Kirloskar Brothers Limited (500241) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to Kirloskar Brothers Limited Q4 FY '24 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 the 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 of Kirloskar Brothers Limited. Thank you, and over to you, Mr. Kirloskar. Ladies and gentlemen please stay connected. Ladies and gentlemen thank you for your patience. Sir, you may go ahead with the opening remarks.

Good afternoon, everyone. On behalf of Kirloskar Brothers Limited, I extend a very warm welcome to all who are joining us on this call today. I hope you've had an opportunity to go through our financial results and investor presentation, which has been uploaded on the stock exchanges and on the company's website. On this call with me, I have Mr. Alok Kirloskar, Managing Director of Kirloskar Brothers International BV; Ms. Rama Kirloskar, Joint Manager Director KBL and MD Kirloskar Ebara Pumps Limited. Mr. Chittaranjan Mate, Senior Vice President of Finance; Mr. Ravish Mittal, our new CFO; Mr. Devang Trivedi, our company's Secretary and Strategic Growth Advisors, our Investor Relations advisers. Before I start my comments, I'd like to brief you about a few developments at Kirloskar Brothers. To start with, I'm pleased to inform you that the Board of Directors has recommended a final dividend for the year, of INR 6 per equity share of fair value of -- face valued INR 2, which is about 300% of face value. We are also pleased to inform you that based on recommendations of the Nominations and Remuneration Committee and consideration of the Board of Directors of the company, Mr. Ravish Mittal has been appointed as CFO of the company with effect from today. Mr. Mittal is a qualified chartered accountant and has completed Executive Education from IIM Bangalore. He's a fellow member of the Institute of Directors, India and London. He has work experience of over 28 years in the field of finance, strategic evaluation, risk analysis, treasury and ForEx management, and Investor Relations among other things. He has been working with Kirloskar Brothers Limited since July last year as Vice President Finance. I'd also like to place on record my sincere appreciation for the excellent work done by Mr. [ Mate ] in his role as CFO. He's been a strong pillar of our organization and has played an important role in taking KBL to where it has reached today. I would take this opportunity to thank him on behalf of everyone, including the Board of Directors, for his dedication and service to Kirloskar Brothers Limited. He will continue as senior management employee with the company as Senior Vice President Finance. Talking about our Q4 and FY '24 performance, let me begin with domestic business. For Q4, we achieved year-on-year growth of 13.3% to INR 899.7 crores and a growth of 7.1% for fiscal year '24 to INR 2720 crores for the full year. This is a result of the sustained demand that we have received for our Make to Order and Engineered to Order products. Additionally, there has been a notable increase in Made to Stock orders, which has contributed to our overall growth trajectory. With a keen focus on our business prospects, supported by a robust order book, we are optimistic regarding our future growth prospects. We expect to achieve double-digit revenue growth in FY '25 compared to FY '24 in our domestic business. As of March '24, the value of our stand-alone pending orders stands at INR 1,826 crores. We are experiencing a sequential uptick in the Marine & Defense, Building & Construction and Industry segments. Our international business has made substantial investments in services which is a high-margin business and is evident in the numerous framework contracts currently active across all our subsidiaries worldwide. For fiscal year '24. I'm pleased to share that our key subsidiaries, SPP U.K. and SPP U.S.A. reported growth of 10.2% and 18.1%, respectively. We expect the international business to show respectable growth in fiscal year '25 compared to fiscal year '24. This is on the back of our sustained efforts to innovate new products and expand in new geographies, along with increasing market share in existing products. Our consolidated pending order board stands at INR 2,999 crores. With this, let me invite Mr. Ravish Mittal, our CFO, to discuss the financial performance highlights.

Thank you, CMD sir, for the warm welcome. Good afternoon, everyone. Let me share the consolidated financial performance highlights with everyone present in the meeting. So our net revenue from operations in quarter 4 of fiscal year '24 grew by 9%, which is year-on-year to INR 1,224 crores. And our net revenue from operations for the full fiscal year of '24 grew by 7%. And I'm very happy to announce that we have crossed the INR 4,000 crore mark. So we have reached to INR 4,001 crores for the fiscal year '24. On the EBITDA front, our quarter 4 EBITDA grew by 44% on a year-to-year basis to INR 228 crores. And our EBITDA margin for quarter 4 also grew from 14.1% to 18.6%, which is nearly 450 basis points growth. And our EBITDA for the full fiscal year of '24 grew by 36% year-on-year to INR 578 crores. And the overall EBITDA margin for the full fiscal year of '24 grew from 11.4% of last year to 14.5% this year, which is nearly 310 basis points growth. When it comes to profit after tax, our PAT for the quarter 4 grew by 52%, which is to INR 153 crores and our PAT margin for FY '24 fiscal year grew by 48% to INR 350 crores, which is nearly 350 basis points rise compared to the last year. This is the key highlight results from our side. And we can now begin the question-answer session. Thank you everyone.

[Operator Instructions] First question is from the line of Sunil Kothari from Unique PMS.

Sanjay, congratulations for you and your team for such a remarkable performance. The way you were explaining in the past about improvement in profitability, removing low revenue or maybe lower margin businesses, which is clearly now reflecting in the performance. So my congratulations again. Sir, my question is on this -- I think your opening remarks, gave us some hint about growth also, which is we were actually always for revenue growth. So hopefully, we'll start at KBL and Karad Projects and Motors also, because we have grown substantially during quarter 4. So if you talk a little bit, you're not giving any numbers qualitatively, what is announcing this growth numbers at KBL stand-alone and Karad Projects and Motors limited. That's my first question.

To answer your first question, from Kirloskar, while as we have mentioned earlier, we made some investments in consolidation of our stores. So we are working on a project there [indiscernible] and that store recently came online in end of Q3. [indiscernible] will be able to enhance the sales and the turnover from that plant in that last quarter essentially because of operational efficiency. And that should be -- essentially, that would be a sustainable growth, which we should see in the future as well.

Great. Yes. Well, so we talk about some -- on the Slide #38, debottlenecking and cost optimization on across subsidiaries. So would you comment on this -- how this debottlenecking will help us to enhance our capability and capacity? What type of -- I don't know, you will not like to give a number, but this debottlenecking will be enough for next 2, 3 years, growth, whatever we are planning? What type of cost optimization here is possible? If qualitatively, you talk more would be really helpful.

Yes. If you talk about debottlenecking, we've done -- over the years, we've invested in various types of machinery. And whenever all of you have asked about what is the CapEx, we say that basically, we are going to modernize and we are also going to debottleneck. And what has happened over the years has been that as our engineers have worked on various machines individually, on individual machines, the capabilities and capacities of those machines have grown, but they may not have grown in the right -- in a balanced way in the sense that the first machine for example, might do 100, the second one might do 120, the third one might do 80. So in that manner, we amongst a few machines, then we would like to see what is the highest capability of the machine in that line and then ensure that all the machines go towards that number. Now something like this has been done in our small pumps business that we -- and all the lines have been -- we look at what we call unit flow where there's very little inventory between stations or between machines. And that is what now we are trying to do to ensure that look at each and every line in Kirloskarvadi and ensure that the line, all the machines have a balanced capacity at the highest number. And that doesn't necessarily involve -- it might, in some cases, involve getting the machine, but in other cases, it might be ensuring that some operations from one machine are moved to [indiscernible] or things like that or [indiscernible] ensuring that each machine is operational all the time. Sometimes, we may need to keep some machines on another shift. As we've told you earlier, we work in 2 shifts, but sometimes now we may need to operate some machines from [indiscernible]. So these are the activities which we believe will in addition to buying new machines, as per the CapEx plan, will improve the situation. Also, like Rama has also mentioned that we have put up the mega store. Similarly, last year, as you are aware, we also put up the high pressure molding line for the small pumps business. So over the period of time, we are truly but surely increasing the capability of our factories to produce in greater numbers. But at the same time, looking at how much we put in CapEx year-on-year. I hope that answers your question.

Mr. Kothari your question about KPML. Essentially, the last quarter, we did see a lot more demand from our small pump business. And as you know, KPML supplies our small pump sector with all the [ motors ]. So that's one of the reasons why the production numbers and the dispatch numbers of KPML were enhanced in the last quarter because these motors were essentially sold to KBL.

Sunil I'll request you to come back for a follow-up question. [Operator Instructions] Next question is from the line of Renjith Sivaram from Mahindra Manulife Mutual Fund.

Congrats on a great set of numbers [indiscernible].

We can't hear Mr Sivaram.

Hello, is it better now?

Yes. Yes.

Yes. Congrats on great set of numbers. Just wanted to understand the stand-alone EBITDA margins have been very good. So is there any one-time impact on these margins?

No, there is no one-time impact because when we have one-time impact like we did, I think in the third quarter of last year, we had reported it. And there is no exceptional item this year. I think throughout the year, there is no exception.

Like the kind of sustainable -- kind of say, margins or you believe that there are certain orders which had helped us to show this kind of margins?

This is basically what we are seeing is improved operational efficiency. The product mix improvement has also been there. And since you are one person who always ask me, there is no nuclear business from us in this year.

Okay, because this is why I understand you wanted to -- whether these kind of margins are sustainable margins, whether it's kind of -- like was there any special specific order, which we had executed, that's what I was trying to understand.

If you look at the company's performance historically, the highest sales and the margins are in the quarter 4. So we expect that the company's performance will continue to improve, but you should look at what has been happening quarter-on-quarter for the last few years. So I don't think it will follow any different trends.

Okay. That's great to know answer. Regarding the overseas business, do you -- what's the overall outlook that you foresee, is there any headwind or any tailwinds. So how do you -- how should we read that?

Sivaram, I think the consolidated backlog is there with you along with the domestic backlog separately. So you can see the backlog position of the overseas business. Usually, we have -- we usually assume between January and July for book and bill business because business that we will book in the same year. And the business, as you will see, has gone up, the backlog position -- order book backlog position. So I think that from a visibility side, it will give you a picture of where the business is headed. Do you have any other specific questions. I mean there's always changes, as you know, with the number of wars going on right now. There are always a variety of changes happening in the market. But that is -- there is some visibility, which is positive.

So in the overseas, we hear that there's a lot more investment that can happen in the oil and gas space. So are you also update on that prospect or you don't see any major change in that?

I think Mr. Sivaram, I've mentioned to you before also, I think when we spoke the first time that in 2014, about 65% of our international business came from oil and gas. Last year, new products contributed -- new products in oil and gas contributed, I think, under 7% or 8%. So we've made effort towards being and targeting green applications, non-oil and gas applications. And at the same time, as you appreciate because you would be tracking many companies in the petrochemical space. Petrochemical margins tend to be higher. And so given that we were growing the other businesses, we've also looked to see how to bring margins to the same level in the other businesses, which slowly is coming to creation. But that said, we haven't exited the petrochemical sector. We are still strong there, we have known there, our brand is strong there. And as you would be aware, there are many floating LNG projects as well as LNG projects going on, and we continue to get a good fair share of the inquiries and we are still booking a good number of orders in that sector going forward.

[Operator Instructions] Next question is from the line of Manish Goyal from Thinqwise Wealth Managers.

Very happy congratulations on strong performance really appreciable. Sir, a couple of questions. One on the -- continuing on the previous question on the margin front. So -- and maybe if you can give us a perspective that we were implementing APOEM model. And so how has been the adoption of that with the dealers and -- how is it also helping us on the margins improvement, balance sheet improvement? And where does this get reflected in terms of our Stock to Order, Make to Order? How has it been helping -- changing in the breakup what we did in our revenue? That was the first question. And on the second question. So Mr. Sanjay Kirloskar did mention that international sales will look better in FY '25. So -- but FY '24 was quite weak in terms of growth rate. It has grown 6% for the full year and for the Q4, the sales were down 18%. So is it that some of the large orders which were getting delayed are still not delivered, what is the [indiscernible] of such orders. And even the order inflow has been weak in the current quarter. So maybe if you can give us perspective on international business? So these are the 2 questions. And then I have a follow-up in terms of what is the exports from India, direct exports from India and how is it growing? And what is the services and aftermarket revenue component in stand-alone and consolidated business? And -- how our digital initiatives helping with our aftermarket and services business to grow? Thank you so much.

Mr. Goyal thank you for your question. I'll answer the first one, which you asked about APOEM model. I think we've been discussing it. And our first APOEM was put up in 2011. But it's been a journey for us to move forward and get not just the market but also the company in line with what we were envisioning we put up the APOEM concept. I just mentioned it because there will be other people on the call. I know we had other calls before. So you'll probably be a little bit aware of the concept. But the APOEM concept is where we sell the bare pumps, industrial pumps, to our APOEMs who are the large dealers. They have made investments in terms of doing some trimming of impellers. So a little bit of customization as well as testing, which is very important because now they can test these. After doing the customization they can test the pumps locally. We have APOEM in the North, east, West and South. And so...

Sorry to interrupt, we are losing your audio.

Alok, you are not clear.

Manish, the audio is not coming clear at all. I'll request you to join the queue again.

Can you hear now? Or it's still unclear from my side?

Sir, it's still unclear.

Just give me 1 second. I will -- I will see why they can't hear, give me 1 moment.

Yes. Ladies and gentlemen, thank you for your patience, we are on the line for the management to be reconnected. Manish, you can proceed with your question.

I could hear Manish's question. I'll just answer his question. So he asked about APOEM. So before getting into the answer I just thought for the sake of the other participants, I mentioned what the APOEM concept was. I mentioned that we put up the first APOEM in 2011 and it was a little slower in terms of the pickup that we were expecting because the concept of an APOEM was that we would sell him an industrial pump. So this is mainly for industrial pumps, only for industrial pumps. The APOEM would trim the impeller and do the customization and then he would test it because he had also invested in a testing facility. And we have 5 APOEMs in India, north, south, east and west and south zone.

Can you hear us?

Alok we lost you again.

Participants please stay connected while we check connection for the management. Participants, thank you for your patience. We have the line for the management being connected. Sir, you may go ahead.

Okay. Just interrupt me if you can't hear me anymore. I think Manish asked the question about APOEM, which I was trying to answer. But before answering it, I think I need to give the background of an APOEM, so people are clear what an APOEM means. So we started with this concept in 2011. The APOEM was -- the idea was that we could supply an APOEM an industrial pump, because it's mainly for industrial pumps. The APOEM could trim the impeller, he could add the motor or engine and he could test it. So the APOEM also made investments in testing of our equipment. And after that, he could dispatch it. The idea was that he would hold a lot of these pumps in stock, thousands of these pumps in stock and the delivery period would be, for us, quarter, maybe 16 to 20 weeks, would probably be for him -- I mean, right down to a week, sometimes less than a week up to a maximum of 2 weeks. And this is the overall concept. The effect of this is that a lot of the traded items, like the motor, the base plate, the coupling, that are normally fitted on the pump and supplied by us, then which are normally have bought out for us and usually sit in inventory for us, would basically be done by the APOEM. So that would reduce the amount of WIP on our books, reduced the inventory in our books and the APOEM would hold that and he would sell the pump. The other side was that the APOEM would pay us upfront for the pumps as soon as they would dispatch. So it was converted to a cash and carry business on the industrial side. So this is the overall concept. The upside was that we get our pumps in the field, our pumps are stocked in large volumes. They come in large bulk orders to our plant. So what was a Made to Order product becomes a Made to Stock product and so there's better balancing in the plant for this kind of industrial business. Cash comes upfront. So these are the positives. The downside was that, of course, traded items go away. So the revenue number starts coming down because all the traded item goes away. But of course, the upside of trade items going away is that material cost also goes down because you can't make the same amount of margin on traded items as you do on your own product. So that is the concept. We now have 5 APOEMs, they're doing very well. The market has picked up. And on the inside of the organization, also we have understood -- our people have understood that just pushing the topline is not important. Obviously, we want cash flow, we want profitability. We want better material costs and lower inventory. And now that both inside and outside, they are both aligned, we see that over the last 2 years, 3 years, the numbers have gone up very fast. And given that it's also in a way in line with a lot of industrial investments, and we are able to deliver at a very short notice from the APOEMS. These together have seen us -- seem to give us a very good rise in the APOEM. So that is the big positive of APOEM. And it's also allowed like I said earlier, a lot of the MTO, the type of business or Made to Order type of business to become converted into Made to Stock business, which is very important from a plant management point of view. So these are the few points. So does that answer your question, Manish?

Yes. I just wanted to get a sense that how does it reflect in terms of contribution for APOEMs? And where does it get reflected? And where does it get manufactured there?

It gets manufactured in the Kirloskarvadi plant. It gets reflected in Made to Stock. And of course, part of it is in Made to Order but lot of it is in Made to Stock. And what was the third question you asked me?

Sorry to interrupt you, we'll ask Manish to come back for a follow-up question. We can move to the next part of...

Yes. And the other thing I think is reflecting margins to [ lower MSR ratio ], lower material cost. I think the [indiscernible]...

The next question is from the line of Varun Bang from Bandhan Life Insurance.

Thanks for the detailed presentation as always. Just 2, 3 questions. Firstly, how should we look at our journey in diversifying our product portfolio in the international market? And simultaneously, we would also need to develop the aftersales network in the newer markets that we enter. So how should we look at our journey there? And should we be looking at acquisitions to get access to the network as well as customers. So with focus on U.K. and U.S. market, if you can share some details?

So we have -- these are 2 different questions really for us because when we entered the U.S. market is a good way to talk about it. When we entered the U.S. market, obviously, as you'd expect, we were not a known brand. The U.S. has some manufacturers who have been around for 80, 90, 100 years. And they have -- like we have in India, an established dealer network with dealers who've been with them for 2 or 3 generations. And so functioning into that market was very difficult. It's one of the reasons why we decided to go with fire pumps. And fire pumps in the U.S. market was useful because fire pumps, number one, have almost no space requirements. They have no real requirement for service. And why safe is because a lot of the dealers of other products did not want to shift to us because they have a concern that they would lose the historic space of the current principle they had. And so we had a little bit more traction on fire pumps. And we started with various dealers, we were able to move over on fire pumps and get penetration on fire pumps. And that's how we started entering the market, and that's how we enter most markets. We enter them looking at one niche area and once we get strong in that niche, we widen a little bit, and we add a little bit more. So like in the U.S. market, the next step was adding water and pumps for water supply. And so these are the pumps added through our company's [indiscernible]. So establishing that route to market really is extremely important. In the case of SyncroFlo, that was an acquisition that we did, it was done at a very, very low price. But the real objective of that acquisition was to get route to market. So to answer your point, yes, we do look at sometimes acquisition, but mainly to look at route to market because we already have a lot of the products between and SPP and KBL. And so there's not any real need to buy a company for products. But we do need to sometimes look at ways to get into markets. In the international market, we are very niche in different countries. We don't cater to the entire basket that we have. In America, mainly it is water and fire. In the U.K., it's water, fire, oil and gas and chemicals. The other business that we really added in is services. And I think I mentioned that earlier that oil and gas was at one time, 65% of our revenue, and now it's under 7% or 8%. And that's because we've moved into services as a business. Today, we have over 110 framework contracts with companies -- and framework contracts are only contracts we consider a framework if they are for 3 years or 5 years. And here, we manage all the pumps on Petronas platforms or Shell platforms, or BP platforms, they are different kinds of platforms that we've been given the framework. As well as chemicals like INEOS in the U.K. and large water companies. So most of the water companies in the U.K., we have an exclusive framework with except [indiscernible] water, which is non-exclusive. So over time, that's also become a very large share of our business because we're doing this across the world. And through services also, we are able to now install our products by replacing a lot of the competitors products because the service contracts are not just our pumps, they are for all pumps at that time. Does that answer your question? I know that your question had a lot of factors but I tried to see if it's possible to summarize it.

No, that's a very good explanation. Just one more thing on the framework contract. How should we think about the margin profile of the framework contract? And how do we price it and what is the cost to service these contracts? And do we have lower margins initially and then subsequently they move up. If you can just share some perspective on that?

So on average, our framework contracts tend to be about 2x the gross margin of our product business for the international business. And they don't start off low and go high. We usually take over the site and our objective is to look at repair, refurbishment. And now recently, we've added upgradation. So usually, we go in and look at an old pump and we'll look to upgrade the efficiency of that old pump. So if it was operating -- I'm just throwing a number at you, 70%, we'll look to make it 75%, 80%. And then we'll work out a new agreement of what that additional efficiency enhancement should mean to the customer and to us as an additional payment. So I would say that we have a base contract, and that's based on the customer saying that we have so many pumps we make a plan of all those pumps and we said that in year 1, year 2 and year 3, we will make changes to these pumps. So that way, we have predictability and we have predictability for its budgeting product requirements. And so there's a fixed amount. So we have -- the objective for us is really that we need to be able to predict and we need to have visibility on revenues out of services. And obviously, if we know the revenues, we'll have a general idea about the margins. So that is then how they operate. Does that answer your question? Or have I missed out something.

No, I think that answers my question. And just one last question on innovation. If you can share some insights on how we manage innovation, how large is our team and where do we source technology from? So basically, where do we get seeds for innovation and as well as on the digital initiatives, if you can share, how are we able to invite these changes that would be to understand...

[indiscernible]. In fact, we have a group for [indiscernible] where we come out with new ideas, and we get quite a few patents all the time. And this is based on -- whether its just on the product side or whether it is the digital side, I think for the last few years, we've been talking about our KirloSmart device, which is an IoT device. We've talked about augmented reality, virtual reality. We've talked about AI, we've talked about 3D printing. So as a company, as an Indian MNC, we can only take business outside the country, if you are on par with global MNCs, the large competitors that we have based in Europe and America. We launch more than 100 products every year, just in our small pumps business. We've launched a new -- I think in the last time, we said we've launched our DBxe, which is the only pump in the world, I would say. Are you there?

Yes, sir, your audible go ahead.

Yes. We've launched last time, I think we mentioned that we launched the DBxe model of industrial pump and now also for Building & Construction, a new range of in-line pumps. Our [indiscernible] pump actually are the only ones in the world that needs the European MEI norm of 0.7 index, meeting efficiencies with an index of point 0.7. In fact, I heard that one of our European competitors is now going to upgrade a series to be able to match pump. So innovation is the only way we can stay in the same space as our global competitors, and therefore, you can rest assured that we will continue to do this, launch many new products every year and also ensure that we are not lacking in the digital -- on the digital side. Mr. Manish Goyal had one question, I believe why the Q4 revenues internationally came down. I think on that in our presentation, we have mentioned that on Slide 7, basically to say that there were 2 orders -- or 2 places where the sales did not go as we had expected. We are -- I think some engines are to come for some U.K. -- our 2 projects -- 2 large projects of [indiscernible] -- about 7 projects. Engines are to come for about 7 projects, which were expected to go out. And in Thailand, I think large CVP orders or concrete volute pump order -- I think 2 sessions ago -- not the last investor call, on the call before we said that we had received the order for concrete volute pumps for flood control and we were the only one in the world to get a repeat order for the city of Bangkok. Those pumps were delivered, but we were waiting to get a confirmed irrevocable letter of credit from the end customer. So about THB 150 million, we held back from dispatching. That has now happened in April because it took until early April to get the commercial term exactly as we wanted. And therefore, in early April, we made that stay. I think with those 2 items, there is a growth over the quarter, but now it will get reflected, and it would have been reflected in the last quarter, now it will get reflected in the first quarter.

Next question is from the line of Akshay from Axis Securities.

Sir, my first question is on the key -- on the raw material prices. We have seen that -- so in the last quarter, it was softened. So how do we see that in FY '25. And so -- have we increase of price as well?

Can you please repeat what you said about raw material price?

Yes. So how are the raw material price trend in the first quarter?

So the raw material price trend for us is the same as anyone else who is buying pig iron, copper, et cetera. It's quite stable throughout the quarter from what I understand.

Okay. Sir, and also, are we increasing sizes [indiscernible] residential pumps of other -- industrial pump side?