Kirloskar Brothers Limited (500241) Earnings Call Transcript & Summary

I mean in the U.S. market, as you -- if you're following the company and you will be aware, we only cater to fire pumps as we cater to booster packages, which go into municipal as well as into buildings. So I mean we do see, as we stand today, a strong growth inquiry. And these are in government spending, so in terms of water supply. And we are also in -- surprisingly in some real estate projects, and the other is very large in data centers. I mean we see a huge, huge number of data centers coming up, and we are well prepared for those. But I mean, on the government side, I mean, I don't want to comment because I mean just like with any government, you never know what actually goes for the completion. So I will not comment on that. But yes, on the other sectors, there is growth and we do have inquiry. But of course, we don't cater to all pumps in America like we do in India. We have a very focused product portfolio there. And that's part of our strategy, so that we are a leader in those segments rather than just we operating in many sectors.

So [indiscernible] in this, we sell firefighting pumps, right, for the data center?

Yes, firefighting for data centers, which is -- I mean one of the key pumps that they require in data centers.

Okay. And every data center requires that, it's a mandatory requirement.

Yes, yes, yes, absolutely. Because for insurance, they require these, what they call, FM/UL pumps, Factory Mutual, Underwriter Laboratory listed pumps. It's not just any pumps, they require a pump that has this certification.

Okay. And these are all diesel-driven pumps, right? Not -- diesel engine driven, not the electric ones?

Normally, there is -- with every data center depending on the size, but [indiscernible] you may be a little small data center, there will normally be 1 diesel set, which, of course, the engines, as you know, we have to buy in America because only Cummins U.S.A. and Clarke U.S.A. approved. And then you have 2 electric sets. So 1 diesel set and 2 electric sets.

[Operator Instructions] The next question is from the line of Nilesh Doshi from Green Lantern Capital.

Sir, Nilesh here. First question is, in Q1, because of lockdown, how many months of the production and the sales we would have lost?

I think in Q1, the factories were all operating all the time. We saw that there was disruption at certain large suppliers due to lockdown. And we've also had issues because of lack of containers out of India. There's a container shortages as well. So whenever there's lockdown in different areas, sentiment also reduces because the warehouses are closed or they are open for short periods of time. I think it will be difficult to tell you exactly how many months or how many crores of material we were not able to dispatch.

Yes. So I mean if I want to extrapolate because we have a good order book position, a; and b, our [ bazaar ] pumps are off-the-shelf product, which has a short -- very short delivery cycle. So if I take this forward, assuming from July, things are becoming normal. Can we reach a run rate of about INR 800 crore kind of a revenue on -- in Q2 and going forward on a consol basis?

We will surely try our best. The order board is there, but I can't make you any promises because I don't know how things are going to pan out.

Yes, I understand. So I mean, bearing COVID kind of situation, but if any normalization happens, maybe we should be able to achieve that kind of a rate. And in that case, along with passing on the price increase, should we able to go above back to Q4 or kind of a level of EBITDA margin going forward?

I should hope so. I Will try my best.

Yes. So because we are a large, fixed cost business also, I mean, as a manufacturing company. So whatever top line we grow, keeping salaries and other costs at a similar level, maybe that should add to the bottom line. That's what I was trying to make out.

Your argument is correct. In fact, that is why last year Q4, our margins were good because the fixed costs remain at a particular level. Operating leverage helps us to grow our PBT percentage higher. The only thing -- since the uncertainties for the COVID are not yet over, so it's too early to commit any number, though we are trying to reach those levels.

No. Mr. Mate, we understand that. So it's not COVID. I think the whole world knows it's COVID. So I understand. Subject to normalization, we should be able to go to that level. That's the point. Second is just to share with you, Mr. Mate, we analysts don't always compare Y-o-Y because especially in the COVID situation and the raw material front, we normally go Q-on-Q because that's a dynamic world and a linear function. So just to share with you. Second point is on the CapEx side, this CapEx are we planning in India or globally that INR 100 crore of CapEx?

Majorly in India. And some part overseas.

And in India, because all our tailor-made and design pump capacity, we have very large underutilization of capacity. And I think in [ bazaar ] pumps, we are fully occupied, I mean, fully utilized. So are we expanding in that category of pumps? The CapEx is going for those off-the-shelf kind of pumps, standard pumps?

It's at both sides.

It's all over the place, Mr. Doshi. It's partly in Kirloskarvadi, partly in Dewas and in the small pump business. but it's more on the manufacturing side and the IP side.

Okay. So will it -- that should help in terms of additional revenue or it is more towards automation and productivity improvement or...

Yes, the productivity improvement and automation.

So largely on that, not on actually from the capacity side, right?

No.

The next question is from the line of Sunil Kothari from Unique Portfolio Management Service.

Sir, my question or my -- I would like to listen Mr. Sanjay Kirloskar's views on basically, sir, we are -- during the last 5, 7 years, we are reducing EPC and project-related business. We are improving our all technical capabilities. We are using latest technology and with the help of Alok and Rama, I think we have enough new blood, new understanding and you always rightly said that some mistake Kirloskar Brothers has made. But with this new talent pool, we are going to do something far better. So sir, would like to understand from you with this -- all these efforts, are you dreaming or aiming for some respectable margin, which, in our understanding, should be at least 15%? I'm not asking you any time line. But can we achieve with all these qualities those type of respectable margins? Sir, some comments or detailed explanation will be very helpful.

Yes. I think for -- on the [ industrial demand ] side, these kind of margins are expected, and that's what we are working towards. We are almost at the end of our problems with the project sector. Like we told you, every time we -- I think Mr. Mate said that we have made some provisions. This is for the fact that some of our customers might end up in IPC or whatever. But the company is a conservative company, and I'm hopeful that we will be able to come out of it soon. Very few projects are left. Rama monitors them every week. And maybe after this, I can ask her to say a few things about what is happening on the project side. But as far as industrial products are concerned, this is possible and can be done and has been done in certain parts of the business. The [ bazaar ] kind of pumps, it's difficult to reach where you are competing with large -- very large numbers of companies, including some small scale, et cetera. But we will -- we are -- I wouldn't say we have growth single digit, we are quite -- very high single-digit margins as far as the -- we were at around 8% last year. So that may bring down the average. But definitely, with the large pumps and the -- once we get out or fully out of the projects business, industrial pumps, this is possible, high single digit in the bazaar type is also possible.

Right. And I welcome Rama as a Joint Managing Director. Would you like to listen her comment on Kolhapur Steel. I think one is a Kolhapur Steel and what Alok in his speech mentioned about and in press release about that subsidiary, there's some challenges. So some comments on both this company will be very helpful.

So as you know, Kolhapur Steel was taken over to essentially be a captive foundry that would cater to our castings from our power sector. But with the crash of the power sector and less orders coming from coal-fired power plant, the orders that were essentially given to TKSL began decreasing. Now in the last 1 or 2 years, we have taken a very ambitious go-to-market strategy for TKSL where we are trying to transition it from a captive foundry to a stand-alone, independent foundry that is capable of getting orders on its own in various other sectors. So pumps and turbomachinery is going to be one of its sectors for sure because it will still cater to the large pump division of KBL. It's also a very big advantage for KBL to have an in-house foundry, specifically with critical applications and customers asking for very stringent quality norms and quality testing, such as magnetic particle or radiography testing, et cetera. So it's definitely an advantage. But we are looking at other sectors, specifically mining, earthmoving, shipbuilding as possible sectors that [indiscernible] not anticipate to have a pandemic in the middle of this project. And as a result of this pandemic, a lot of our customers visits, a lot of our customer audits for -- we want -- the customers with whom we wanted to be registered with [indiscernible]. And therefore, I think with this lockdown easing out, we should be able to get those customers and continue the audit process. But essentially, until we are registered with those customers, it will be a slight delay until when this foundry gets to routine orders month-on-month. I hope that answers your question.

Yes. And Alok, if you can talk about [indiscernible] subsidiary.

Yes. I'll talk about the [indiscernible] subsidiaries. I mean, I'll just talk for -- just in a minute in general. I think you may have already seen in the investor presentation. And I think you will notice that across most of the companies, I think we have started to move, starting whether it's South Africa, whether it's Thailand, move them from a very project and lumpy kind of business. And when I say project, just large pump orders, single -- in terms of engineered pump orders, we've moved them into a regular kind of business where they get business every day and they are generating cash flow every day. Because one time all we looked at was the basic cash flow in and out. And I mean you can only do that for that long because at the end of the day, you need orders. And if you don't have orders, I mean there's not very much cash coming in. So building those businesses was really the first focus area. And I think that's what we've done first in South Africa, in Thailand. And the U.K., which was an existing business, you will remember, I mean, almost 65% of our business was -- or maybe more was dependent on oil and gas. And when the oil and gas market collapsed in 2014, the international market, we were in deep trouble, and there were very few orders that were in the market available. And the whole portfolio to be changed again over there. And we see that company started picking up. I would say the story is similar in Netherlands. I would say that our efforts of cost were on those areas because that's where we were for a longer period of time. But now our effort and focus is on Netherlands. We are obviously managing the cash flow. But like I said earlier, unless you have orders, you have no cash at the end of the day. So we have focused on things like fish-friendly pumps where they have an approval, they have installed their fish-friendly pump. That has really brought us into the limelight in the Dutch water sector. And now the water sector in what we call Benelux, which is Belgium, Luxembourg and Netherlands, has suddenly opened up and it's looking quite interesting for them with a lot of inquiries from a lot of these water companies that in the past felt that Rodelta was just another company. So that has really changed the profile of the company because fish-friendly is something that's really coming under regulation across Europe. And I'm sure it's going to come over the world over time because, as you know, environment and -- is a real hot topic at the moment. The other area that they are already strong in with shale approval is upstream and midstream pumps. We continue to focus on that, and they have got orders from them. Unfortunately, as you know, the oil and gas market internationally is still not that strong with very few new projects coming along. And so the other area we focused on, as part of our oil and gas diversification is hydrogen plants. A lot of plants that we're already working with are now getting into production of hydrogen in the oil and gas sector. And that's something that we have products suitable for, and we are now quoting and getting into that market after we've got approval from a very large oil and gas company, a European oil and gas company for those products. So I would say that water on one side, oil and gas and hydrogen on the other side and the third leg is service. And we've also now bagged a few service contracts with -- one of them is Vitens, V-I-T-T-E-N-S (sic) [ V-I-T-E-N-S ], which is a Dutch water company, private water company. But like this, we're going to start picking up framework contracts with different water companies just like we've done in SPP on the water, power and oil and gas side. We've done that in SPP. And over here, we'll do it starting with water, but slowly moving into other sectors, where we get framework contracts. So I would say that's really the general strategy. As you know, the EU has never allowed British companies to enter very easily because of all sorts of unwritten trade barriers, so we expect that being local now in Europe, we should be able to have a little bit more traction. I hope that answers your question.

Very, very useful, very useful. Sir, just one more question is can we give a detail about maybe percentage, how much is service-related revenue? And how much is spares?

You're asking me this for the international business or you're asking me just in the case of...

No, general. Overall consolidated KBL.

Overall consolidated KBL, I mean the numbers are different for the international and numbers are different for domestic.

Yes. But we being an investor in this holding company, so just would like to understand.

I think service and spare parts for the stand-alone businesses in -- business in India is around 10%, 12%. But that's -- when you consider that our small pump business doesn't need any spare. People basically would just replace the pump rather than buy spare parts for that pump. So on a stand-alone basis, I would say it's about 10% of the total turnover. On the international side, I think, again, it's different for different companies.

Yes. It's different for different companies. But just to give -- I'm sure you have the numbers from the investor presentation, so I'll give you a rough picture. For SPP, it's about 35%. For Rodelta, it's I think -- it's just new, as you know, so it's less than 7% or 8%. For our South African business, it's about 45%. And for the Thai business, it's about 12%. So I mean that's how it's sort of across the different businesses because that's how we really look at it. Because when -- we don't look at a overall level because finally, we need the operating company to increase the service business. And one of the detach from the management to them is that we want 50% of this business. In line with that, we have also launched in India, Kirloskar smart systems and overseas the SPP FireEye system, which we've discussed, I think, before in last presentation. Then this is basically remote diagnostics as well as remote monitoring for predictive maintenance. So these are the systems that we have now. And the idea is to develop a subscription business out of these. We already see in the U.K. about -- we have about 720 AMC contracts, which are not framework contracts because framework contracts are very complicated and large contracts. These are just regular AMC contracts. And of these, already 26 are converted. In India, we have installed in the last 2 quarters, about 88 Kirloskar smart systems. So we've already started picking this up as a key area. And we see that, especially in this corona time, where people don't actually want to go to work, they are more open to having the remote diagnostics and then reporting to their bosses based on what the system reports to them. So yes, there are many initiatives in service and that's definitely our focus area.

So sir, you -- the numbers...

Sorry to interrupt you. I will request to come back in the question queue for a follow-up question. The next question is from the line of Bhagyesh Kagalkar from HDFC Mutual Fund.

So this is regarding the nuclear pumps application. On Page #61 of your PPT, you've given the assignment that you had done. But can Mr. Sanjay Kirloskar throw more light, what are the opportunity in next 4 to 5 years in India for your nuclear pump applications and for overseas? Because you had mentioned in one of the conference calls that the smaller nuclear power project also the company has capability. And what are the process for the nuclear power sector worldwide because there's so much noise on renewables essentially? So can Sanjay Kirloskar throw more light on this?

Sure. Like I said last time, in many countries, nuclear is winding down. Germany, I think, doesn't want to do any more nuclear -- Germany doesn't want to do any more nuclear I think, the Japanese don't want to do any more nuclear. Very interesting to see Korea, a very senior political leader in Korea, who said that Korea should not go down that path. We -- if you look at it -- and America also, I think, does not seem to have any policy. I haven't heard of any new American power plant coming. The French, as far as I know, they have their [indiscernible] nuclear power plants, I think it's called the European -- EPR, pressurized reactor. The first one in Finland, I believe, just got commissioned after being 20 years late and 2x over budget. The one in France, I think, is still not commissioned. They've had some material issues. They had got some orders from Britain with Chinese aid, which was canceled by the conservative government. And about 2 months ago -- 1 month ago, there was a problem in China with this French design. So I don't know, we are planning to have this. KBL is one of the companies that is approved for this power plant supply for Jaitapur. But there's a big question on what is going to happen over there. We are looking at Russian putting up power stations, nuclear power stations in Turkey and in Egypt. Over there, with [indiscernible] export, we are one of the approved vendors. But there is a big question mark about the nuclear liability, which I think a lot of people don't know what is going to happen. That being said, if you look at the Indian nuclear power program, there was an expectation that we would be putting up 60,000 megawatts of nuclear power in the 2 decades after it was announced in 2012, I believe. I don't know how much has been added exact, but I believe it is less than 1,000 megawatts that has come on stream since then. There is a fleet ordering program that seems to be going slow, but I'm hopeful that that would come up. What I mentioned in the last call was that you see that whether it is Rolls-Royce or GE, they're talking about small packaged nuclear power plants. And that is for distributed or decentralized power stations, where they are looking at prepackaged nuclear power plant, which can serve the city or talk about 40 megawatts or about 100 megawatts. We are not talking about very large ones so 1,000 megawatts or 700 megawatts or 600 megawatts. These -- for these kinds of power plants, there would be, what I call, canned motor pumps. KBL has already made for the BHAVINI, we've made the primary and the secondary [indiscernible] supply circulating water pumps. And as I said last week, exactly or a few weeks ago, we have very successfully tested the first boiler feed pump for a nuclear power plant, totally designed and manufactured in India. This has never been done by anyone before, to design it in India and to completely manufacture it in India. So as a company, yes, we have the wherewithal to make products for all kinds of nuclear power patients, whether they are 1,000 megawatts each, like the one that is coming up in Jaitapur, all packaged plant, which would need canned motor pumps or the fast breeder reactors, which -- the first one, I think still needs to be -- is still to be commissioned. I hope I've answered your question.

Yes, mostly. And one more area in which the group is doing business for a long time, actually in the different space, what can happen positively for the company next 5 years, I'm saying, not immediately. It will take time obviously.

We are approved by the Indian Navy. We are participating in the Naval dockyards that are being modernized. And also on all kinds of ships of the Indian Navy, we supply various types of pumps. It is a big area going forward that's what I believe. And with the ability at Kolhapur Steel to make castings, which are suitable for seawater, it's the only foundry in India that has NORSOK approval, which has that specific kind of accreditation. KBL will be able to provide pump castings for whatever applications that the Indian Navy requires, and it will be totally made in India. Nothing will need to be imported, either machine casting or a raw casting, everything can be supplied from within, which I hope the Indian Navy is looking for. And also, I think on Page 60 of the investor presentation, you'll see that there's a picture of the fast breeder reactor pumps and there's also the pumps that -- special pumps that we supply for the fusion reactors that is coming up the International Thermonuclear Experimental Reactor, which is in France. It's the world's largest magnetic confinement plasma physics experiment. So thus the company has the capability of going forward on that.

The next question is from the line of Tushar Sarda from Athena Investments.

My question is more related to the number of subsidiaries that you have and they are actually fairly small. So are there any thoughts on reorganizing this? Because the time and effort that management would have to spend on managing them properly and since they are -- a lot of them are less than INR 100 crore turnover and in different countries and different places. So are there any thoughts on how better to manage this structure?

I assume you're talking about international subsidiaries, right?

No, even Indian because I just counted you have like 8 or 9 subsidiaries and your consolidated turnover is INR 3,000 crores and stand-alone is INR 2,000 crores. So subsidiary turnover is around INR 1,000 crores. And they actually lose money, INR 70 crores, INR 80 crores a year. So you have a lot of entities which lose money. And obviously, a lot of -- I mean you've given very detailed explanation and -- of the actions that you're taking in various countries. But it obviously means a lot of management bandwidth and time is going, right? And this must have come up for historical reasons. So I'm just saying that there's a long-term strategic kind of thinking 3 to 5 years, any thoughts on reorganizing this structure?

Yes. Number one, the subsidiary losses are not INR 70 crores, INR 80 crores a year. That was the situation a few years ago. Most of them are turned around. And as has been explained now, there's only 2 or 2.5 because Kirloskar Corrocoat got hit flat because their people could not go -- because of travel restrictions because we do a lot of work at the customers end, but Kolhapur Steel and Rodelta are the 2 loss-making subsidiaries. There are 4 -- 2 subsidiaries in India and 2 joint ventures. Obviously, we can't do anything about the joint ventures, the partners want to be in India. And the subsidiaries, one is our Motor subsidiary and the other one is Kolhapur Steel. Internationally, yes, there are quite a large number. But there has been -- if you look at any global pump company, you will see that. The other day, we were benchmarking with one of the world's largest companies, Grundfos. They have 83 subsidiaries around the world. This is -- in many countries, the government bonds or the trade barriers require us to be present locally to be able to sell either -- whether it's made in India, like made in India, the U.S. government has made in U.S.A. where if you want to take part in contracts, they want a certain U.S. content. I think now it is 40%, but I think President Biden wants to increase it even further that is available in the U.S. -- White House's website. You can see what they are doing for make in America. Similarly, there are trade barriers, which forced us to have a certain value addition in each of these places. We want to grow each of these subsidiary. Thai subsidiary has a very -- a performance which was very lumpy. But now it has what last time Alok described as daily business, which means that every day orders come in and everyday products go out. And as we are increasing our distribution network across Southeast Asia, that company is growing over the last 2 or 3 years. The same thing, SPP, whether our -- even Braybar for that matter. Braybar had an issue with the broad-based black empowered enterprise laws. Thanks to COVID, a lot of the smaller players in South Africa are out of the way. We manufacture in South Africa. And therefore, we are getting preference over suppliers from China and these other places. So we are like the other players in our industry with a large number of subsidiaries basically to have made in that trading block kind of output from these factories.

I'll just add an additional point. In some of these areas, you have things like, let's say, Thailand, you have ION and India-Thailand have a free trade agreement. But if you were to sell from India to Vietnam, I mean you would have probably taxes of 20% or 30%, depending on the product you're selling. So I mean a lot of our subsidiaries are also located in different trade blocks to ensure that it's easier for us to trade. And the second is a lot of the accessories because pumps cannot -- I mean you can't sell a pump by itself where the valuation addition is quite low. But very often, the subsidiaries do the local value addition in terms of drivers and then all sorts of other things, testing if that's required, et cetera. So all that is really what makes the differentiation to make it user-friendly for the customer, who use to -- whatever he's used to in his own geography rather than us supplying something from India or even worse importing something from somewhere else, installing it in India and then exporting it again. So -- and dealing -- how it is dealing with customs. So from that point of view, I think it's a lot easier to send them a bare product and/or components and let them do the value addition locally. Historically, our problem, I think, had been that it was very lumpy because of single orders and not definite penetration in the market. Our focus really over the last 5 years has been to get more and more depth and penetration to get daily business.

Thank you very much. Ladies and gentlemen, due to time constraints, that will be the last question for today. I would now like to hand the conference over to Ms. Rama Kirloskar, Joint Managing Director of Kirloskar Brothers Limited and Managing Director of Kirloskar Ebara Pumps Limited, for closing comments.

Thank you all for joining us on this call. We remain confident on the growth prospects of our businesses across geographies. Our endeavor is to strengthen our businesses, leading advanced digital initiatives in the pump industry globally and turn around the loss-making subsidiaries through cost optimization, operating leverage and better product mix. With this, we thank you for joining us for the call today. For any queries, please feel free to reach out to us or our Investor Relations consultant, SGA. Stay safe. Thank you.

Thank you.

Thank you very much. On behalf of Kirloskar Brothers Limited, that concludes this conference. Thank you for joining us. You may now disconnect your lines.