Kirloskar Brothers Limited (500241) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Kirloskar Brothers Limited Q2 and FY '27 Earnings Conference Call. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations of the company as on date of this call. These statements are not the guarantee of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] I now hand the conference over to Mr. Sanjay Kirloskar, Chairman and Managing Director from 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 all of you joining us on our call today. I hope everyone has had an opportunity to go through the financial results and the investor presentation, which have been uploaded on the stock exchanges and the company's website. On this call with me, I have Mr. Alok Kirloskar, Managing Director, Kirloskar Brothers International B.V.; Rama Kirloskar, Joint Managing Director, KBL and MD KEPL; Mr. Bhavesh Chheda, Chief Financial Officer; Mr. Devang Trivedi, our Company Secretary; and Strategic Growth Advisors, our Investor Relations Advisors. Let me begin with my remarks by giving some business highlights. I'm pleased to report that during the quarter, consolidated revenues grew by 24% on a year-on-year basis, reaching INR 12,767 million. And for H1, our consolidated revenues grew by 19% on a year-on-year basis, reaching INR 23,816 million. This increase underscores the strong demand for our products and services across various segments, both domestically and internationally. EBITDA for the quarter grew by 16% on a year-on-year basis, reaching INR 1,432 million with EBITDA margin standing at 11.2%. EBITDA for H1 fiscal year '27 grew by 9%, reaching INR 2,738 million with an EBITDA margin of 11.5%. During the quarter, we also recorded healthy order inflows across both domestic and international markets. Our consolidated order intake grew by 68% year-on-year to INR 20,472 million, providing continued visibility for future growth. Turning to our standalone domestic business. For Q2 FY '27, revenue increased by 23% year-on-year to INR 7,991 million, while EBITDA grew by 37% to INR 937 million. Profit after tax stood at INR 544 million, reflecting a 45% year-on-year growth. Our healthy order book, coupled with our focused approach towards high potential business opportunities, provides us with confidence in our growth outlook. We remain confident of delivering double-digit revenue growth in FY '27 over FY '26 for our standalone businesses. As of September 2026, order book on the domestic front grew by 29% on a year-on-year basis, reaching INR 29,264 million, which, as you know, excludes the small pumps order book reflecting -- and it reflects a strong pipeline. Furthermore, we are seeing good order inflows across segments. On the international front, we reported 24% year-on-year growth in revenue during Q2 FY '27. This performance was primarily driven by strong execution across SPP U.K., SPP USA and the Dutch Group, supported by the robust order book execution. SPP USA continues to witness encouraging traction in data centers, fire and HVAC projects. EBITDA stood at INR 233 million with an EBITDA margin of 5.3%. This moderation was primarily attributable to a lower contribution from the services business, which traditionally carries higher margins. We are actively focused on expanding the services portfolio, which we believe will support improvement going forward. Our overseas pending order book stood at INR 17,013 million, reflecting a growth of 32%, providing strong visibility for the coming quarters. Looking ahead, we are very optimistic about the company's growth trajectory backed by a healthy mix of domestic and international business, a robust order pipeline and continued focus on operational excellence. Our company is well positioned to deliver sustainable growth in the periods ahead. This is all. We can now begin the question-and-answer session. Thank you.

[Operator Instructions] Our first question comes from the line of Mahesh Bendre with LIC Mutual Fund.

Very strong performance on sales side and the order intake given the current environment. Sir, I have 2 questions. First is on margin side. In this quarter, I think domestically, we have done really well. But it's international pieces, which is actually lagging in terms of margin. So do you anticipate recovery to happen in the second half?

Margins to go up in the second half.

Sorry, sir, I didn't...

I said, yes, we do expect margins to go up in the second half as usual. But for the international business, and I'll ask Alok to explain it a little more, we are now in our third quarter and the next -- this current quarter will be the fourth quarter for them because they follow the calendar year as their financial year.

Just to add to that, I think one point which was mentioned at the start was that the mix this year has been slower in the U.K. for services. I have mentioned in previous analyst calls that we have, from an order point of view, bagged many more service contracts. But as I also said, it takes some time for us to finish the site evaluation and kick off the contract. So we do expect more of those contracts to be kicked off in the current quarter, but definitely in KBL's fourth quarter, which is, of course, the first quarter of the international companies from Jan to March. So I think that's the reason why it was mentioned earlier that the second half should have stronger margins.

Sure. And sir, the order intake has been very strong for the domestic as well as international operations. So is there anything -- I mean, we have observed in terms of such a -- I mean, given the current business environment, these numbers are very strong. So anything you would like to share on this?

I've always said that we shouldn't look at this company from quarter-to-quarter. And I have mentioned many times that sometimes large orders get delayed and I think I mentioned that last time. So yes, the orders come in when the customers are ready to place them. So -- and the outlook is quite good. I've always mentioned that this company will grow with India's economic growth. And I think customers recognize the fact that our products are superior to whoever else offers the products that we make. And I believe there's a growing recognition that not only are they the most efficient and reliable, but the quality is also good and they last for a long time. So I think we're seeing that from customers recognizing the premium products that we supply.

Sir, last question from my end. We have seen there is a huge shortage of water in Maharashtra and even at India level. So at some point of time, do you expect -- anticipate growth in the standard pumps to go up given the shortages in the water?

Yes, it should. It should go up.

[Operator Instructions] Our next question comes from the line of Raj Shah with ENAM Asset Management.

My first question was on the margin front. Especially gross margins, if we see, it has seen a decline of almost 400 bps in both standalone as well as consolidated business. As you said, in the overseas business, especially U.K., there was a fall in service revenues. But when we talk about the raw material cost increase, can you please elaborate what was the quantum of RM price increase? And were we able to pass on if yes, and by what percentage?

Specially the price of copper, gun metal, steel, which are used in our products. And we have been able to pass them on to a large extent. But this also depends on product mix, how different products with different material costs go through during different parts of the year. So while we are able to pass on and we are the price leaders and always the first ones to increase prices, we expect this to get moderated in the next few quarters.

Okay. Got it. Sir, relating to the U.K. business margins, just following on the previous participant's question, if you see the margins, especially in H1, there is 0% profit that we have made in specific to U.K. business. In F '25, it used to be 12% EBITDA margins. In financial year '26, it came down to 7%. Do you think this year we can go back to, say, 5% to 7% range? I'm not asking for a specific number, but some direction because in H1, we have not made any profits in the U.K. business, which is close to 17%, 18% of the total revenues.

Yes. I think that this year, we will have a recovery in the margins if you look at KBL's financial year and even if you look at the U.K. year. It will not be like the financial year 2024-'25. But I think that the next year would be similar in terms of margins. And the reason I say that is 2 issues the U.K. business has this year and one issue may continue. One, of course, as you highlighted earlier, is material cost. The material cost has increased in the U.K. by 7% to 8% -- actually 8% to be exact. And that's one aspect of it. The second is that with the oil and gas business picking up again, the oil and gas business has a lower margin, but also requires a lot more specialized skill set to be executed. And so with the enhanced order book coming in of oil and gas in the U.K., we see that there's a drag in margins on the products. And there's an additional drag in margin because of rising employee-related expenses. The benefits only come when the spare parts come of these businesses and that of oil and gas products, and that's really why we sell these products. But I would say there are 2 additional factors, these 2, which I mentioned, in addition to the fact that our service business has been down the first 3 quarters or in KBL's case, the first 2 quarters. And we only expect that partially to recover in this quarter and next quarter.

Okay. Got it. So you expect H2 to be much better in terms of margins in U.K. business? Hello?

Yes, go ahead.

Yes. Am I audible, sir? Hello?

Yes, you are audible. There's some other noise in the background.

Yes. So next question, sir, was on -- relating to order inflow. You mentioned that the orders are lumpy and it would have been from the customers and the orders came together in Q2. But this INR 2,000 crore order, sir, if you can give some breakup from which sectors you have received large orders? And what would be the execution period of this INR 2,000 crore order inflow for this quarter?

We normally don't give order inflow sector-wise. But we do give pending order -- the order position -- order book position we do give, the pending order board. So I think from there, you will be able to see the way the different sectors have behaved.

Page 12 of investor presentation.

Page 12.

Yes, yes. I'm aware about the order book, right, sir.

Yes.

Okay, fine. And last question, sir, was relating to the drought situation in the country. There are multiple states like Gujarat, Maharashtra, even Karnataka, Andhra Pradesh, Rajasthan. They have announced drought in various of its districts. So as a business, from a broader perspective, how do you see this impacting our business? Or if you can also elaborate what quantum of our business is directly proportional to the rainfall?

Number one, if the states are going to do something, it's going to take some time. And water has to be there in order to be pumped. I'll leave you with these 2 thoughts. So number one, it will be state managed. And historically, we do not take orders from state governments. The state governments will have to place orders on EPC contractors. And by the time they are ready, we will be ready to quote to them. As far as smaller pumps are concerned, yes, I think the retail side pumps will move going forward. Historically, third quarter for the company is a good quarter. And maybe with drought-like conditions, the requirement for small -- the retail pumps would be good.

Our next question comes from the line of Manish Goyal with Thinqwise Wealth Advisors LLP.

I have a few questions. One on the -- if we probably look at standalone growth of 23% and in the press release, we have mentioned that small pumps have grown 12%. So a couple of questions around this. One is on this 12% growth in small pumps, how much would it be driven by the price hike which we would have taken probably in -- I think since Jan, I think in last call, we had mentioned we had taken 10% price hike. So maybe in this first half, what would be the scenario? How much would be the volume growth? And also related question is that if total revenues have grown 23%, then it implies that your way to order and engineered to order would have grown much stronger. And what could have driven that growth? Is it -- because oil and gas has seen a sales jump of 5x price as per press release? And is it like completely driven by petro pumps, some of the old orders which we had last year, which got carried forward and maybe other areas which is driving this? And now with very strong order book on hand, do we expect that this execution momentum to continue in the second half for us to probably do better on the double-digit growth guidance what we have given? So that was one set of the question. Yes.

Hello?

Hello.

Am I audible?

Yes, now, ma'am. You're audible.

Yes. So we have seen a rise in both the volume and the value for that 12%. So -- and we do see strong growth because of -- we do notice that other players in the market are having issues with supply due to various issues that happened earlier: foundries were shutting down, the LPG shortage, change in wage code. So I think that puts us at a good price point in the market today. So we do believe that we are enhancing our market share. And that's what...

So Rama, can you just give us some broad perspective, how much would be volume growth and value growth?

So you can say 50% because of value and the balance because it has come through volume.

Okay. And my other question was that related in terms of the higher growth what we have seen, what would have driven growth in the customized pump segment, number one. And number two, despite the -- logically that customized pump usually offers better margin to us. So why is it that not reflected in the margin improvement? Because sequentially, we have seen the margin declined from 11.3% to 10%. So that -- and what is driving this strong growth? And how do we see going forward?

So we are at a very unique time when we see both the retail business and the capital goods business doing well. Capital goods is mostly doing well because of all the geopolitical uncertainties happening. And therefore, we are seeing orders in oil and gas, in fertilizer. We have seen orders in power. And that's one of the reasons why you are seeing a large order booking there. As far as the margins are concerned, it is a function also of the sales value. And we do have large consignments that are yet to go out. And that's one of the reasons why the inventory is also a bit higher. We expect this to go out in the subsequent months and that should contribute to both the inventory reduction as well as higher margins.

Yes. In fact, I had a related question also that even in Q1, we had seen our inventory going up. And in first half, the balance sheet number also shows that working capital has increased significantly by roughly INR 225 crores in the standalone and INR 250-odd crores in consolidated. So like -- because in Q1, I think you had mentioned that there were some spillover issues of the foundry modernization and some orders were not dispatched.

Right.

So how is the...

No, so those orders have gone out. If you see now, a large part of the order book is because of the large capital goods sectors with long lead time, right? So they can be anywhere between 8 and 12 months. So in preparation to get -- dispatch those orders, we had to obviously buy a lot of the raw material and associated bought-out components and start processing. So that's one of the reasons why you see a high inventory there.

Okay. Okay. And you expect that this should get probably liquidated in Q3 and Q4?

And I'm sorry, Manish, one more point. Most of that inventory now is in WIP because obviously it's been processed to send out.

Okay. Okay. And in the press release, we have mentioned that in power sector, we have received orders from nuclear sector, 10 numbers of primary circuit and 57 numbers of canned motor pumps. So what would be the value of these orders? Because sequentially, the power order book has gone up from INR 600 crores to INR 700 crores. So what would be the -- and no doubt the execution would have also happened in the sector. So what is the order value of this nuclear? And maybe if you can tell us that which nuclear project is it pertaining to? And also for nuclear, like probably we were at final stage of getting approval for primary coolant pump. So is the testing over? Have we received the approval? And when do we expect to deliver this development order?

So the nuclear power plant orders are for canned motor pump and for primary side safety package that we have received. I think the value would be around -- both the packages would be around INR 60 crores or INR 70 crores. I don't have the exact number, I'm sorry. But these are safety package and canned motor moderator pumps that we've been historically supplying. The good thing is it looks like pumps are starting to get ordered for nuclear power plants. I think there was a statement also something came in the press that now some 32 pumps, primary coolant pumps, are going to be ordered by NPCIL. And as far as we are concerned, the only thing that I said we haven't achieved was the material. I'm happy to say that we've been able to also prove out that we meet all the material requirements. And therefore, we should be qualified to participate in the tender and hopefully get the order.

Okay. Okay. And how soon this tendering would start, sir? Any sense on that?

I think the tender has been issued.

Okay.

Decisions, I don't know how long it will take because since it's coming after a long time. I'm sure there will be pre-bid meetings, which would be going on now.

Our next question comes from the line of Pratik Kothari with Unique PMS.

Sir, one question to Alok. So this shift that you are attempting towards utilities and services, given what is happening on the pet-chem and the oil and gas side of things, so from your comment, this is only a delay, right? This is, again, no change in what you're intending to do and hence, the reflection in margins, et cetera. This is purely a delay and no cancellations or no change in direction.

Yes. I mean we already have the framework contract, as I mentioned. But it takes us some time to do the ground assessment because what we normally do is we go through all the assets. Many of them -- most of them are not our brand. There are some other brands. And we have to establish with the customer their state. Whether they're in a desperate state or they can be refurbished or repaired or -- because finally, we have to come to a budget for -- because it's normally a 3-year or a 5-year contract, many of the water ones contracts. So after we agree on those things, then we can start the contract. After we start the contract, then whatever we've agreed on for that year, we start working on. Either it's refurbishments, we start bringing it into our service centers. If it's replacement, then we replace it; whatever we've agreed to do. So that's why I mentioned that it's taking a little longer for it to start, but it has started in this quarter onwards. And we expect it to probably hopefully get a little bit more steam next quarter because as those contracts come into effect, you start getting that change in mix.

Correct. And also after a long while, we have seen very strong inflow again on the international side of business. Anything specific that is driving this?

I would say one is oil and gas has picked up again. And there are many projects that we are -- we have already in Qatar for North Field, NFPS, as well as we have in -- generally in the Middle East with ADNOC. Also, we have got the projects in Guyana for the upcoming fields that are going to be -- are being commissioned slowly over the next year, 1.5 years, which is jobs like Camino. So I would say that's picked it up a lot in terms of new opportunities. The other area we've seen a jump in is data centers. So even now Europe data centers have started. So in Portugal, there is Sines data center, which has now gone for expansion as an example. It's Europe's largest data center. So I would say it's the pockets like these that are sort of giving the growth. AMP8, which has started, but AMP8 is not yet giving that kind of number that you would see over here that would be noticeable as of now. But we hope that AMP8 picks up because AMP8 is quite a big scheme and it's a 5-year scheme, as I mentioned, which is the asset management program 8 in the U.K.

And last clarification. You mentioned next year margins would come back. So this -- again, just to clarify, this is absolute numbers that we're talking about, right? So percentage -- I mean, for a while, at least we'll not see a percentage coming back?

No. I mean absolute numbers, probably similar if you go back to calendar year '24 for U.K. or if you go by KBL's year then '24-'25 for SPP's numbers. I mean more like the physical numbers, it will be comparable because we have slowly building up that pipeline. But as I mentioned, with the intake of oil and gas projects, which, of course, have lower margins as well as higher ERE to execute those projects, the margins may not recover next year. Maybe you will probably see that more in the following year, if I were to make a forward projection. But it's difficult for me to make that exact projection right now because as you're aware, there are a lot of upcoming jobs coming up in petrochemicals and on midstream and upstream. And we would want to have those jobs because of the future spare parts that come from them.

Our next question comes from the line of Prolin Nandu with Edelweiss Public Alternatives.

Alok, my question is to you, right? On this U.K. business, right, even if I look at this quarter's numbers as well as the first half numbers, the growth on the top line has been extremely strong, right? And you mentioned that this is coming despite the fact that the service element is not as strong as it was last year. So what is driving this strong growth? And you have also mentioned the AMP contract is not yet in the numbers, plus some of the other water contracts are also in the numbers. And in the past, you have also mentioned about this whole deindustrialization, which is going to take place in U.K. as well, right? So despite those things not in numbers, despite the headwinds of deindustrialization, we are seeing extremely strong growth in top line. So is it more the currency part? Or is it the actual like-to-like numbers are also very healthy? What is it that is driving such strong top line growth?