Kirloskar Brothers Limited (500241) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Kirloskar Brothers Limited Q3 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. On behalf of Kirloskar Brothers Limited, I extend a very warm welcome to everyone for joining us on this call today. I'm sure you've had an opportunity to go through the financial results, which have been uploaded on the stock exchanges and on the company's website. You must have seen the numbers, stand-alone as well as consolidated as well as the order book. So I thought I would ask Alok and Rama to speak more about the international and domestic businesses, following which Mr. Mate will make a short presentation. Thank you. Of course, I'll be available for the question-and-answer session. Alok?

Thank you. The overseas operations had reported a good performance in Q3 FY '23, healthy revenue growth as well as improvement in operating profit margin. The company's Thai, U.K. [indiscernible] business has shown resilience over the last few months amid multiple uncertainties and in fact, has gone from strength to strength. But that business too is at inflection point, and we are expecting the business to do better after the changes that we've made over the last year. The company's focused efforts in developed markets in water, fire and industrial and services has helped it get more regular business rather than be dependent on large product jobs coming from oil and gas. That said, there's been an uptick in the oil and gas market and more new orders have been booked in the sector compared to the last few years. That said, those orders are not reflected in the sales as yet. We expect those orders reflecting in our order book will come into sales over the next few quarters. There have not been any major high-value product sales in the year-to-date sales of the international companies. It's mostly been regular daily business. The company's framework services business has picked up pace and is witnessing increased adaptation by the customers. The South African business has signed major framework contracts for services in the power and mining sectors. The Thai business has signed services in the steel and offshore oil and gas sector. The British business has continued and signed on more companies in chemicals, water and oil and gas space. The company is able to -- is well positioned and is able to build up this business going forward. The order book position just from a point of interest for KBI B.V. company's opening in January 1st, 2022, was about GBP 52 million. And the opening order book position on 1 January, 2023, is about GBP 84 million. There are new projects coming up in the pipeline. And as we have focused on developing standard business or regular business, we are now pushing our dewatering autoprime products so that we can further build another layer of base business in the company, which will help give consistent performance. With this, let me invite Miss Rama Kirloskar, Joint MD, KBL and MD, KEBL to take you through the performance of domestic companies.

Thank you, Alok. On the domestic operations side, we see an improving demand for our made-to-order and engineered-to-order products. The market is also picking up for our retail segment. We continue to invest in modernization and productivity improvements at our plants in [indiscernible], Sanand and Kaniyur. We expect to reduce lead times for delivery through such productivity improvements and ensure no sales losses. We have launched many new products, including numerous energy-efficient pumps and we'll continue to do so in the subsequent quarters. We continue to be the only player in the retail segment with IE4 and IE5 motors, which are the most efficient motors available in the market. Most of our retail competitors offer IE2 motors at most. As all of you are aware, the company's recently launched APOEM program aimed towards reducing our turnaround time continues to gain momentum from the dealers and distributors. We expect this program to propel growth going forward. The government, in the recently announced budget, has focused on increased capital expenditure, which augurs well for the company's products in the agriculture, water and oil and gas sectors. We firmly believe that with the sharp uptick in the government and public CapEx, the growth of the private sector CapEx will follow. Major private expense -- capital expenditure is expected towards data center, healthcare, energy and industrials. The company is putting extra efforts to reinforce the presence and expand its product offering for these sunrise sectors. The growth in public and private CapEx cycle is expected to aid the growth for the domestic business. Now coming to the domestic subsidiaries, Karad Projects and Motors Limited continued its healthy growth pace. KPMLs revenue grew by 11% while PBT grew by 6% in 9 months FY '23. The company is well on track to turn around the Kolhapur Steel Limited, which is witnessing a sharp growth in revenue as well as production. With this, let me invite Mr. Chittaranjan Mate, our CFO, for the financial performance highlights.

Good afternoon. Thank you, Rama. Before I share my views on the financial performance of the company, please note that during Q3 FY '23, one order of the company has crossed threshold for recognition of revenue as per rules that follows consistently. Consequently, there is a favorable impact of INR 31 crores on profit before tax during the quarter and 9 months ended on 31 December 2022. Let me start with consolidated financial performance highlights, starting with Q3 FY '23. The top line grew by 23% year-on-year to INR 957.5 crores. EBITDA grew by 160% year-on-year to INR 153 crore, while EBITDA margin expanded by 787 bps to 16%. Profit after tax grew considerably by 308% year-on-year to INR 88.9 crores. EBITDA without the impact of revenue recognition [ referred amount of INR 31 ] crores would have been INR 122.1 crores. That is 12.8% margin [ as compared to ] 8.1% of previous year and a growth of 107% in value terms on year-on-year basis. Now coming to 9 months financial performance, top line grew by 24% year-on-year to INR 2,606 crores. EBITDA grew by 91% year-on-year to INR 268.1 crores. EBITDA margin improved 362 basis points to 10.3%. Profit after tax grew by 240% year-on-year to INR 135.1 crores. EBITDA without the impact of revenue recognition referred amount of INR 31.3 crores would have been INR 236 crores, that is 9.1% margin as compared to 6.7% margin in previous year, and it's a growth of 69% in value terms year-on-year basis. Now coming to standalone performance. Q3 FY '23 revenue stood at INR 611.9 crores as compared to INR 521 crores, a growth of 17% year-on-year. This contributed approximately 60% to consolidated turnover. EBITDA was at INR 79 crores, a growth of 115% year-on-year, while EBITDA margin expanded by 584 basis points to 12.9%. PAT for Q3 stood at INR 44.6 crores, which is a growth of 148% year-on-year. And on 9 months performance, revenue stood at INR 1,745.9 crores as compared to INR 1,403.1 crores, which is a growth of 24% year-on-year. This contributed approximately 67% to the consolidated revenue. EBITDA was at INR 156.9 crores, a growth of 65% year-on-year. EBITDA margin stood expanded by [ 290 ] bps to 9%. PAT for 9 months FY '23 stood at INR 73 crores, which is a growth of 79% year-on-year. This is all from our side. We can now begin question-and-answer session. Thank you.

[Operator Instructions] The first question is from the line of Mahesh Bendre from LIC Mutual Fund.

Very impressive performance. Sir, one clarification is that we said that we have received INR 31 crores of benefit at PBT level because of threshold level in one of the projects we achieved. Is this happened in domestic business or its international business?

It's a special order for domestic business.

Okay. Okay. Sure, sure. And sir, the margins have been very significantly gone up. I mean -- so what could be normalized margin one could see from both domestic and operating -- export side?

I think we have consistently maintained that since all the investors felt that margins could be improved, we've said that we feel margins will rise consistently over a period of time. It's all the efforts that has been put in by the entire team that's resulting in this performance.

Because, sir, operating performance for even international business, our margins are -- operating margins are showing around 21%. So I'm just trying to understand, is there any one-off item in the international business as well?

No, there's not been any one-off item. I mentioned that when I was speaking, that it's just the main daily business. The service business continues to creep up and become a larger share of the overall portfolio. And I think the main difference is that the other businesses have helped the business cross breakeven. I think in the past, someone had asked me this question that there's so much service business, but why is it not coming to the surface. It's maybe because at that time, the service business was compensating for all the regular business, which were not performing as well. But as the regular business, which is our baseline business, starts getting over to breakeven, then we get that effect in the business in general.

So these margins are sustainable going forward?

You're asking in the context of international or domestic?

International.

Yes. I mean the margins, you have to also see that what you're seeing is 9-month margins, they don't exclude -- they exclude our first quarter. And for the international business, the third quarter of KBL, which is the quarter that just passed, is their last quarter. And then the [ first quarter is a first quarter ]. So I mean, I would look at it from an annualized point of view rather than just a 9-month point of view. That's what I would say to you.

Okay. And last question that you mentioned that at the beginning of the last year, we had an order book for international business of around GBP 52 million, and now it has gone to GBP 88 million. So do you think the execution will be very strong over the next 3 to 4 quarters?

I mean, yes, I mean, like I mentioned, we opened at GBP 52 million, which roughly translates into INR 520 crores last year. And this year, the opening order book is about GBP 84 million, which roughly translates into INR 840 crores. So yes, I mean, definitely there is more pressure for them to deliver. And there will be some -- hopefully some in and out business as well.

The next question is from the line of Renjith Sivaram from Mahindra Manulife Mutual Fund.

Sir, congrats on good set of numbers. Sir, if I look at your -- this threshold to these cost associated...

Sorry to interrupt you, Mr. Sivaram, the audio is unclear from your line. Please use your handset.

Yes, I'm using handset only, is it audible now? Hello?

Yes, sir.

Yes. So in this INR 31 crores additional which we have told, this cost till the threshold will be booked in the previous quarters, and now we are booking the profit? That's how it works, right, as per the accounting standard?

Yes. As per the accounting standard, when the percentage of completion exceeds the 25% of whatever is set by the company, that time, we book a pro rata income also. Earlier only cost was booked, cost at equal amount of revenue.

Okay. So in the previous first quarter and second quarter, the corresponding cost was booked and this quarter the margins are also booked, right?

Yes.

So how much...

As well as the pro rata margins would be booked in subsequent quarters.

Okay. And how much the spending was? What percentage of this is over?

No, that we cannot disclose because it is as disclosing margin on that margin percent on that quarter.

Okay. But this is a one-off quarter, no, like it won't repeat, right?

Yes, we believe it's a one-off quarter.

Okay. And sir, one more thing which I noticed in your presentation is that, the standalone order intake is showing a INR 485 crores compared to INR 814 crore last quarter and INR 624 crores last year same quarter. So why is that reduction in order intake?

If you see the trend, last year, Q3 was INR 624 crores, then it went to INR 721 crore, and came down to INR 596 crore, again INR 814 crore, basically part of our business is against made to stock, so their order booking is not there. And there it is made to stock -- sorry, made to order an engineered firm, it depends on the -- based on order finalization by the customer. Inquiries would be there, but the time which they take for finalizing, accordingly, there will be ups and downs quarter-on-quarter.

So it's -- I should read me it more as a timing issue and probably structurally this will come back in the fourth quarter? Is that right?

Yes. What we have given is funnel, order funnel and like Mr. Mate said, it depends on when the customers finalize.

Okay. So probably, it might come back in the next quarter? Is that reading right in our understanding?

Yes and no, sir.

Okay. And sir, is there any ForEx impact in your international margins in this quarter? How much was that, if you can quantify?

Yes, I think there's a ForEx impact in the 9 months, and we have recovered some of that impact -- or will be, I think, 20% of that impact will be recovered in the third -- in this quarter -- in the third quarter. But year-to-date, what the 9 months, there is still quite a significant ForEx impact.

Okay. So how much was that impact for the 9 months?

Approximately INR 25 crores.

So INR 25 crores of your 9 month profit in the overseas subsidiaries is kind of impacted -- hello?

As per accounting standard, they are loss booked under the head ForEx loss was INR 25 crores. But while expecting the goods and realizing, we got some benefit of increased sales realization. So I won't say the entire INR 25 crores was the ForEx loss. Part of it was already recovered through increased revenues.

Okay. So for this quarter, there was a recovery in this ForEx this quarter Q3 FY '23?

Yes.

How much was that?

Roughly INR 10 crores.

Okay. So roughly INR 10 crores is the kind of gains that we got in this quarter. But despite that, your margins are looking healthy. That means structurally you believe that the things are falling in place?

Yes.

Yes.

Okay. Okay. That's good to hear. And in terms of this irrigation projects, we are hearing a lot of announcement that at least from the government and from some of the large companies like M&T, so in that market, like what is your overall monthly earning? Seeing good order finalization happening and because we have a good product, are we still able to maintain your market share there? What's your overall thoughts in this irrigation market?

Whether it's irrigation, water supply or power, as we have explained earlier, out of the total number, the amount that is announced by the government, roughly 1% to 1.5% is what is the pump content in any large project. And we remain the preferred supplier of choice as far as large players in this market are concerned. And I think I've also explained that we take the orders on our terms, which is advance and nature of credit. So even then we supply on a monthly basis 10-plus large pumps, and large we define as more than 1 megawatt to 1.5 megawatts.

Okay. Great. And sir, lastly on the small pumps business, what's your overall feel in terms of the market? Are you seeing good demand and do you believe that the trend will continue in the small pumps? And anything on the pricing you can share like, pricing, have you taken any pricing action and market share?

Yes. I'll answer that question. So we -- the market is picking up as far as the retail segment is concerned. We have not increased our prices and we don't foresee any price increase as of now. But we do see that there is a lot of healthy booking from customers. So that should not be a problem going forward.

Okay. And what will be your utilization there in small pumps?

It would be anywhere between 65% to 70% utilization.

And how much of an increase in that has happened over the last 1 year?

How much of an increase in...

Utilization of your small pumps?

No, I think it's gone from around 55% to 70%.

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

Sir, first question, again on international. Being after a gap of 2 years, we're seeing the margins that we are in profitability. Alok, if you can just throw more like -- and is this just a quarter 3 phenomenon? Or how should we read into these numbers?

Pratik, I would look at the 9-month number, and also, as you know, generally, and I'm not making a forward-looking statement here, but generally, the first quarter in any company tends to be a little slower. And what you're looking at, and I'll not look at the Q3 number at all in here, I'd look at the 9 months and then consider what a Q1 would be like. So that's really how I look at the numbers, if you want to look at the international holistically. And -- but I would say that the main -- like we've said earlier, there's no medium job that's gone through. In fact, just to put it in context, SPP as an example, used to do GBP 25 million just in oil and gas revenue in its peak days, back in 2013, 2014. At its lowest we did GBP 4.5 million. Last year, we did GBP 7 million. So we're actually closer to the lower end than to the higher end. So from that point of view, I would say that it's basically all the other businesses that like we've been saying, we're trying to develop and stabilize the baseline of the business, and that's really what's really kicking in. Our services business anyway had picked up, and we were touching 35% to 40%. But the services business in a way was cross subsidizing all the other businesses. So now that I think most of them are back over break-even, you get that effect that you see in the numbers. And I think it's actually more visible in our South Africa business, where they are at 50% service business.

Fair enough. Sir, just one clarification on this project. You mentioned that it has crossed 25% completion against your book. So this would be, I mean, recurring in the future also, right? Or this was one-off and this is done?

Pratik, let me clarify. This is not a turnkey project, the way we were undertaking earlier. This is our order development, order with long delivery period. So as per accounting standard, we follow POC. And yes, in subsequent quarters, there would be impact, but it won't be in such a mix and amounts of 25% and like that, because it would be a slowing impact.

Okay. Sir, any light that you'd like to through, what kind of development order is this for whom, the customers, the use?

We cannot disclose.

Okay. Fair enough. And sir, last question on the stand-alone part. I mean, are we seeing -- I mean, we spoke about the cyclicality in terms of orders that we get. But in terms of decision-making, the confidence on ground, any color you would like to throw on that?

So I believe that these things happen year-on-year. There's nothing adverse that we are seeing.

The next question is from the line of Vikram Rawat from East Lane Capital.

Sir, 2, 3 questions from my side. One thing is on the overseas side, the margins which you are now saying on a sustainable basis would be around 9%, which comes on a 9-month basis for our future? Is that the correct one?

I think what I just said earlier was that you're seeing it on a 9-month basis. And effectively, in these numbers, the first quarter of KBI BV is not included. I've just mentioned that, traditionally first quarters are not always the strongest quarter for most company. I'm not making it at any forward-looking statement on that. But I think we should factor that in when we look at general margin for rather than just looking at second, third and fourth quarter of the company.

Okay. So probably, it will be somewhere between the 5% to 7%. Is that the correct assumption -- at the end of first quarter?

Yes. I mean it's our -- like, I don't want to make a prediction about it.

Okay. Because we don't have the fourth quarter -- your last year first quarter number calendar year, okay. And second, on the domestic side, can you just highlight the -- what is the inquiry pipeline on MTO and ETO and what was it in last year? Hello? Hello?

Ladies and gentlemen, the line for the management has got disconnected, request you all to please stay online while we reconnect them. Thank you. Ladies and gentlemen, the line for the management is reconnected. Thank you, and over to you. Mr. Rawat, please repeat your question.

Mr. Rawat, sorry, I was answering your question. And I think all I was saying is that, one should consider it from a 12-month point of view.

Sure. Another question on the domestic side. So can you just highlight what is the inquiry pipeline on an MTO and ETO order side currently outstanding? And what was it 1 year back?

You want to know the inquiry pipeline?

Yes.

We don't have the numbers yet.

Okay, got you. And can you just also highlight how is the working capital and the cash position or net cash position in the book on net debt?

On the domestic side, I would say that we are cash positive.

The next question is from the line of Manish Goel from ThinkWise Wealth Management. Mr. Goel, Your line is in talk mode, please go ahead with your question. Mr. Goel, please unmute your line from your side if muted. As there is no response from the current participant, we'll move on to the next question from the line of Himanshu Upadhyay from o3 Capital.

Congratulations on good set of numbers. Am I audible?

Yes.

See, I had 2 questions, okay. The first was, after a very long period of time, we are seeing the CapEx cycle recover, okay? And last time was 2002 to 2010, okay? How different is this cycle versus the previous one? And is the intensity of competition similar or you think the intensity of competition is less or more? And scope to increase the pricing, especially on the industrial side of the business, can you give some of your thoughts of current cycle versus historical, how it has been?

I think the capital -- CapEx cycle is quite strong in certain parts of the business, whether it's steel industry or industry building and construction. I think in all these areas we see a very strong -- I mean people are coming towards asking for products, et cetera. And what was the other question? -- Price rise. Price rise, actually, we are doing consistently over the last year. And luckily, I think the commodity prices are softening. So we've been able to hold on to our prices. And the third question was about competition. I think competition is still there. I mean there's no -- there are many more players who have come in that will be coming in from outside, but setting up inside India and competing with us. That is not an issue.

Okay. And the second thing is on the order book accretion in the domestic market, the type of accretion we are seeing for other capital goods, let's say, a boiler turbines, we are not seeing that much in our case, okay. Even when we look at our foreign subsidiaries, like Alok mentioned, there has been a 60% growth in KBI, these book in last 1 year, okay, opening order book, so which was INR 600 crores, what I see is currently INR 900 crores consol minus standalone. The standalone, the accretion is much lesser, okay, it has grown by 10%. So -- what am I missing? Because what we are seeing is pretty strong growth in order books across the place. But -- and even in our own outside India book, it is pretty strong, but on the stand-alone entity, it is not showing that much traction and accumulated book. Where are we missing something or can you give some light on it?

No, I think, number one is the question of timing. Number 2, I think you're looking at just 1 quarter. Don't look at it quarter-to-quarter, is all I can tell you.

No. See, I'm not talking about quarters, but let's say, Q3 FY '22 versus Q3 FY '23, the cumulative order book growth on the standalone is 10%, okay? And if I look at our consol minus standalone, that INR 600 crores has come to something like INR 900 crores, okay? In 1 year, what we have seen is accumulation is much stronger. But on standalone, we are not seeing, okay, and this is similar in other companies also where we are seeing 30%, 40% order book growth and our cumulative order book growth is some 10%. That was the way I was looking at it.

Well, let's look at next quarter what happens.