Kirloskar Oil Engines Ltd - Generating Returns from Generators

Stock Opportunities
1

I stumbled across this business as a technical find, however ended up researching about it and thought of sharing my findings.

OVERVIEW:

Kirloskar Oil Emgines Ltd’s business is divided into three segments

  1. B2C
  • Engine based Pump Sets
  • Electric Pumps (KOEL)
  • Electric Pumps (LGM)
  • Farm Equipment
  1. B2B
  • Engines and Gensets
  • Industrial Engines
  • Power Solutions for Large / Institutional Project Clients (Marine, Defence etc)
  • After Sales Support
  • Retail Channel - Tractor spares, Oil, Batteries
  1. Arka Group - Financial Services
    IMG_5321
    IMG_53211699×954 217 KB

As per the recent Quarterly results; Q1 FY2024, the revenue % breakup for each segment:

IMG_5337
IMG_53371063×285 29.7 KB

IMG_5322
IMG_53221512×839 119 KB

IMG_5319
IMG_53191574×1262 209 KB

  • It’s customers in the B2B business are predominantly from industries like Power, Telecom, Railway, Infra, Railway, Defence and also Data centres

  • B2C customers include ones from Agro and Irrigation

  • Arka Group is a NBFC with focused lending in sectors like real estate, Coporate lending and SME lending (initially started with 500 crores, to diversify business; had very strong and robust balance sheet, and maintained healthy cash positions)

The management had planned for 2X-3Y Strategy; Double the topline in course of three years(indicating an avg revenue CAGR of 24%)

IMG_5320
IMG_53201423×1305 141 KB

Concall Learnings:

  • It’s part of a legacy conglomerate - Kirloskar Group

  • Not interested in white labelled products

  • Management has shown decent control over fixed costs during volatile times

  • Management is very defensive in terms of its lending business

  • Managements focus on cashing out on the Value added Products

  • OEM’s usually place repeat orders

  • Acquisition of Optiqua (management is keen on water solution segment of its portfolio)

    IMG_5331
    IMG_53311511×1301 442 KB

  • Focus on African Continent - delivering good growth in overall exports

  • A growing sales (also focus) in Ultra High Horse power Genset segment

  • The company is benefitted from both power deficit in the country and growing power needs due to infra capex and general population needs

  • Outlook for Q2 FY24 is cautious but optimistic, with potential for growth in new geographies and expanded product portfolio.

  • Commitment to 2X-3Y strategy to double topline in 3 years.

  • EBITDA margin of 12.1% is sustainable, with potential for improvement.

  • Strong performance in the financial services segment with a loan book of Rs. 3,656 crores.

  • Financial services segment experienced a slight decline in AUM, but expected to rebound

  • The company’s Financial arm earns a decent Fee income from Syndication as a third party participant

  • The management is not in a hurry to lend, wants to play a Calibrated move and play defensively for few years before becoming aggressive

  • the management has divided itself into parts, as in the case of different heads for each division

I’ll add a few more interesting concall excerpts below:

IMG_5333
IMG_53332126×1077 309 KB

IMG_5332
IMG_53322149×1051 299 KB

Challenges and Risks:

  • Decrease in profitability due to

  • Raw material price fluctuations

  • Decrease in order inflow

  • Mess ups in financial segment of the company

  • Decrease in demand for the Gensets

  • Competition from Chinese Players

  • The company also has a compliance burden; which results in the management to update many of its products accordingly

  • this compliance is Due to the Emmissiom Stamdards set by the government from time to time

  • Also in case of Fuel efficiency standards

Personal take:

Valuations are reasonable, although P/B is high. Personally invested in it. I’ll hold until there’s a constant tailwind environment

  • This is my first time preparing a note like this, and I could have made mistakes(will correct if I find any)
  • I hope to see some critical suggestions on the timeline
  • My observations are not so redundant amd sought after as other professionals
  • I’ve not not gone in detail for each product category (as in case of various Categories of engines like Low to Untra High Horsepower ones)
11 Likes
2

I hope I added value to this community

3 Likes
3

Decade at a glance

IMG_5338
IMG_53381706×1589 310 KB

1 Like
4

In my findings,

  • I also came across the fact that the company is quick in implementing recent Emission and efficiency norms
  • the company is also, if I’m not wrong is at high capacity utilisation; although may not be at full capacity
  • I also found that the company also sells gas based engine generators and working to improve this product portfolio
  • It’s on track with its 2X-3Y strategy and looks like it will achieve it early
  • in case of agri products like Tillers; it’s 2 or 3 largest player, approx 15% market share
5

Thanks @Subham_Jain for sharing
People who are believing in capital goods cycle/ manufacturing upward trend in coming days… this is good company to play it. Debt free , good ROCE, proven management and reputed brands in B2B
Disc: holding this company from lower level

1 Like
6

Can I ask for your investment thesis, like your reason of buy

7

Kirloskar Oil Engines Q2FY24 Concall Summary

1 Like
8

Thanks .

  • The levers for margin enhancement are:
    • Entry into higher horsepower segment
    • Growing service and aftermarket business
    • Strategic focus on international business

All of the above look highly plausible which will augur well for continued robustness in growth of KOEL.

9

Concall Summary: (both Nov and Feb)

  • B2B segment slows down due to a transition phase
  • still a strong order book on hand
  • B2C business showed more than 20% YoY growth in Q2, with margins on track
  • Launched new products such as OptiPrime and OptiPrime Hybrid range of gensets
  • Focus on margin enhancement through high horsepower segment, service and aftermarket business, and international markets
  • Strong order book and readiness for CPCB IV+ norms in the second half
  • White labeling not preferred option for exports
  • Strong demand from OEMs in the industrial segment
  • Strong demand from infrastructure and data center sectors in Power Gen segment

image

  • CAPEX focused on technology and engineering for emission norm changes and new product launches
  • Q3 FY24 saw highest ever sales with a 14% year-on-year increase in gross revenue.
  • Growth in net sales, EBITDA, and net profit on both quarterly and year-to-date basis. * Expansion in the Middle East market with the appointment of a GOEM called My Span.
  • Notable achievements include winning a large NPCIL order for gensets and acquiring Wildcat Power Gen in the US.
  • Industrial segment saw strong demand from construction and railway sectors.
  • Strong growth and margin improvement in Water Management Solutions business, focusing on domestic and agri pumps.
    image
    image909×628 83.3 KB
1 Like
10

I have exited the stock due to my style of investing requiring me to churn my concentrated portfolio from time to time.

But the business is interesting enough that I’m continuing to track it.

1 Like
11

@Subham_Jain can you shed some light on whether there’s any further valuation left after the recent run-up. Looking at their targets, it looks like the PE already discounts all near term positives

Also, have a few other questions after glancing through the latest PPT:

  1. The company grew it’s standalone sales by 18% in FY24 and as per their target, they need 35% growth in FY25, do you think that is possible?
  2. What are the revenues that are not considered in Standalone but considered in Consolidated: A) Financial revenue of 564 Cr but I can also see revenue gap of 47 Cr in B2B and 481 Cr in B2C revenue?
1 Like