Please see the end of the report for disclaimer and disclosures. -1-

KIRLOSKAR BROTHERS LTD

RESEARCH

EQUITY RESEARCH July 23, 2008

Feeling the pinch of rising costs

• Raw material costs impacting margins badly: During Q1’09, input

price inflation impacted KBL’s margins badly. EBITDA margin shrank

to 0.3%, compared with 11.4% in the same period last year. Per unit

price of castings has increased by almost 10 times in the past one

year, while prices of pig iron have shot up by more than 30% over the

past six months.

• Exports on a downtrend: Exports have declined over the past one

year, resulting in a further erosion of profits. Though the Company is

exploring new export markets and is also striving to increase its range

of products in the existing foreign markets, the results are yet to be

seen.

• Substantial order book offers solace: As on 1 Apr 08, the Company

had a sizeable order book worth Rs. 40 bn. Out of this, Rs 3 bn is for

industrial pumps and the remaining is for project and engineering

pumps, which are to be executed over the next 2-2.5 years. The

healthy order book reinforces our confidence in the Company’s

revenue-generation capabilities.

• Valuation: At the current market price (CMP) of Rs. 153, the stock

trades at a forward P/E of 13.6x and 11.2x for the revised earnings of

FY09E and FY10E, respectively. Based on our DCF valuation and

assuming a WACC of 13.2% and a terminal growth rate of 5.5%, the

stock price does not provide any upside from the current levels and

looks to be fairly valued. Hence, we reiterate our Hold rating.

Kirloskar Brothers Limited HoldRESULTS REVIEW

Share Data

Market Cap Rs. 16.2 bn

Price Rs. 153.00

BSE Sensex 14,942.28

Reuters KRBR.BO

Bloomberg KKB IN

Avg. Volume (52 Week) 21,041.5

52-Week High/Low Rs. 527 / 145.6

Shares Outstanding 105.8 mn

Valuation Ratios (Consolidated)

Year to 31 March 2009E 2010E

EPS (Rs.) 11.2 13.6

+/- (%) (13.2)% 21.3%

PER (x) 13.6x 11.2x

EV/ Sales (x) 0.7x 0.7x

EV/ EBITDA (x) 11.3x 9.2x

Shareholding Pattern (%)Promoters 62

FIIs 2

Institutions 12

Public & Others 24

Relative Performance

0

200

400

600

800

Jul-0

7

Aug

-07

Sep

-07

Oct

-07

Nov

-07

Dec

-07

Jan-

08

Feb

-08

Mar

-08

Apr

-08

May

-08

Jun-

08

Jul-0

8

KKB Rebased BSE Index

Key Figures (Standalone)Quarterly data Q1'08 Q4'08 Q1'09 YoY% QoQ%(Figures in Rs. mn, except per share data)

Net Sales 3,155 5,690 3,703 17.4% (34.9)%EBITDA 359 722 10 (97.3)% (98.7)%Adj. Net Profit 257 527 (45) (117.4)% (108.5)%

Margins(%)

EBITDA 11.4% 12.7% 0.3%NPM 8.1% 9.3% (1.2)%

Per Share Data (Rs.)Adj. EPS 2.4 5.0 (0.4) (117.4)% (108.5)%

Please see the end of the report for disclaimer and disclosures. -2-

KIRLOSKAR BROTHERS LTD

RESEARCH

EQUITY RESEARCH July 23, 2008

Result Highlights

During the first quarter of FY09, standalone net sales grew 17.4% yoy to

Rs. 3.7 bn on the back of a 15.5% yoy growth in the revenues of the pump

segment. The other segment (5.3% of revenues) grew at a rate of 122%

yoy.

The Company’s inability to curtail the effect of rising prices of raw materials

and trading articles pulled down the EBITDA to 0.3% of the total revenues.

In absolute terms, EBITDA almost got washed away and stood at

Rs. 9.7 mn. However, to help control the margin erosion, KBL intends to

increase the proportion of orders from private players, as against the orders

from the government, which are fixed-price contracts.

A 14.7% yoy increase in the depreciation cost led to an operating loss of

Rs. 36.7 mn. In addition, rising interest rates further dented the net profit

margin. As a result, the Company reported a net loss of Rs. 44.8 mn,

compared with a profit of Rs.257.1 mn a year ago.

Moderate growth in revenues

Higher rate of interest further resulted in erosion of profits

Source: Company data, Indiabulls research

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Q1'07 Q2'07 Q3'07 Q4'07 Q1'08 Q2'08 Q3'08 Q4'08 Q1'09

Am

t in

Rs

bn

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

14.0%

16.0%

18.0%

Sales EBITDA margin

Declining Margins

Please see the end of the report for disclaimer and disclosures. -3-

KIRLOSKAR BROTHERS LTD

RESEARCH

EQUITY RESEARCH July 23, 2008

Outlook

Since KBL’s raw materials include iron and iron-made products, we expect

increased pressure on the margins due to the expected increase in iron-ore

prices in the next five to six months. However, we believe that the

Company would be able to post better earnings from the construction- and

project-related businesses as these have higher margins than products

sales. In addition, the acquisition of The Kolhapur Steel Limited is expected

to bring in synergies.

Factoring in the continuing slippages in the order execution rate, we have

lowered our revenue forecast from a CAGR of 16.8% to 15.6% over

FY08-10E.

At the CMP, the stock trades at a forward P/E of 13.6x and 11.2x for the

revised earnings of FY09E and FY10E, respectively. We have used DCF

valuation to value the stock, assuming a WACC of 13.2% and a terminal

growth rate of 5.5%. Based on our valuation, we feel that the unfavorable

performance during the quarter has been factored in the stock price.

Hence, we reiterate our Hold rating.

Key risks to our rating include any further increase in raw material prices

and a reduced order execution rate.

Margins would remain under pressure

Key Figures (Consolidated)

Year to March FY06 FY07 FY08 FY09E FY10E CAGR (%)

(Figures in Rs. mn, except per share data) (FY08-10E)

Net Sales 14,883 17,819 20,588 24,092 27,532 15.6%

EBITDA 1,807 1,875 1,806 1,590 1,955 4.0%

Net Profit 1,484 1,820 1,370 1,190 1,444 2.7%

Margins(%)

EBITDA 12.1% 10.5% 8.8% 6.6% 7.1%NPM 10.0% 10.2% 6.7% 4.9% 5.2%

Per Share Data (Rs.)

Normalised EPS 14.0 17.2 13.0 11.2 13.6 2.7%

PER (x) 27.8x 21.0x 11.8x 13.6x 11.2x

Indiabulls (H.O.), Plot No- 448-451, Udyog Vihar, Phase - V, Gurgaon - 122 001, Haryana. Ph: (0124) 3989555, 3989666

-4-

KIRLOSKAR BROTHERS LTD

RESEARCH

EQUITY RESEARCH July 23, 2008

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