Kirloskar Oil Engines Ltd - Generating Returns from Generators

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

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  • 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%)

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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)

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  • 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:

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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)
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I hope I added value to this community

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Decade at a glance

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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
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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

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Kirloskar Oil Engines Q2FY24 Concall Summary

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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.

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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

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  • 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.
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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.

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@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?
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Q1FY25 Concall Summary

Business Updates

  • Highest ever Q1 sales recorded during Q1FY25. The first quarter of last year had pre buy included and thus 6% yoy growth over that quarter is great because if that effect is negated growth on a yoy basis is 18% in Q1FY25
  • On the power gen side the CPCB IV plus capacity has been ramped up effectively and the company has also got approval for natural gas nodes
  • In the B2C segment the relocation of manufacturing facility is happening as per plans
  • The AUM in ARKA stood at 5768 crores as on June 2024
  • Over the past 2 years the business has been restructured and cultivated a strong company culture which will prepare the company for the long part that lies ahead
  • The idea is to change the company from an engine manufacturer to a power and energy solutions provider
  • The path for next five years is to be a $2billion enterprise by 2030 and the levers that will be used to achieve this are to manufacture more, the new plant on the B2C side and the company is an engineering company which will continue to invest behind R&D
  • The company will evaluate inorganic opportunities only in areas which are core to the company and its operations
  • The net cash as on end of Q1FY25 was around Rs 400 crores
  • The long term debt rating has been upgraded by CRISIL

Participants

Sancheti Family Office

DSP

Subhkam Ventures

Edelweiss

Macquarie

One up Financial

Motilal Oswal

Oaklane Capital

QnA

  • The data centers buy a various type of power backups and power gensets are critical for a data center. The company is developing a range that will allow them to be aggressive in this segment along with maintenance contracts for the same which brings in annuity business
  • The life of a genset is 15 years
  • The annuity contracts associated with maintenance varies according to scope of work and can vary but the idea is to help keep 24x7 uptime
  • From an end customer standpoint not seeing any varied signals and demand continues to be strong without any challenge or softening
  • The service channel is being ramped up and capabilities are being built so that after market can be serviced and growth can be maintained
  • The 5 year target is an ambition and not a clear number with areas of focus already outlined and most of the growth that will be achieved will be on the B2B side
  • On the international business identifying open space where the company can win and working on what kind of channel and distribution network will be needed
  • Currently the capital adequacy in “ARKA” is adequate and there are no considerations for new capital addition as the company is not leveraged to that extent
  • In power generation the company currently has a market share of 30% and in CPCB IV Plus it has a product range across both diesel and natural gas segment
  • On margin front expectation will be to remain in double digits without a firm commitment on any certain number
  • The demand is stronger across construction and infrastructure sector. Across railway and defense there are stronger opportunities
  • The focus is currently on augmenting capacity of high horsepower gensets and bulk of the execution of this capacity will happen over next 2-3 years
  • The company has received the patent for India for hydrogen internal combustion engine gensets
  • In the B2C business very close to double digit margins on an annualized basis and idea is to maintain double digit levels going forward as well
  • The big improvement in margins in CPCB IV Plus will come from aftermarket and services which will commence once the warranties get over for the products
  • The Rs 700 crore capex that the company will incur is a fresh investment over and above the normal capex that the company will incur over the next 2-3 years
  • At this point channel will focus on CPCB IV Plus products as the industry has moved to that era
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Covers Cummins and Kirloskar Oil Engines #GenSet theme

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https://www.manufacturingtodayindia.com/from-cpcb-ii-to-iv-indias-gensets-industry-gear-up-for-cleaner-future

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