The following predictions were made about the various financial ratios of KSB Pumps Limited while performing the valuation of the company by various methods.
Growth rate of turnover has been taken as a three stage model. For the first five years from now the growth rate is estimated to be 13%. This rate is used considering the following factors: slowdown in the global economy, decrease in the growth rate in the last two years, increasing inflation, growth stall in the Indian infrastructure projects etc. A growth rate of 13% is not really on the conservative side considering the above factors. But this is achievable considering the fact that the recent nuclear deal (setting up of power plants) gives enough scope for sales and also the well diversified clientele of the company. There are number clients in businesses which provide for enough sales even under recession. Hence a growth of 13% is realistic. Next 5 years growth is taken as 16% based on the number of Government as well as private projects lined up. Terminal growth of 6% is assumed.
Operating expenses, depreciation and operating WC are estimated as a % of sales of the company. Also the net PPE is estimated as a % of sales. These are taken as a % of sales as they are the expenses and investment related to the operations of the company which result in sales for the company.
D/E ratio is assumed to be constant at the current level for the next five years as there is no perceivable need for capacity expansion. The D/E ratio for the next five years is taken slightly higher as there might be a need for expansion.
For estimating the non operating income, the historical ratio of other income to non-operating assets is taken as a base. The ratio is continued through out the valuation for calculating the non operating income.
Cash tax rate is taken as the average historical tax rate and deferred taxes are calculated as a percentage of cash taxes.
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