Kirloskar Brothers Limited (500241) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Kirloskar Brothers Limited Q1 FY '23 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Sanjay Kirloskar, Chairman and Managing Director at Kirloskar Brothers Limited. Thank you. And over to you, sir.

Thank you. Good afternoon, everyone. And I'd like to thank you for joining us today to discuss the financial results for Quarter 1 of fiscal year '23. I hope all of you have had the opportunity to go through our financial results, the investor release and investor presentation, which has been uploaded on the stock exchange as well as on our company website. Our company witnessed a healthy revenue growth, which was driven by improved product mix and pickup in demand in key international geographies as well as the domestic market. The growth in domestic markets was driven by B2C comps. On a consolidated basis, the revenue grew by 25% on a year-on-year basis, EBITDA and PAT grew by 13% and 31% on a year-on-year basis for Q1 fiscal year '23, respectively. This performance has been delivered despite the numerous challenges in the business environment in terms of various multiple geopolitical conflicts, sustained upward trajectory in some input costs and volatility in exchange rate. We believe that this is a testimony of the company's brand equity, diversified presence across the products and geographies and strong fundamentals. However, inflationary pressure on key input costs and constant depreciation of currencies against the U.S. dollar has impacted margins and profitability. The company has taken multiple price hikes to partially mitigate this impact. We are also closely monitoring all macroeconomic events and do not expect any significant impact on the business operation. Despite these issues, we have continued to build momentum in order inflows, which are driven by oil and gas, marine and defense, industry, and building and construction. Consolidated order book as of 30th of June stood at approximately INR 2,611 crores, which does not include made to stock business, which contributes approximately 50% to the stand-alone revenue. The order book position is expected to accelerate further on account of recovery in CapEx at first geographies, with improved demand from the oil and gas sector due to recent spikes in the prices. I will now request Alok Kirloskar, Managing Director of Kirloskar Brothers International BV, to share his thoughts on the performance of the International business.

Thank you. For the international business operations, the U.S., U.K., Thailand and South Africa continue to do well in terms of operational excellence -- execution. Foreign losses -- ForEx losses, which are mainly unrealized, and mark-to-market losses impacted the profitability of international businesses, though at the operational level, most of the international businesses registered healthy year-on-year growth. This is coupled with strong order inflow across the geographies. Apart from the growing order book, the company's focus continues to remain on growing the spares, services and subscription platform businesses. The best business continues to have -- remain affected and is -- expected to witness some recovery in FY '23, but we're still going through some restructuring banks. The international order book stood at INR 747 crores, a robust growth of 42% year-on-year, along with an improvement in the product mix. With this, let me invite Mr. Rama Kirloskar, Joint Managing Director and MD Kirloskar Ebara Limited, to take you through the performance of domestic subsidiaries.

Thank you, Alok. In the domestic business operations, small pumps business witnessed momentum along with other verticals such as industrials and other CapEx-driven sectors. The company's platform production also increased by 103% year-on-year, in line with growth in demand, especially for small pumps. The company is focusing on multiple marketing and branding programs along with increased dealer and distributor engagement to further grow the small pumps business. As you already know that the company is continuously investing in R&D and various technologies and remains the foremost pumps company to launch innovative products and services. The company has now accelerated authorized pumpset original equipment manufacturers at an AP OEM program, which is aimed towards reducing the turnaround time significantly from the existing 3 to 5 weeks to 12 hours to 2 weeks. The company has witnessed an initial success in terms of TAT reduction and reduction in supply chain costs along with improved distributor commitment and engagement. The company endeavors to further accelerate this program, which we believe would disrupt how the pump industry operates in India and be a key catalyst to drive growth in the mid-to order business -- domestic business. Now coming to the domestic subsidiaries and JVs, Karad Projects and Motors Limited, KPML, continued its healthy growth pace. KPML revenues grew by 65%, while its PBT grew by 74%. Various initiatives are already underway to turn around the Kolhapur Steel Limited, which is now witnessing growth in production and revenue. With this, let me invite Mr. Chittaranjan Mate, our CFO, for the financial performance highlights.

Thank you, Rama. The company reported a resilient state of performance, with topline growing by 25% year-on-year, while EBITDA and PAT grew by 13% and 31%, respectively. EBITDA margins stood at 6.1%, slightly lower than our expectation, mainly on account of higher unrealized MTM losses at the international subsidiaries and higher input costs. On a stand-alone basis, revenues stood at INR 542 crores as compared to INR 397 crores, a growth of 37% year-on-year. This contributed approximately 70% to the consolidated revenue. EBITDA was at INR 31 crores, a growth of 46% year-on-year, while EBITDA margin stood largely stable at 5.7%. PAT for Q1 FY '23 stood at INR [ 8.1 ] crores, a growth of 45% year-on-year. That is all from our side. We can now begin the question-and-answer session. Thank you.

[Operator Instructions] The first question is from the line of Akash Mehta from [indiscernible] Investments.

I had a couple of questions. First one, on the revenue part -- sorry, the order book part. Can you just bifurcate INR 2,611 crores order book between made to order and engineered to order?

Can you please repeat?

Sir I just wanted to know the bifurcation in our order book between made to order and engineered to order, the INR 2,611.

You are talking about order book.

Order book, yes.

It is all made to order and engineer, because made to stock doesn't come in order book. But if you go sector-wise, you would be -- particularly irrigation and water and projects would contain some made to engineer orders.

Okay. And just last question. Can you explain why have you taken the impairment for TKSL during the quarter?

Last year, we took it at the end of the year. This year, we felt it might be better to take it quarter -- from the beginning, from the beginning just to be conservative.

So just to clarify your first question. Irrigation, water, power, marine and defense, and ESD, they are made to engineer.

Engineered to order.

Engineered to order. And made to order are the rest.

About INR 1,200 crores would be engineered to order.

That's it -- I think it's about 50-50.

Next question is from the line of Atul Kothari from Progwell Securities.

Sir, I have a couple of questions. Sir, first of all, we had closed 2 EPC projects during the quarter. So what was the order value for these 2 projects?

Can you repeat your question? You were not clear.

Sure. We have closed 2 EPC projects during the quarter, right? So what was the order revenue of these 2 projects? Am I audible?

We didn't understand what you were saying. 2 something projects.

Yes. There were 2 EPC projects during the quarter which we have closed. So what is the order value for these 2 projects?

I would tell you that exactly the order value of the 2 projects.

Yes. So what is the order value of these 2 projects, of the 2 EPC projects which opens?

We'll get back to you before the end of the session.

And sir, also, can you basically give -- explain into how many projects are pending as far as our EPC vertical is concerned?

There are around 59 projects pending.

Okay. And just the last question. What was the contribution of made to stock firms to our stand-alone business during the quarter?

I think we mentioned that it is a little more than 50%.

Yes. So the turnaround time will made to stock comp. So some of it could come in out quarter also.

[Operator Instructions] The next question is from the line of Renjith Sivaram from Mahindra Mutual Fund.

Sir, one thing which last quarter which you had highlighted, you said that you have taken price hike, and most of the impact of this price hike will get visible in Q1. But still, we are not seeing that kind of an impact in our margins. So why is that despite the price hike our margins are not improving.

I think what we have said was margins are impacted for the large pumps. And these large pump orders tend to have delivery times of 12 months to 18 months. And that is -- they are quoted even earlier. So this is what has impacted the results in the first quarters.

So then when can we see these margins normalizing, sir, now the commodity prices have cooled off? So probably from 2Q onwards, can we assume that the margins can normalize?

Since this is a forward-looking statement, I will still hesitate and give you an answer. I believe that we will be out of this by Q3.

Okay. But when do we benefit from this reduction in commodity prices?

You know -- because, as we mentioned earlier, that very often, these large pumps with the -- delivery terms tend to be maybe on the shorter side at 8 months and longer side at 18 months. Very often, we have to obviously plan and buy materials. And given that lot of these orders have come in earlier, as material prices were going up, of course, we expedited some of the purchases only because there was no such as quick movement going up and it just kept going up for a while. There was a good amount of material bought in earlier to execute these orders to avoid any continued hike. So while maybe some orders would get a benefit from the lower material cost as it come down, definitely, I think there is still some orders in our pipelines are being executed, which still have the old materials which have already been procured.

You see, the downward trend started from June. It was not for throughout the quarter.

Okay. So in the small pumps segment, can we assume that these -- there can be an immediate impact, because there at least, it will be like more of short cycle, right, for the small pumps business?

Yes. We should see a positive impact.

Okay. And we are hearing a lot of the STP, ETP and water irrigation kind of tender -- order intake execution from the larger project guide. So are you also seeing a influx in terms of orders for pump from these ETP contractors? Is that something which we can be costing?

[indiscernible] inflow of orders for large pumps from ETP contractor.

Okay. And even the STP, ETP side also?

Sewage treatment plant, you're talking about STP and ETP, right?

Yes, yes, yes.

[indiscernible] treatment.

And the irrigation also we have seen?

Yes.

Okay, okay, okay. And sir, there is one worry that now the oil prices are gradually coming down, so is that something which can impact us, or we are completely hedged for, in terms of oil price movement in our overseas operation?

You mean in terms of order intake or you mean just in terms of our operations and the cost of operations because of the oil price?

Because oil prices, we see impact our overseas growth in a big way in the past. So now it has come down, so is that something which we have to be worried about, or you believe that we are kind of hedged regarding oil prices?

I think, overseas, we have, of course, diversified away from oil, especially after we had some of these difficult years in '15, '16, '17 in our main company, SPP. So I mean, we don't see that such an issue at the moment. But that said, I mean, the number of projects continue to be quite large in the international markets in terms of inquiries. So at the moment, we are not yet seeing a slowdown. But I mean, you never know where it goes. But as it stands today, there are still quite a number of inquiries in the market at the current prices.

And overseas PAT, this quarter, when we -- when you see there is a profit booking from the subsidiaries book improved, which portion of that business has been profitable? And where do you see some more challenges in the overseas PAT?

I think as we've shown, almost every company is profitable. And our Dutch company in the first quarter is breakeven. And I'm saying this in the context after adjusting for the ForEx losses, because in our U.K. company, all the ForEx is hedged. So it's only a mark-to-market loss. But if I talk about operationally, and I think the presentation has the numbers both with and without the ForEx impact. And I'm just talking -- since I'm talking operationally, I will just highlight operationally, that the U.K. company and most of the other subsidiaries are looking a lot better. We continue to have challenges in the Dutch company, which is just at breakeven, and even that after a lot of effort. So I mean that's the area where we'll continue to have some trouble. The other companies, we're slowly seeing the mix improving, and the order book, as I mentioned earlier, is quite strong. So that should -- we expect that should ensure that they are in a better position going forward.

[Operator Instructions] The next question is from the line of Devansh Nigotia from SIMPL.

After the fall in price for raw material, for B2C pumps, how will the trade channel reacting to it? I mean, are we retaining some kind of the volume in raw materials? Or how is that interplaying?

Are you asking about the impact of a price increase on the channel?

Yes. Even on the demand outlook and even for the gross margins on standard pumps, considering after June, the raw material price corrected. So are we passing on the prices to the trade channel? Or are we holding up, and there might be some improvement in gross margin?

So we have not done any price increase as far as our pumps are concerned. So -- and there has been no reduction. So -- and the channel has been taking it quite well. So we've not had that issue as of now.

Okay. And if you can just give an outlook on residential pumps as well as water energy pumps?

Yes. So this covers residential, industrial as well as agriculture.

From the small pumps business.

From the small pumps business.

If you are asking about the building and construction side, which is our small and medium pump businesses, I think the order book has increased over there, and we are seeing a good growth in that part of the business.

Investor release under building and construction and under industry, those are our -- like mentioned, our medium-sized industrial products, which are categorized as industry and building construction. And we can see a change in the order book from last year to this year in the investor release.

Okay. So even residential pump which are B2C and sold through channels, we classify them here.

No, no, no. Only the B2B pumps that are sold to the developers and that go for firefighting or for the big booster packages or HVAC packages come under building construction.

Okay, okay. And if you look at the order flow overall for the company, so that has kind of stagnated. So if you can just share your perspective on the demand outlook for ex B2C pumps, how the demand scenario is there currently.

Which business are you talking about right now?

So PRPL standalone, if I look at the order received 524, to 620 or 721, and kind of the order flow was slightly weaker this quarter. So...

I think the orders you see are excluding the retail business.

They're not B2C.

Yes. There is no B2C orders in that. I think it was mentioned earlier, the way their market has increased. But in these businesses, I mean, you probably want to compare 524 to 596. And within that, I think someone earlier had asked the question about water and those government projects. As you know, those are a little longer gestation. But generally speaking, I mean, the market is quite buoyant at the moment. And at least in the private sector, you can see in terms of industry, which has broken up to you, building construction, the market seems to be quite a lot stronger than it was last year's first quarter. And in fact, it is stronger than Q4 also. If you see in the industry or building construction, and of course, even in the case of power for us. I guess the shortfall is coming in the -- on the government side, which is normally indication of water project. And as someone mentioned earlier, there's just a lot of them have been floated with the EPC right now. So hopefully, there will be -- EPC will be tendering very soon for other components like pumps.

The next question is from the line of Sanjay Kumar from ithoughtpms.

Just an expansion to the one of the previous questions. So let me make it more pointed. So BMC gave out almost INR 26,000 crore, INR 28,000 crores of orders to EPC players for all the 7 STP plants. Roughly, say, 100 MLD sewage treatment plants will cost say INR 1,000 crores, what would be the share of pumps in that package? And these EPC players wouldn't have now bid for it without inquire -- making inquiries for pumps, right? So are we -- it's not in the order book, it's not reflecting in the order book. Are we actually seeing inquiries from these EPC players who won these orders?

So we are one of the biggest players in the ETP, WTP and STP area. We are getting inquiries. But the question that you asked, I have answered many times earlier. In any large project, the pump tends to be between 1 to 1.5 percentage value of the total value. Talking about INR 1,000 crore project, you will understand -- I'm sure you know that there will be piping, there will be civil construction. And it depends on how big the job is, from where they're taking the water and how fast they're taking it away. The electromechanical, which includes the electricals and the switch gear and everything else, if you add that to the pumps, it would be about 2%. So INR 1,000 crore order or could be INR 20 crore or -- for pump -- for electromechanical, it would be INR 20 crore to INR 25 crore. And for pumps, maybe between INR 10 crores to INR 15 crores.

And for valves will also be a similar figure?

Valves will also be in that electro -- sorry, in the mechanical part.

Okay. Okay. Good, got it. And a second question is more technical. I know we are into centrifugal pumps. Say if there's a CapEx cycle where it -- CapEx picking up, or more and more oil wells and things are being drilled, would a positive displacement pump see more demand rather than a centrifugal pump? I just wanted to understand from a technical perspective.

Historically, there's 2 types of pumps, centrifugal pumps and the positive displacement pumps. So positive displacement is your gear pump, system pumps, very high pressure pump. The total market for pumps, as has been defined by the European -- what do we call -- EIF, industry product, they say that the total pump market is $66 billion globally. And the -- and this is -- I mean, I have been watching this growth of about 23. That's quite old now. But historically and even now, it is on hold, positive displacement pump and centrifugal pumps. So centrifugal pumps today would be $44 billion, $45 billion out of the $66 billion.

Okay. Are we looking at any kind of acquisitions for positive displacement pumps to get into that market, or we'll continue to stay away?

I cannot share anything like that, if we have it or if we don't have. Sorry.

I'm sorry?

I can't give you this kind of information, if we have it or even if we don't have it.

Okay. Okay. Okay. Fair enough. And third, so we do have a JV with Ebara. And do we share technology or get technology from them? Because I was going through their annual reports, and they're already talking about pumps for delivering hydrogen. So anything on that regard? Are we working on it? Or anything on the pipeline down the line? I mean it's not an immediate thing. Just a long-term perspective will be helpful.