Kirloskar Oil Engines hosted a conference call on Nov 13, 2024. In the conference call the company was represented by  Gauri Kirloskar - Managing Director; Rahul Sahai – CEO (B2B Business); Aseem Srivatsav – CEO (B2C Business) and Sachin Kejriwal - Chief Financial Officer.

Key takeaways of the call

Q2FY25  was the first quarter of the CPCB IV+ emission norm transition.

The B2B segment grew by 17% year-on year for the quarter and the growth is largely due to higher realization.  

Demand in the B2B segment remained strong. Observed strong demand from the infrastructure and construction sectors in Q2FY25.  Power Generation segment, the real test lies in market reactions to the new emission norms Overall power gen industry volume has dipped by almost 12% to 15% in Q2FY25 as market adjusts to the new pricing levels that come with the upgraded emission technology and correction due to the pre-buy sales that happened over the past couple of quarters.  The company expects the order board building up and demand picking up in  Q3FY25 in case of powergen segment.   

The company also had the impact of lower volumes in Q2FY25 as the overall power-gen industry itself witnessed a dip in volume.    However the company is able to hold on to its market share and that have not taken any dip.  The company has strengthened its position in certain nodes such as high horse power engines. For example,  in the high horsepower nodes of 750 kVA or 1,000 kVA it has strengthened its position.  

The company is not expecting any significant  pre-buy in Q3FY25 due to migration to BSV emission norms effective Jan 2025 in case of industrial products as that is largely sold to OEMs. 

The company have completed the construction of its new manufacturing facility at Sanand, and have consolidated 5 of its manufacturing locations at Ahmedabad, to a single unit effective Sep 12, 2024. Have done a capex of Rs 140 crore for the new facility in Sanand.

B2C segment sales declined by 13%YoY, due to a planned plant transition. In  Q2FY25 the company was shifting man, material, and also the assets to the new plant, it had some challenges and there was less production, which led to some sales loss and that''s the reason for weak B2C results in Q2FY25. 

Now have started producing in the new Sanand facility.  The company is still ramping up production and as date the company is at 60% of the mean capacity and expect the capacity utilization to stabilize by December 2024.  Confident that it will be able to come back to normal margin for B2C business by Q4FY25. So the aspiration of the company is to go to double-digit EBITDA for B2C business, and the company is confident that it will be there very soon.

For international B2C business, the new Sanand  facility will be a boon. Because approval of the facility for new orders will be easy in case of many OEMs and also customers from Europe as well as from Middle East, when they visit this facility. 

Consolidation of manufacturing unit at single location will brings in benefits of cost efficiencies from economy of scale and sharper focus on LGM operations facilitating strong growth in LGM business in the medium term. The company is confident of achieving double-digit margins for B2C in due course.

In Q2FY25 and H1FY25, exports accounted for 12.5% and 11% of the consolidated revenue with the share of exports in B2B stand at 12% and that in B2C stand at 24%. 

Consolidated B2B exports in Q2FY25 and H1FY25 was Rs 132 crore (down 4%YoY) and Rs 231 crore (up 0%) respectively.

Consolidated B2C exports for Q2FY25 and H1FY25 was Rs 55 crore (up 4%YoY) and Rs 113 crore (up 13%YoY) respectively.

The international B2B business front while the  international channels are making strategic realignments establishing their teams and facilities to enable long-term sustainable presence in these markets, the company sees some challenge on the power gen side due to changing power scenarios in key markets like South Africa.

The company see  strong growth for its industrial and firefighting products in international market.   

On B2C front the growth was driven largely by LGM and small engines. In Q2FY25 LGM export sales registered 11%YoY growth and that of small engine exports grew by more than 100% primarily driven by growth in agri engine exports to Africa and the Americas region.

On the final year of its 2X3Y journey with two quarters to go. Will continue to build up and capitalize on the momentum.

KOEL standalone EBITDA margin stood at about 12% for Q2FY25.   

Standalone cash and cash equivalents (Net of debt; includes treasury investments and excludes unclaimed dividends) as end of Sep 2024 stood at Rs 213 crore. 

Do have enough players in each node. The players are established ones. Given requirement of strong investment for developing products for CPCB IV+ emission norm compliance not much of small players are there in the market currently.

Significant interest from lot of customers for high HP products.  Internally the company classify HHP anything which is greater than 750 kVA. So the share of HHP in the entire portfolio will be over 15%, 20% by now compared to less than 4% 3 years ago.

Watching over how the powergen market evolves. It might be premature to comment on pricing, market share etc., right now  because as more and more players enter the CPCB IV markets, it would be interesting to see how the market dynamics evolve over a period of time. 

Overall, the company remain cautiously optimistic about demand, with expectations for H2 demand to pick up, especially given the low base from an election-impacted Hl market.

Segment revenue of financial services was up 54% to Rs 195.08 crore. AUM of Arka Fincap   stood at Rs 6284 crore as end of Sep 2024 and total debt of financial services business stood at Rs 5103 crore.   KOEL’s total investment in AFHPL as on 30th Sep 24 stood at Rs 1053 crore.