Kirloskar Brothers Limited (500241) Earnings Call Transcript & Summary

Ladies and gentlemen, good afternoon. Thank you for standing by, and welcome to Kirloskar Brothers Limited Second Quarter of Financial Year 2020 and 2021 Earnings Call. Joining us in the conference room are the Chairman and Managing Director; Mr. Sanjay Kirloskar; Director, Mr. Alok Kirloskar; Director, Ms. Rama Kirloskar; India Business Head, Mr. Anurag Vohra; CFO; Mr. Chittaranjan Mate; and Company Secretary, Mr. Sandeep Phadnis. Mr. Mate will take us through the result highlights for the quarter ended September 2020. All participants are requested to refer the presentation, which is available on the company's website, www.kirloskarpumps.com before the meeting. [Operator Instructions] Please be advised that this conference is being recorded today. I will now hand the conference over to Mr. Mate. Thank you, and over to you, sir.

Thank you. Good morning, and welcome to all participants for this presentation. First, I would read out the disclaimer statement. These materials may contain forward-looking statements regarding Kirloskar Brothers Limited, our corporate plans; future functional -- financial condition, future results of operations; future business plans and strategies. All such forward-looking statements are based on our management's assumptions and beliefs in the light of information available to them at this time. These forward-looking statements are, by their nature, subject to significant risks and uncertainties, and actual results, performance and achievements may be materially different from those expressed in such statements. Factors that may cause actual results, performance or achievements to differ from expectations include, but are not limited to, regulatory changes, future levels of industry product supply, demand and pricing, weather and weather-related impacts, wars and acts of terrorism, development and use of technology, acts of competitors and other changes to business conditions. KBL undertakes no obligation to revise any forward-looking statements to reflect any changes in KBL's expectations with regard thereto or any change in circumstances or events after the date of -- hereof. Now I turn to individual sheets. I assume that all of you have already gone through this and at least is before you on your laptops. So I will take liberty to skip reading each and every bullet point, but would touch upon the major points, and I hope you would accept that. I'll first turn to company highlights. Q2 sales increased to INR 431 crores, which is a growth of 63% over Q1 sales of the company. We achieved 100% growth in our order booking when we are switching over from Q1 to Q2. We have a strong order board. We have been able to reduce inventory. We've been maintaining -- able to maintain our credit policy of cash and carry business for small pumps. Small pumps achieved 21% business from new products. We have introduced new pumpsets, which are more energy efficient with IE4 motors and focused efforts for promotion of KirloSmart remote health monitoring pumpsets. We have [Technical Difficulty]

Sir, this is the operator. Sorry, to interrupt you, sir. The audio is breaking from your line, sir. Please check.

Okay.

Now it is clear, sir. Please go ahead.

Okay. Okay. More than 100 suppliers were trained on 32 quality modules. Dewas Plant successfully completed -- cleared first stage of TPM implementation. Now individual sector highlights. I will not read out everything. First, we have commented on the Cement segment of our Industry sector. Industry sector is our sector, and we serve various segments like cement, steel and coal, etc. And we have given business scenario for each of these segments whom we serve and the number of firms for which orders are procured in last quarter. Similarly, we have stated the industry scenario and our order booking for Power sector, for Oil & Gas sector, for Marine & Defence sector and Building & Construction sector. Next slide shows Water & Irrigation sector. We have booked orders for 185 different types of pumps in various irrigation and water supply projects in different states. We have also given a list of major orders received for our Valves sector. Export Excellence Cell, which is our export marketing and coordination department, during this period, they have been able to get various orders in different countries like Egypt, Israel, Iraq, Jordan, Bahrain, Singapore, Ireland, and we have given a list of major orders, which they have procured. Then Slide #9 is showing company-wide pending order board. In this, we have shown data for last 4 quarters as well as given total orders outstanding for KBL consol level and orders received for each quarter for KBL and KBL consol level. Next, I come to financial highlights. I would like to state that in spite of 27% drop in sales, which resulted in loss of contribution of INR 124 crores still, a swing in profit and loss account was restricted to INR 13 crores, as we were able to control our manufacturing sales at fixed cost in this period. I will not read out each and every line, but we have given details. Similarly, we worked on reduction in working capital in this period, and we were able to reduce our inventories by INR 89 crores and receivables by INR 75 crores. Our controlling working capital helped us to bring down our borrowings for working capital. We also worked on closing old projects, which is a concern for most of you, and I'm glad to inform you that in last 5.5 years, we have brought down our retention debtors by 53% and brought down our bank guarantees which were outstanding on 1st April 2015 by 62%. Now we also given highlights of our subsidiary companies, Kirloskar Corrocoat, Kolhapur Steel, Karad Projects and Motors as well as Kirloskar Brothers International, which is a holding company for our overseas businesses. In our overseas businesses, we have made a profit of INR 2 crores as against loss of INR 20 crores in previous year same period. SPP group has been in profits. In this period, we have made investment of INR 34 crores in our international business. Kirloskar Ebara Pumps, which is our joint venture company, they also continue to make profit. This year, they have made a profit of INR 8 crores in 6 months, and they have a very strong order board of INR 233 crore as on date. Next slide, we have shown for stand-alone financials for quarter ending current September, June '20, September '19, and then half year ended September '20 and September '19 and for comparison last year full year-end. We have given key financial ratios, which shows that our EBITDA-to-sales percent has improved from September '19 from 6.9% to 8.1%. And for the quarter, it was 12%. Then coming to consolidated financials. For the last quarter, PBT was INR 35 crores and for half year, PBT was INR 16 crores as compared to INR 5 crores previous year for 6 months. Next 2 slides, we have shown company wise sales of each subsidiary -- direct subsidiary. And there's a last slide, company wise profit for all direct subsidiaries of KBL. Thank you. I now request you to have your questions one by one.

[Operator Instructions] The first question is from the line of Nikunj Doshi.

This is nothing regarding performance of the company. Means performance has been improving, and it is really good. But market is not appreciating the same due to promotors' personal disputes and recent SEBI ruling also adds to the worry of the investors. So what are your thoughts on the same? How are you planning to address those issues?

That's a difficult question to answer because part of the thing is in court. And therefore, I cannot comment on the issues in court relating to the family settlement as well as the trademark. On the other hand, I believe the SEBI orders are very self-explanatory. And therefore, I know they are very long and I don't intend to paraphrase them or anything. I would only urge you to read them. Thank you.

The next question is from the line of Manish Goel.

Congratulations on excellent set of numbers in tough times, sir, and thank you for, again, a very detailed presentation this time. I had a couple of questions in terms of the fixed cost reduction, what we have seen in the first half. Would like to get a sense as to how much of this cost reduction is sustainable going forward? Is it structural for us? Or was it that there was a certain onetime and we'll probably revert to the normal?

Mr. Goel, Mate here. There are 2 types of cost reductions. Certain are structural and which we expect are sustainable even in future. Whatever we experienced and learned in this lockdown period and we could envisage various ways to control our expenses and work more smartly, it will continue in future also. And certain are the temporary measures, which we may roll back looking at the situation. I will give you some example, when we saw that when we can operate from home or can we have reduced or smaller office sizes, and we shifted from larger offices to more smart but decent offices at [Technical Difficulty] rate, it will be permanent. On traveling, because there was lockdown, total traveling was banned. So what we saved may not be the same, but we will definitely have learned how to make business without so much travel. But some traveling express would go up. So I won't say that Q1 level would be maintained in future. So some saving would go back to original, but some major portion would remain.

I think in addition to what Mr. Mate said, I can tell you that whenever customers required service, we were able to be there with them virtually, which would save us quite a large amount of money. And also we've done many things, which will also save the customers' money might, right, along with saving us money. But what Mr. Mate mentioned, yes, power and fuel, you see that much lower in the first half because for some months, the factories were not operating. Obviously, once the factories start operating and maybe at a higher level, those costs will come up with the savings that we see may not be seen. But yes, there's a lot of, as he said, that we have learned, and we will carefully operate more smartly.

Sir, in relation to this, like, certain observations from the annual report also that we have seen a consistent increase in professional, legal and consultancy cost and there are some onetime separate costs. So over the last 3, 4 years, we have been seeing that these costs are going up. So how do we see it forward? Can we probably have certain initiatives being now reached to the peak level. And going forward, we expect them to decline? How do we see them?

Mr. Goel, separate charges, something for one special order, we paid it, but it was factored in our selling price. So that is not affecting our profitability. And looking at professional fees, in a growing business and looking at business complexities, we do engage outside consultants, reputed foreign or Indian consultants, who advise us on various new situations and that would continue. But I can assure you that we do carry out of cost benefit analysis before engaging any consultant. And ultimately, it results in company's improvements or entering new business or cost reduction elsewhere. So that is certainly an account item of expense eating out profitability, I would say. Similar other services -- for remaining -- back to the new requirements up to date, we need to upgrade our systems, like, which we switched over from SAP ECC 6.0 version to SAP HANA or like that. But ultimately, that has saved somewhere else, like, reduced our efforts in planning, improvement in production cycle time, et cetera. So as a result, I will say profitability of the company has been increasing for the last 4 years.

Mr. Goel, I had one more point, which is that we are, as you are aware, ahead of -- way ahead of the curve when it comes to implementation of artificial intelligence or 3D printing or augmented reality solutions. And a lot of those have helped us remain quite operational, not just in India, but in other places around the world, especially in this time of the pandemic, where we are able to -- like our Chairman mentioned earlier, support customers remotely, as an example, where we have a very clear understanding what's happening, and he also is satisfied with our initiative and reactions. So I think those also need to considered from a longer-term point of view because maybe in 2011 or maybe 2009, when we started with some of the investments, it may have seemed excessive, but today, I think it is well timed.

I appreciate that. Just want to get a sense that basically, have we seen the peak numbers and the absolute number will probably stabilize at current levels?

That's difficult to answer because technological change is moving so fast ahead. And if you need to deal with the right people for giving the right solutions then they can cost that we will have to incur whether we like it or not.

Sure, sir. And on the projects business, it was mentioned that almost on WIP front, 53% amount has been recovered around BG side, 62%. So would it be possible to kind of give numbers as to what is the outstanding on, say, WIP as well as retention money from the old projects? How has been the recovery from the old projects in value terms, If you can highlight, please?

To give you -- Mate here, to give you a rough idea, the total retentions as on date are INR 250 crores but every year, we are collecting old money, but something gets added. There is a recovery, and there is addition. But the current projects are the running projects are working projects.

ll Sure. So out of these INR 250 crores, how much should be pertaining to, say, these old projects, which were part of our order book, and we are executing? So if you can just give us an...

I can say they are around INR 190 crores.

[Operator Instructions] The next question is from the line of Ranjit Shivram.

Congrats on good cash flows, both in stand-alone and in consol, given the challenging environment. So I would just like to hear from me you, what's the update, if you can give some granularity on SPP and Rodelta. So how are they panning out? And what is the outlook there? Do you see -- because oil and gas was the major thing, so last call, you told we are moving away from oil and gas. So has the Water business in Belgium and Luxembourg picked up. So what is the outlook there?

Let me -- this is Alok Kirloskar speaking. Let me break up that into 2 parts. I think one is SPP, and one is Syncroflo. And SPP, you, I think, have seen that the company is in profit as is shown on one of the slides. And SPP includes SPP U.K. and SPP U.S.A. SPP U.K., I think is a larger entity is the one that has exposure to oil and gas. As we've been saying since 2016, especially, we've been making a strong effort to move to service. And we have done that consistently where we are now close to from maybe 9% or 10% service, we are close to 35% service. So we have made that transition away. And while oil and gas revenues are not the strongest, I mean, given where the prices are, the company has recovered pretty well, both at debt level, which has reduced significantly from last year, so the cash flows have been strong, and also from profitability, means reasonably profitable at the moment. If you look at Rodelta, I think Rodelta, we are focusing on the water market in Benelux region and also in the Middle East, where we find opportunities for our Water business and in the Far East where there are, especially in Thailand, new opportunities coming up for our Water business. So there is a focus there. There, in the Middle East, especially for Rodelta, because they have a historical presence in places like Iraq, et cetera, there are investments in midstream oil and gas and downstream oil and gas. And so we expect to do some business in the region. So -- but that said, Rodelta is still a struggle for us. I mean you've seen the SPP profit number, and you've seen the KBI profit numbers. So you know that we are still having a difficulty in 2 companies. One is Rodelta and one is -- hello, can you hear me?

Sir, this is the operator. We can hear you, sir.

Okay because I thought they couldn't hear me. So I said, you have seen the profit level of KBI, and you've seen the profit level of SPP. So clearly, there is some money lost somewhere. And that money continues to be lost for us right now in Rodelta and in South Africa. And we do recover in South Africa. So I think my point being that, yes, there's a gap, and the gap continues to be that we're struggling with Rodelta and South Africa. We are working with them, and we do expect that the numbers should get better over the next few -- of course, over the year, but definitely in the future because there are various initiatives we are taking to recover, like we said in the last call.

[Operator Instructions] The next question is from the line of [Bhavan Parekh]

So sir, on the India business now, if you could share some outlook, if not in numbers, maybe directionally, how you expect things to move from here on? And secondly, these legacy projects, do you still have any one-off cost hitting our P&L, say, in H1? And how do we see that going ahead also?

[Technical Difficulty] the order was the made. So I think the -- we showed the order board, the orders seem to be coming in now after a few weeks or months of the [Technical Difficulty]. And Mr. Mate showed in his presentation in different sectors, we are starting to get orders -- or we have been getting orders over a period of time. And things seem to be looking up. In the first -- in the second quarter also, we were closer to last year. I hope that we can meet, and I would hasten to add that I don't know which way the pandemic is going to go. But we would like to see how we can reach numbers that we achieved last year. The order board seems to be strong, but one never knows if there are rolling lockdowns, what is going to happen. The company has strengthened its supply chain. We have quite a few sources for materials. So as far as we are concerned, we will try our best to achieve somewhere very close to last year's numbers. As far as the historic projects are concerned, there are slowly, step by step, there is a team that has a review every week to note the progress of all the old projects. I think over a period of time, we preview around the different projects, whether they be water or irrigation or power have been closed or going towards closure. The company doesn't take any new projects. And I think now has -- from -- it's hardly -- our project turnovers are hardly 3% of the total turnover. So we're trying to be -- I mean we hopefully will be a full product company with a very good cash flow as we go forward.

Right. So sir, just a couple of follow-ups. Now the order book, while we got orders, we're executing more than what we are getting actually. So there's been a mild, slight shrinkage in the order book. And despite that, we remain fairly confident of meeting largely the number -- revenue numbers FY '20. Is that understanding correct?

I would like to intervene that part of our business comes from small pumps, which is a stock and sale. So the order book is really not a full story about the company's future turnover.

Right. All right. And sir, in response to the earlier question, you had -- regarding the legacy projects, you had mentioned one number at INR 190 crore. What was that? Sorry I missed it.

That is retention money for the old projects, which are executed, but not fully handed over as the customer was not ready to take over the deliveries or pay after taking deliveries.

This INR 190 crores is part of the INR 250 crores?

Yes.

But I would also like to -- sorry for interrupting, but I think you would all remember that I think the central government had made a statement that they would like to close -- improve the liquidity of various businesses who are taking part in project contracts with the central government. And they wanted to ensure that bank guarantees and the pending payments were brought up to speed as far as completion of project was concerned. Now we are seeing that happening in the states as well. So we are hopeful that the situation with regard to working capital in KBL also will improve further.

All right. So sir, of the INR 250 crores, a sizable amount of INR 190 crores is actually something when hardly the work is done. So assuming things -- I mean, cash flow improves from here on, right, say, maybe in 6, 9 months, this problem should be largely over for us. Other things are obviously.

So you -- the time line -- I hope your time line is the right one.

Right, but sir what is your say on this?

What is my time line? I'm trying for even earlier, but as they say, man proposes and God disposes. So it is government instead of God.

Right. And sir, just one thing. So any one-off costs hitting the P&L now? Or is it like a steady state P&L. I mean so for example, assuming, say, 2 quarters down the line, we don't have these projects. So these margins should be like more like double-digit kind of? How should we look at it?

I don't know that I have understood the question correctly, but these outstanding are after taking credit in our profit and loss account. [indiscernible] improve our cash flow and not profitability.

So I think in the earlier quarters, we would have -- we've taken some provisions. And so we're not taking any of these provisions anymore, right, one-off provisions relating to a couple of -- relating to say, FX...

[indiscernible] because we are making provisions for our policies, which are quite conservative. If we are able to recover everything, yes, [Technical Difficulty] those will be rewarded, but it's too early to commit anything on this.