back. Though this renewed focus should help generate revenues for Shakti, the new product portfolio isn’t a unique one and is already manufactured across the country. Thus Shakti seems to be a late entrant in these products and therefore one will have to wait and watch the kind of growth it posts in these segments. Besides, there is a huge unorganised market on the domestic front which firstly eats into the market share (according to the management, Shakti’s market share is 3 per cent in the overall pump industry i.e. includ-ing the unorganised market) and sec-ondly, it reduces the pricing power of the organised players, thus impacting realisations and margins.

 

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