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

KIRLOSKAR BROTHERS LTD

RESEARCH

EQUITY RESEARCH July 01, 2008

Gaining momentum, finally

Kirloskar Brothers Limited’s (KBL) FY08 net profit slumped 25.4% yoy

because of lower revenue booking, increased input prices, and the

doubling of the interest costs. As a result, EPS for the year was Rs. 12.8,

compared with our estimate of Rs. 14.9.

In spite of the lower-than-expected numbers, we believe that KBL should

report improve its top line in FY09 on the back of good order book visibility,

driven by recent order inflows, and the faster implementation of its projects

in Q4’08.

Since the Indian pump industry is poised to grow at 6-7% p.a. over the next

three years, KBL, a leading player in this market, is well positioned to reap

the benefits of the increasing demand. We believe that the Company will

post revenues at a CAGR of 16.8% over FY08-10E. However, we do not

expect any considerable margin expansion due to the effect of inflation on

raw material prices and increasing competition from the private players.

Valuation

At the current price of Rs. 188.5, the stock trades at a forward P/E of 12.5x

and 10.4x for the revised earnings of FY09E and FY10E, respectively.

Based on our DCF valuation, the stock price does not provide any

considerable upside from the current levels and looks to be fairly valued.

Hence, we reiterate our Hold rating.

Kirloskar Brothers Limited Hold

Key Figures (Standalone)Quarterly data Q4'07 Q3'08 Q4'08 YoY% QoQ% FY07 FY08 YoY%(Figures in Rs. mn, except per share data)

Net Sales 4,486 3,225 5,690 26.9% 76.4% 13,400 15,252 13.8%EBITDA 389 136 722 85.5% 429.5% 1,546 1,422 (8.0%)Adj. Net Profit 367 64 527 43.4% 721.9% 1,205 1,101 (8.6%)

Margins(%)

EBITDA 8.7% 4.2% 12.7% 11.5% 9.3%NPM 8.2% 2.0% 9.3% 9.0% 7.2%

Per Share Data (Rs.)Adj. EPS 3.5 0.6 5.0 43.5% 723.9% 11.4 10.4 (8.6%)

RESULTS REVIEW

Share Data

Market Cap Rs. 19.9 bn

Price Rs. 188.50

BSE Sensex 12,961.68

Reuters KRBR.BO

Bloomberg KKB IN

Avg. Volume (52 Week) 22,394.8

52-Week High/Low Rs. 538.7 / 161

Shares Outstanding 105.8 mn

Valuation Ratios (Consolidated)

Year to 31 March 2009E 2010E

EPS (Rs.) 15.1 18.2

+/- (%) 17.4% 20.5%

PER (x) 12.5x 10.4x

EV/ Sales (x) 0.9x 0.8x

EV/ EBITDA (x) 10.5x 8.8x

Shareholding Pattern (%)

Promoters 62

FIIs 3

Institutions 12

Public & Others 23

Relative Performance

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7

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-07

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-07

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-07

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-08

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-08

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-08

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-08

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08

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8

KKB Rebased BSE Index

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

KIRLOSKAR BROTHERS LTD

RESEARCH

EQUITY RESEARCH July 01, 2008

Result Highlights

Standalone net sales for FY08 grew 13.8% yoy to Rs. 15.3 bn, driven by a

14.9% yoy growth in the revenues of the Pump segment. Growth in sales,

which was subdued in 9M’08 but gained momentum in the fourth quarter,

reflects the gaining momentum in the order execution rate.

Since the Company was unable to curb the effect of inflation on raw

material costs, standalone EBITDA declined 8% yoy and the margin shrank

to 9.3% (down 222 bps).

In addition to higher raw material prices, a double-fold increase in the

interest expense resulted in an 8.6% yoy decline in net profit to Rs. 1.1 bn.

Net profit margin for FY08 declined to 7.2%, as compared to 9% in FY07.

Key Events

� Reorganisation of the business structure

KBL has reorganised its business structure into nine business verticals

with the objective to serve each sector at the highest level of

operational efficiency and to provide better customer service.

Execution on track

Net profit margin declined 177 bps

Source: Company data, Indiabulls research

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Q1'08 Q2'08 Q3'08 Q4'08 FY08

EBITDA contribution (in Rs. mn)

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

KIRLOSKAR BROTHERS LTD

RESEARCH

EQUITY RESEARCH July 01, 2008

� Recently, KBL bagged orders for its business. Some of them are:

• Orders worth Rs. 992.4 mn from Nuclear Power Corporation of

India Limited.

• Orders worth Rs. 1,500 mn from the Irrigation & CAD Department,

Government of Andhra Pradesh.

• Orders worth Rs. 1,667 mn from the Koderma Thermal Power

Project, Stage—I (2x500 MW), for supply and installation of

Balance of Plant Package.

Outlook

We maintain our positive outlook for KBL as it performed well in Q4’08 to

post a net profit growth of 43.4% yoy and on the basis of its recent order

inflow. Moreover, the Company’s strong brand equity, wide distribution

network, and proven engineering capabilities should lend it a significant

competitive advantage and help it to maintain the order inflows.

KBL’s revenue is expected to grow at a CAGR of 16.8% over FY08-10E on

the back of a higher order execution rate in the fourth quarter of FY09. We

believe that the Company will just be able to maintain its margins due to the

increasing pressure of input price inflation.

At the CMP, the stock trades at a forward P/E of 12.5x and 10.4x for the

revised earnings of FY09E and FY10E, respectively. Based on our DCF

valuation, we believe that the stock is fairly valued at the current levels.

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.

KBL is likely to maintain margins at similar levels

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 01, 2008

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 24,438 28,104 16.8%

EBITDA 1,807 1,875 1,788 2,004 2,389 15.6%

Net Profit 1,484 1,820 1,359 1,596 1,922 18.9%

Margins(%)

EBITDA 12.1% 10.5% 8.7% 8.2% 8.5%NPM 10.0% 10.2% 6.6% 6.5% 6.8%

Per Share Data (Rs.)

Normalised EPS 14.0 17.2 12.8 15.1 18.2 18.9%

PER (x) 27.8x 21.0x 14.7x 12.5x 10.4x

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

-5-

KIRLOSKAR BROTHERS LTD

RESEARCH

EQUITY RESEARCH July 01, 2008

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