Kurita Water Industries Ltd., established in 1949 and based out of Tokyo, initially started to sell water treatment chemicals for boilers and gradually began to provide value to customers by supporting the safe and efficient operation of their facilities.

Additionally, with over 7900 employees, the Group offers engineering cleaning services, maintenance, precision tool cleaning, soil remediation, and water supply business. The company operates through two segments - General Industry accounted for 55% of the sales mix in 1HFY25, followed by Electronics Industry at 45%.

Guidance revised upward

As the electronics industry continues to gain traction with semiconductors and related industries becoming a core aspect of the social infrastructure, Kurita would look to broaden its service portfolio further to capture net sales of JPY210bn and a business profit margin of 20% in FY28. The Group plans to achieve this by evolving the water supply business, expanding in Europe and North America, and strengthening the foundations of the precision tool cleaning business.

Kurita further plans to leverage its presence in the General Industry segment, which has a broader customer industry base, to achieve net sales of JPY240bn in FY28 with a business profit margin of 13%. The Group plans to meet its target plan through the expansion of the Creating Shared Value (CSV) business and improving profitability in the U.S.

Kurita has revised its business forecasts for full year FY25 on the back of favorable current business environment and good progress made in the first half of the year. The company now anticipates order of JPY425bn, up from earlier JPY400bn forecast, net sales of JPY410bn (from JPY400bn), and net profit of JPY34.5bn (from JPY33bn).

Improvement in cost of sales ratio

The company demonstrated a revenue CAGR growth of 8.2% over the period FY19-24 to reach revenues of JPY385bn. Operating income grew at a CAGR of 11.2% during the same time to reach JPY41.4bn in FY24, witnessing 136 basis points (bps) expansion in margins to 10.7%. Net income also grew in similar lines to register a CAGR of 11% to reach JPY29.2bn.

Kurita’s peer, Organo Corporation, fared better delivering a CAGR growth of 10.2% in revenues to JPY150bn, over the same period. The operating income grew at an impressive CAGR of 28.4% to JPY22.5bn in FY24, aided by robust margin expansion of over 800 basis points (bps) to 15%. Net income followed suit, growing at a CAGR of 31.2% to JPY17.3bn.

Overall net sales improved 3.8% YoY in 1HFY25 to reach JPY195.5bn, while orders demonstrated a solid 13.9% YoY growth to JPY212.2bn, led by the facility and recurring contract-based service businesses in the Electronics industry segment.

However, net sales declined in the Electronics Industry segment by 0.3% to JPY95.6bn owing to the absence of revenue from a large-scale Japanese project, offset by an increase in recurring contract-based services. On the other hand, net sales increased 7.4% YoY to JPY108.2bn in General Industry segment, aided by positive forex impact.

The operating profit of the Group increased 17.5% YoY to JPY21.5bn, supported by the impact of the improved cost-of-sales ratio. Consequently, net profit improved 18.6% YoY to JPY14.9bn.

Analysts uphold a positive perspective

The company is trading at a P/E ratio of 17.4x based on the estimated FY25 EPS of JPY316, compared to a global peer average of 64.6x. However, it is trading on similar lines compared to its peer, Organo, which is trading at a P/E of 19.5x. Valuation through the EV/EBITDA approach yields a lower multiple of 8.3x for Kurita, compared to 13.6x for Organo.

The stock has delivered returns of 5.8% in the past one year, while in the past six months the prices declined by 19.2%. Seven analysts covering the company appear to be optimistic, with 3 of them suggesting a ‘Outperform’ rating, 3 recommending ‘Buy’ rating, and 1 having a ‘Hold’ rating for an average target price of JPY7,614, indicating a significant upside potential of over 32% from the current levels.

Overall, Kurita presents a compelling opportunity for evaluation by investors, backed by its guidance upgradation, favorable industry dynamics, and optimism amongst analysts. However, the company is faced with certain risks including policy and legal risks, risk of technology obsolescence and substitution of water resources. Nevertheless, the company’s mission and values towards the sustainability of the environment should augur well in the long run. Additionally, focus on the CSV business should contribute substantially to water savings and GHG emissions reduction.