Kirloskar Oil Engines : FY 2023-24 Q4 Text Transcript

"Kirloskar Oil Engines Limited Q4 Earnings

Conference Call"

May 9, 2024

MANAGEMENT: MS. GAURI KIRLOSKAR - MANAGING DIRECTOR.

MR. RAHUL SAHAI - CEO (B2B)

MR. ASEEM SRIVASTAV - CEO (B2C)

MR. SACHIN KEJRIWAL - CFO

MS. SMITA RAICHURKAR - COMPANY SECRETARY

MR. AMIT GUPTA - CFO (ARKA).

MR. ANKUR GUPTA - CFO (B2B).

MODERATOR: MR. DHIRENDRA TIWARI - ANTIQUE STOCK BROKING LIMITED

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Kirloskar Oil Engines Limited

May 9, 2024

Moderator:Ladies and gentlemen, good day, and welcome to Kirloskar Oil Engines Limited Q4 FY '24 Earnings Conference Call hosted by Antique Stock Broking.

As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing "*"and then "0" on your touch- tone phone. Please note that this conference is being recorded.

I now hand the conference over to Mr. Dhirendra Tiwari from Antique Stock Broking. Thank you, and over to you, sir.

Dhirendra Tiwari: Thank you very much. Good evening, ladies and gentlemen. We, at Antique Stock Broking, welcome you on this call to discuss 4Q FY '24 results of Kirloskar Oil Engines Limited.

We are glad to have with us Ms. Gauri Kirloskar - Managing Director; Mr. Rahul Sahai - CEO, (B2B Business); and Mr. Aseem Srivastav, CEO B2C business, along with the rest of the management team. I first congratulate the entire team of KOEL for delivering yet another strong performance. And now I invite Ms. Gauri to start with opening remarks, following which we will open the floor for Q&A. Over to you, Ms. Gauri. Thank you very much.

Gauri Kirloskar: Thank you very much for that kind introduction. Good evening to all of you. This Gauri Kirloskar, Managing Director of Kirloskar Oil Engines. Thank you all for joining the call today. I have with me Rahul Sahai - our B2B CEO; Aseem Srivastav - our B2C CEO; Ankur Gupta - CFO (B2B Business); Mr. Smita Raichurkar - Company Secretary; and Amit Gupta - CFO of Arka. We also have on call with us Mr. Sachin Kejriwal.

As you all must have gone through the Stock Exchange notice that we gave yesterday, Sachin has joined us as CFO with effect from today.

As usual practice, I will start with the business update first, followed by a quick overview of financial performance and then we will go on to the question-and-answer session.

As evident from the figures, this quarter has been remarkably prosperous for Kirloskar Oil Engines. We've achieved the highest quarterly sales in KOEL's history. Moreover, when considering the entire year's performance, it also marks the highest annual sales ever. I extend my heartfelt congratulations to the entire KOEL team and express gratitude for their unwavering support. This success is undoubtedly a collective effort with every member of the team contributing to their utmost. I firmly believe that this milestone signifies just the beginning of our journey ahead.

At KOEL B2B, we are transitioning from a diesel engine manufacturing company to a technological leader in power and energy systems. We are doing this by focusing on our internal R&D, making progress on our technology tracks and encouraging innovation within our team.

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Coming to business updates. Overall demand has stayed strong this quarter too. If we look at the macroeconomic indicators, India's economy outperformed the expectations in Q3 '23, '24 with 8.4% GDP and was at a 6-quarter high. This trend continued. It was evident in the Q4 demand across sectors with high demand coming, especially from construction, infrastructure and railways in particular.

In power generation, Q4 demand, in particular, was a mix of CPCB-II and CPCB-IV+. As we approach the deadline of June 2024, we expect the CPCB-IV+ demand to start gathering momentum. On the industrial side, we saw strong demand from our construction OEMs and government sectors such as Railways and Defense. Another noteworthy update is on the international business side. This year, we crossed the Rs. 500 crore international sales mark for the first time, taking the overall share of exports to approximately 12% of total sales. As the CPCB-IV+ norms have opened up a lot of new avenues for our products internationally, I believe this is a beginning of the exciting journey ahead for us in the international markets. If we look at the business unit-wise breakups for the quarter as well as the full year, most of the businesses have grown double digit year-on-year.

On the B2B side, I will talk about also the new and alternate fuel products first. The Optiprime series is gaining good traction. We shipped 17 Optiprime products, including 4 2,000 KVA gensets during the quarter. Gas genset sales have also been encouraging, and we expect the demand for natural gas gensets to increase going forward. We sold 229 gas gensets during last year. Remanufacturing is now part of our offerings through the launch of the New Life brand. Last year, we offered 110 New Life products to our customers. This quarter, the International business unit clocked a 70% growth over last year's Q4, making the full year performance at Rs.

520 crores, a 32% growth year-on-year. Please note that these are standalone numbers.

Now coming to the B2C business:

Overall, the B2C growth was 7% quarter-on-quarter, mainly backed by a strong growth of Water Management Solutions. The farm mechanization business continues to decline for the quarter and also for the full year. We continue to increase market share in WMS due to our deepening and widening strategy, 83 deepening channels contribute to Rs. 22 crores and 91 new channels through the widening effort contributing to Rs. 26 crores. As you know, our focus has been on the profitability of the segment. We have been taking a series of steps to improve margins. The PBIT margin has improved 25% for the quarter and 73% for the full year.

I will now briefly update on the Financial Performance on a quarterly and year-to-date basis:

These are standalone numbers. So, first, a review of the Q4 FY '24 Financial Performance on a standalone level:

Net sales is at Rs. 1,378 crores for Q4 FY '24 versus Rs. 1,141 crores for Q4 FY '23, a 21% increase year-on-year. EBITDA is at Rs. 178 crores for Q4 FY '24 versus Rs. 129 crores for Q4

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FY '23, a 38% increase year-on-year. EBITDA margin is at 12.8% for Q4 FY '24 versus 11.2% for Q4 FY '23. Net profit is at Rs. 118 crores for Q4 FY '24 versus Rs. 93 crores for Q4 FY '23, a 26% increase year-on-year.

The year-to-date or the whole year performance on a standalone basis:

Net sales is at Rs. 4,806 crores for FY '24 versus Rs. 4,073 crores for FY '23, an 18% increase year-on-year. EBITDA is at Rs. 578 crores for this year versus Rs. 457 crores for last year, 26% increase year-on-year. EBITDA margin is at 11.9% for fiscal year '24 versus 11.1% for fiscal year '23. Net profit is at Rs. 375 crores for FY '24 versus Rs. 298 crores for FY '23, a 26% increase year-on-year.

Just as a note, the above EBITDA and net profit numbers are after adjustment of overdue receivables towards a customer and the detail is in the notes to the financial results. Looking at the working capital. With diligent efforts and regular monitoring, we've achieved a reduction of working capital by Rs. 140 crores in the quarter with inventory days down to 48 days from 60 in the last quarter. The cash position now stands at Rs. 269 crores at the end of the quarter. Please note that this cash is net of debt and includes treasury investments and excludes unclaimed dividends.

Now I will take you through the business-wise standalone revenue breakup for the quarter and year-to-date performance:

The B2B business reported sales of Rs. 1,210 crores for the quarter, which indicates a growth of 22% year-on-year. The full year sales were at Rs. 4,182 crores for the quarter, which is 18% growth year-on-year. Within B2B, the power generation reported sales of Rs. 518 crores for the quarter, which is 11% year-on-year growth and Rs. 1,905 crores for the full year, which is 15% year-on-year growth.

Industrial reported sales of Rs. 309 crores for the quarter, 28% year-on-year growth and Rs. 1,008 crores for the full year and 18% year-on-year growth. Distribution and aftermarket reported sales of Rs. 210 crores for the quarter, that's 19% year-on-year growth and Rs. 749 crores for the full year that's 19% year-on-year growth. International business reported sales of Rs. 173 crores for the quarter, which is a 70% year-on-year growth and Rs. 520 crores for the year, which is 32% year-on-year growth.

B2C standalone business reported sales of Rs. 168 crores for the quarter, which indicated growth of 10% year-on-year. The full year sales were at Rs. 624 crores for the quarter, which is 15% growth year-on-year. Within B2C, KOEL Water Management Solutions business recorded a revenue of Rs. 153 crores for the quarter, up by 22% and Rs. 537 crores for the full year, that is 23% year-on-year growth. Farm Mechanization recorded a revenue of Rs. 15 crores for the quarter, down by 45% year-on-year and Rs. 87 crores for the full year, down by 18% year-on- year due to seasonality leading to delay and subsidies from the states in where we operate.

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Now, I will update you on the consolidated business:

LGM sales were flat, but with significant improvement in year-to-date PBT from Rs. 8 crores to Rs. 34 crores. The new plant construction is going as per schedule. LGM export grew at 15% and now contribute more than 30% of the revenue of LGM.

Now, I will update you on the consolidated business:

For the full year, Arka clocked revenue of Rs. 565 crores, which is a 52% growth year-on-year. The loan book as on 31st March 2024 was at Rs. 5,210 crores, including off balance sheet. Last last quarter, Arka had an exceptional item of Rs. 31 crores towards the provision made for investment in Arka's alternate investment fund due to the regulatory changes announced in December 2023. However, during this quarter, Rs. 15.6 crores have been reversed from that exceptional provision towards investment in Arka Credit Fund I post clarification from RBI.

Overall, if you look at the consolidated results, for the quarter, the revenue from operations is at Rs. 1,660 crores for Q4 FY '24 versus Rs. 1,384 crores for Q4 FY '23, a 20% increase year-on- year. Net profit is at Rs. 131 crores for Q4 FY '24 versus Rs. 107 crores for Q4 FY '23, a 23% increase year-on-year. At a yearly basis, on a consolidated level, revenue from operations at Rs. 5,898 crores for FY '24 versus Rs. 5,024 crores for FY '23, 17% increase year-on-year.

Net profit, Rs. 468 crores for FY '24 versus Rs. 360 crores for FY '23, a 30% increase year-on- year. Please note that the EBITDA net profit numbers are excluding the exceptional items and provisions and reversals or overdue receivables made for a customer towards sales made in the previous year. And for details, please refer to the notes in the financial results.

In Summary:

With 2 years down, the journey of our 2X-3Y strategic path, I am very satisfied with the progress we have achieved. This is despite the last-minute unforeseen changes in the CPCB-IV+ deadline. The deadline change has not just affected us on the top line target, but of course, we had to make a lot of changes on the production line and keep our supply chain agile to manage the transition. I would like to reiterate that this was achieved because of the support we received within the organization as also from our supply chain partners. Amidst managing these challenges, we remain steadfast in our pursuit of new business development and progress in research and development. This underscores the dedicated endeavors of our team in crafting cutting-edge products for the modern era.

Our aim is to excel in internal combustion engine technology, spanning alternate fuel, hydrogen blends and hybrid engines. These innovations are tailored to support our customers in their decarbonization journey. In summary, with a strong FY '24 performance, we are very much on track for our 2X-3Y target, advancing satisfactorily on the 5 growth pillars. We have registered a 21% CAGR in the last 2 years on the base of FY '22 revenue of Rs. 3,250 crores. We have

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	Kirloskar Oil Engines Limited
	May 9, 2024
	reached double-digit EBITDA margins, too, reflecting a healthy above 40% CAGR on the
	EBITDA numbers. As we move towards the last leg of the 2X-3Y journey, we have our eye
	setup on the longer path that's ahead of us. We are committed to the strategic roadmap and our
	technology tracks. You will hear more about these in the coming calls, stay tuned until then.
	With that short update, I would like to open the floor now for the questions.
Moderator:	Thank you very much. We will now begin the question-and-answer session. The first question
	is from the line of Amish from JM Financial Services PMS. Please go ahead.
Amish Kanani:	My question is, is it possible on the B2B business to get some kind of flavor in terms of the
	volume growth versus value growth because we've seen quite a bit of value growth there and we
	have the CPCB-IV transition. Is it possible to understand how much was this due to price
	increases of the new products versus the volume growth and whether there was a volume growth
	in underlying business? That will be very helpful.
Gauri Kirloskar:	Thanks for your question. Just give us a moment.
Rahul Sahai:	This is Rahul. So, what's actually been happening is at an overall level, we are seeing not just
	value, but also significant volume growth. And if I compare versus the base of FY '22, which is
	where we started the 2X-3Y journey, the volume growth versus that year is about 25%.
Amish Kanani:	And this is as a basket for the whole B2B or does this mostly have no mistake?
Rahul Sahai:	For B2B helpful.
Amish Kanani:	So, will it include international business growth as well? Or it will be largely the domestic
	growth, or B2B.
Rahul Sahai:	This was B2B business.
Amish Kanani:	And sir, is it possible or any chance to get the number for this year? Because there was the sense
	because of the price increase, the volume may not have come. So, the consumers are probably
	buying the higher value-addednon-polluting products, but maybe volume wouldn't have come.
	But given the strength in the underlying businesses that we cater to, I mean, real estate and
	infrastructure, I was wondering whether the demand in volume terms also remains strong?
Rahul Sahai:	So, our CPCB-IV shipments continue to be at about 20% and lower levels. So, the price increase
	that we were initially envisaging as per the regulations, didn't really come through in the last
	financial year because of the change in the norm, the soft postponement that ended up happening.
	So, which is why it is still fairly apples-to-apples at this point. In this coming financial year is
	when we are likely to see full impact of the price increase after June, which is where the CPCB-
	IV+ norms will kick in with full effect.

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Amish Kanani:	So, can I say in the context that no major price increase has resulted in a good volume growth?
	And in that context, is it possible to give us some sense what happens after the June thing?
Rahul Sahai:	So, if I look at versus last year, we had at an overall level or, I will say, 10% volume increase.
	And the price increase after June would, I mean, while it will vary by node, it would be at a
	weighted average level of about 35% to 40%, which is due to the enhanced scope of the after-
	treatment systems and the electronics that are going into the engine for power generation.
Moderator:	The next question is from the line of Ashutosh Garud from Ambit GPC PMS. Please go ahead.
	Please go ahead.
Ashutosh Garud:	I just wanted an outlook on the margins going ahead given that we have clocked 17% to 18%
	kind of EBITDA margins in the last 3 to 4 quarters? That is one. And second, I wanted some
	color on the debt on the balance sheet? How do you think the debt will look like, let's say, 1 year
	down the line? And what kind of interest costs are you building in going ahead?
Gauri Kirloskar:	So, I will answer your second question first, and then I will just hand it over to Rahul and Aseem
	to comment on the margins going forward in their businesses. So, on the debt side, we expect to
	maintain just the same because we have a strong cash position currently. So, we don't envisage
	that the debt levels would go up. Go ahead, Rahul.
Rahul Sahai:	So, on the B2B side, our current EBITDA levels appear at about 14%. And we will look for
	opportunities to enhance that, but I wouldn't give any guidance at this point.
Ashutosh Garud:	No, I didn't get your answer for the debt level, ma'am, if you can just repeat it.
Management:	So, currently, we are having a debt of around Rs. 200 crores in the books. And we expect to
	maintain the same debt level. We do not expect to increase it as we have sufficient cash in the
	balance sheet.
Aseem Srivastav:	Yes. On the B2C side, our EBITDA level is now around 6.6%. And going forward, this will
	slightly go up.
Moderator:	The next question is from the line of Mahesh Bendre from LIC Mutual Fund. Please go ahead.
Mahesh Bendre:	Ma'am, you just mentioned about the natural gas gensets, and we already sold quite some volume
	in this quarter. So, I mean, how is the product compared to a traditional diesel engine in terms
	of performance and pricing?
Rahul Sahai:	So, if you look at our natural gas portfolio, we are actually getting our entire portfolio certified
	for the latest emission norm that is CPCB-IV+. In fact, most of it is already certified. Now if I
	compare it versus diesel, these natural gas-based gensets can only go where the natural gas
	availability is there.

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If I look at advantages versus diesel, while the emission norm compliance is the same, it will comply with CPCB-IV. But natural gas is a cleaner and a more sustainable fuel source. Also, what ends up happening is the aftertreatment systems required to clean the emissions, they are simpler. So, there is some amount of derating that happens at a platform level when we move towards natural gas. But at a product level, if you compare the pricing of diesel and natural gas, there would be, for equivalent appear 30% to 40% price variation where natural gas is more expensive. But if you look at overall cost of ownerships, then natural gas gensets tend to be the better alternative.

Mahesh Bendre: And sir, a lot of investments are going in data centers now. So, have we introduced a product in that category? And what is the prospects in that segment?

Rahul Sahai:So, absolutely, data center is one of the key segments that we are focused on. In fact, we have refined some of our platforms, such as the K4300 and we have got the BCCC rating for some of our platforms also and so we are also, in particular, executing some orders with data centers.

Mahesh Bendre: And last question, what is the CAPEX plan for the current year and next year?

Gauri Kirloskar: Just give us a moment. So, if you look at our CAPEX plans for the current year, it's at about 1.5 to 2x what we did last year.

Mahesh Bendre: And so, what could be that absolute number, ma'am?

Gauri Kirloskar: It's approximately Rs. 400 crores.

Mahesh Bendre: And this is the for expansion of the facilities?

Gauri Kirloskar: For some capacity enhancement and also investing along the lines of the technology tracks that we have defined on the R&D side.

Moderator:The next question is from the line of Teena Virmani from Motilal Oswal Financial Services. Please go ahead.

Teena Virmani:Just wanted to get some sense on the demand scenario in the current quarter, quarter 1 of FY '25 as to how is the inventory status of CPCB-II now? And how is the traction coming in along for CPCB-IV, even prior to the implementation from the month of July? So, how do you see quarter 1 of this fiscal panning out in terms of power genset demand?

Rahul Sahai:So, Teena, this is Rahul. What we see at the moment is demand for CPCB-II continues to be fairly strong. We continue to fulfill our obligations to our customers as far as executing orders are concerned. What we expect is through this quarter CPCB-IV+ will pick up slowly, but I think it's really when this quarter ends is where the switch over to CPCB-IV will happen.

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Teena Virmani:	So, how is the inventory status of CPCB-II? Is there enough inventory of CPCB-II to last till
	June in the system? Numbers for KOEL, but generally for the industry.
Rahul Sahai:	Yes. So, I mean, you are right by asking that question because the parts in many cases are quite
	different. But from our standpoint, we planned the inventory ahead. There's no problem.
Teena Virmani:	So, you expect the demand for CPCB-II to remain till June and there is sufficient inventory to
	cater to that demand?
Rahul Sahai:	Correct.
Teena Virmani:	And then if you start shifting towards CPCB-IV?
Rahul Sahai:	Yes, then there is a switchover.
Teena Virmani:	My second question is related to the other expenses, which are down in the current quarter. So,
	is it more to do with the performance of the B2C division where we are seeing some kind of
	improvement in the margin for B2C and that's the reason other expenses are down, or any
	specific reason is there for lower other expenses?
Gauri Kirloskar:	Teena, can you just be a little bit more specific, what number are you referring to coming down?
Teena Virmani:	Yes. So, in quarter 4 of FY '24 for standalone business, when we see overall other expenses as
	a percentage of sales, it is down to around 14.7%. And when we compare the same number for
	4Q of FY '23, this number is 16.4%. So, even though the absolute amount would have increased,
	but as a percentage of sales?
Gauri Kirloskar:	So, Teena, that's just fixed cost leverage that you're seeing because of the increase in volumes
	and sales.
Teena Virmani:	So, what is a sustainable number going forward with this level of nearly 14.7% or so, is it looks
	to be the sustainable number going forward as volumes improve?
Gauri Kirloskar:	Yes, it should be.
Teena Virmani:	If I may ask 1 last question, then I will join the queue again. My another question is related to
	exports. You've seen a very good traction in export numbers in the current quarter and even for
	the full year. So, what's the strategy to increase exports from the current levels. Because as per
	your strategy plan, your target is still higher on the export front. But how do you plan to grow
	export numbers further from the current levels in terms of geographies, in terms of nodes? Or is
	it something that you're targeting something inorganic to meet the current targets which are given
	in the strategy plan?

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Rahul Sahai:	Teena, this is Rahul. See, on the international side, we are looking at developing the market. So,
	it's not just exports. It's actually international business for us because we have to generate the
	leads and orders and things like that. So, we are evaluating each of the geographies very
	carefully. You may have seen in some of the messages we've given out, the Middle East and the
	U.S. are key markets that we're focused on. So, on the power generation side, we have GOEMs
	appointed in both these markets, which is something that we have not traditionally done, and we
	are operating via GOEM model now. And along with that, we are also taking a hard look at what
	is the structure required for those respective geographies to build for us. So, if you were to ask
	me what are the focus areas? The focus areas at this moment are Middle East and the U.S. We're
	being extremely purposeful. So, which is why I won't give anything away. It's proprietary at this
	point, but international business is important, and you are seeing the focus translate to numbers
	in the last quarter.
Teena Virmani:	So, would there be any kind of elongated growth also would you be targeting to meet the targets
	given in strategy?
Rahul Sahai:	So, we are evaluating all options, whether it's organic or looking at inorganic growth
	opportunities, either for market access or for certain technologies, we are evaluating all options.
Moderator:	The next question is from the line of Ashwani from Emkay Global Financial Services Limited.
	Please go ahead.
Ashwani:	My first question is on the Industrial business. If you see the performance has been very strong
	during the quarter. Was there any one-off large order during the quarter in the Industrial
	business? That's what I wanted to check. And what is the outlook that you gave going ahead?
Rahul Sahai:	Yes. So, while I wouldn't give any guidance on the Industrial side, but what I can say is the
	Industrial business wasn't one large order. In fact, if you track the performance quarter-on-
	quarter, the Industrial business has grown fairly consistently. Of course, Q4 was relatively large
	for us, but the industrial business has grown pretty consistently. So, we engage very closely with
	our OEMs. We want to make our OEM successful, and we intend to grow with them.
Ashwani:	Secondly, any feedback you would like to share with us on the Optiprime series of gensets,
	which you launched some time back?
Rahul Sahai:	So, in general, we've got good feedback from our customers. Optiprime is a novel product in the
	market. And there is a clear positioning for it. I think there are clear advantages for our
	customers. And so the customers are also acknowledging that, which is why we've been able to
	sell 4, 2,000 KVAs in the last quarter. I mean at that range of genset, customers won't take a
	chance unless and until they are completely convinced. So, I think the Optiprime is a new product
	in the market. We're quite excited about it, and we're hoping that we can build further on the
	product in the months to come.

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