Kirloskar Oil Engines Limited (KIRLOSENG) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Kirloskar Oil Engines Limited Q2 FY '21 Earnings Conference Call hosted by Axis Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Abhishek Puri from Axis Capital Limited. Thank you, and over to you, sir.

Thank you, Janice. Good afternoon, ladies and gentlemen. On behalf of Axis Capital, I am pleased to welcome you all for the Kirloskar Oil Engines Limited Q2 FY '21 Earnings Conference Call. From the company, we have with us today, Mr. Sanjeev Nimkar, the Managing Director; and Mr. Pawan Agarwal, the Chief Financial Officer of the company. The call will be initiated with a brief overview by the management followed by the Q&A session. With that, I would like to hand the conference to Mr. Pawan Agarwal for his opening remarks. Over to you, sir.

Thanks, Abhishek. Thank you, everybody, for joining the call today. I am Pawan Agarwal, the Chief Financial Officer of the company. Present with me on this call are our Managing Director, Mr. Sanjeev Nimkar; and our Company Secretary, Mrs. Smita Raichurkar. First of all, we hope that everyone present on the call and their families are safe and healthy during these COVID times. Also, we would like to take this opportunity to thank each and every stakeholder of Kirloskar Oil Engines Limited for their continued support in navigating through these challenging times. We would like to inform you that all the workplaces at KOEL and its subsidiaries continue to maintain safety and hygiene protocols, like wearing a facemask, physical distancing norms and workplace sanitation to make sure that the health of our people is assured. We wish to start by qualifying that during the call, we may make some forward-looking statements. These statements are considering the business environment we see as of today, and therefore, there could be risks and uncertainties that could cause actual results to vary materially from what we are discussing today on the call, and we would not always be able to update on these forward-looking statements. With unlocking of geographies, we have witnessed improvement in our business performance, and the same is reflected in the financial results for the quarter ended 30th September 2020. During the past few months, our clear focus has been on the resumption and gradual improvement of production activities. Our continuous efforts have aided in delivering superior performance even in these uncertain times. We continue to receive positive feedback from our customers during COVID times on the performance and commitment demonstrated by our employees and channel partners. Safety of our employees and fulfilling our promises to our customers continue to remain our top priority in quarter 2, even though operations for the company were affected to some extent due to constraint in the availability of adequate manpower due to COVID-19 infection as well as delay in availability of few raw materials during the quarter ended 30th September 2020. Having said that, on an overall basis, quarter 2 has been quite good for us in many ways. On the demand side, we are seeing signs of improvement with unlocking. Infrastructure and construction activities are gradually coming back in action. On a sequential basis, we have seen considerable recovery in quarter 2. In fact, we have started off quarter 3 also on a positive note. As of now, we are witnessing healthy growth in all the segments sequentially. In fact, all businesses, except Power Generation business of the company, grew in quarter 2 on year-on-year basis. Having said that, it is also important to keep in mind the number of countries that are witnessing a second wave of pandemic and lockdowns. Hence, we will remain cautiously optimistic and adopt a well-calibrated approach to ever-evolving dynamics of the market. We would now like to discuss our second quarter and H1 financial year 2021 stand-alone financial performance. We are pleased to share with you that KOEL has done well in quarter 2 sequentially, both in terms of top line and bottom line. Quarter 1 was impacted by the pandemic-led lockdown. Market conditions and operational constraints existed in quarter 1. And therefore, we did not have a great quarter 1. In quarter 2, however, we had a good rebound in terms of business and financial performance. Total revenue from operations for the second quarter stood at a little over INR 662 crore against INR 682 crore in quarter 2 of the previous financial year. Total income of INR 668 crore for the quarter was about 3% lower compared to INR 691 crore for the same period in previous financial year. Except Power Generation business division, all other businesses have delivered growth in quarter 2 on year-on-year basis. In comparison to the domestic business, International business performed relatively better in quarter 2. Our quarter 2 export sales grew by nearly 8% year-on-year basis. The momentum seen in GCC countries in quarter 1 continued in quarter 2 as well. Various cost reduction measures launched in first quarter continued in quarter 2 as well, which helped reduce other expenses by 9.5% in quarter 2 on year-on-year basis. For H1 FY 2021, other expenses are lower by nearly 25% compared with the same period in the previous financial year. As the majority of the employees continue to work from home in the second quarter as well, travel and a number of administrative expenses were minimal in the first half of the financial year. Advertisement, sales promotion, repair, maintenance, professional consulting fees, et cetera, were significantly lower in H1 compared to the last year. We are quite optimistic that the measures taken by us to manage our costs optimally in H1 of financial 2021 will help us maintain a lean cost structure and also institutionalize new ways of working. EBITDA, which is excluding other income, for quarter 2 stood at nearly INR 76 crore compared to comparable INR 44 crore in quarter 2 of last year, which is before exceptional income of INR 16.49 crore. This is an impressive 72% growth in EBITDA on year-on-year basis. We made a provision of INR 9 crore towards doubtful debts in the second quarter this year. These receivables are overdue for collection from government and PSU customers. And as a matter of policy, we have made these provisions in the books. That said, we are reasonably confident of collecting these amounts from our customers in coming quarters. On the working capital side, despite lots of challenges of COVID-19, both receivables and inventories have come down considerably, primarily due to robust collections, controlled purchase of raw material and focused approach towards consumption of on-hand inventories. The receivables and inventories are lower by INR 60 crore and INR 53 crore, respectively, as at the end of quarter 2 compared to 31st March 2020. Looking at the uncertainty in the economic environment caused by the spread of the pandemic and as a measure of abundant caution to augment liquidity, during quarter 2 we reached INR 100 crore through issuance of Commercial Paper. These CPs have been redeemed in full on 29th October 2020. The company has generated more than INR 128 crore from operations in first half of the financial year as against INR 144 crore during the same period in previous financial year. During the quarter, the company has invested INR 45.39 crore towards share capital in its 100% subsidiary, Arka Fincap Limited. At a consolidated level, the revenue from operations was INR 828 crore in quarter 2 of FY 2021 compared to approximately INR 817 crore in quarter 2 of FY 2020. Total income for the quarter improved from INR 828 crore in the previous year to INR 835 crore in the current year. All the 3 subsidiaries of the group delivered profits in quarter 2, primarily driven by stringent cost control measures initiated in quarter 1. As a result, EBITDA for the quarter at consolidated level was a little over INR 107 crore as against INR 55 crore EBITDA before exceptional and other income in the same period previous financial year. At the group level, PAT for the quarter was INR 60 crores compared to INR 41 crores in quarter 2 of the previous financial year. At the segment level, during quarter 2, the Electric Pump segment grew by 14% year-on-year. Other segments, which includes farm mechanization and tractor spare parts and oil, grew by 44%, whereas nearly 6% decline was seen in the Engine segment. So that was on the financial side. Briefly touching on the outlook. The world continues to be in a difficult space. Macroeconomic issues continue to exist. And we are keeping a close watch on the trajectory of the virus spread. We remain focused on our customer, resilience in operations, protecting our profit and loss and maintain the liquidity to deal with the impact of the pandemic. In conclusion, we would like to mention that we continue to remain focused on sales and profitability improvement and making our businesses more competitive. We would like to assure all our stakeholders that KOEL continues to remain optimistic and confident amidst all this turbulence. With this summary, we may now commence the question-and-answer round. Thank you.

[Operator Instructions] The first question is from the line of Sandeep Tulsiyan from JM Financial.

My first question is on the PowerGen segment. If you could share some more details? How is the market share within different power categories? And have you gained market share in any of the key categories in which you operate? And your comments on the demand outlook on that segment?

Sandeep, nice to hear your voice on this call again. Power sector, the market share results have just come in. 3, 4 days back only we received the results and very happy to share with you on -- we get the results generally with telecom and without telecom. So because telecom market behaves very erratical and differently, and our share also is very different in that, so we look at both ways. I will tell you, first, with -- without telecom, holistically, we are at 35% market share. So after a long time, we touched at company level 35% quantity market share. So that's at a holistic level. And without telecom -- sorry, this is without telecom. And with telecom, we are at 31% at a company level. And in both places, we have gained 2% market share in this quarter.

Okay. So 33% and 29% it was -- 33%...

Has moved to 31% and 35%, yes. So that's a positive story. And if you look at the breakup, the market shares are not very clearly available on a breakup level, but we have some judgment on that. So the movement in the market what we are observing right now is LHP, that is the low horsepower and high horsepower, these 2 segments are moving at a better pace, whereas the medium horsepower, and we define medium horsepower somewhere in 30 kVA to 200 kVA, that is the domain, which basically goes into banking segment, small retail outlets, the showrooms, the malls, like these kind of segments, this segment -- this product line goes, and there, we have not yet seen the pickup as expected. But the lower side and the higher side, both are doing close to the last year number. But holistically, we are at around maybe 10% decline over last year.

Okay, okay. And secondly, sir, I wanted to understand on the power tiller side, there were some restrictions put on imports. So how has -- has that been a bigger contributor of the jump? Or is it more because of the subsidies being released and rural spending happening? So could you just give some color if you have on the market share or on the overall market growth perspective over there?

Yes. In the power tiller side of the story, we have gained 1% market share, holistically. This quarter market share are not yet out, but we have our own estimation that we may gain another 1% in this quarter. So we are right now at 16% holistically in the power tiller story. This -- whatever notifications and restrictions which were posed, so good to share with all of you that we are not impacted because of that because we do not import any of the power tiller in full -- like fully built-in unit from China or any other place, we don't bring it. Some components which goes in our engines are brought in, and those are also not affected right now. So that is the story. But a good part to share with all of you that we are completely geared up to balance the story on our own engine. So all those components which we were bringing in, even those we have indigenized now, and we are ready with our own engines going into completely, that means 100% indigenous engines, will be going into the power tiller, even in weeder segment. And first trials are very positively successful, and we have put our -- the set of products, 5 or 10 numbers, there is something like SRFMTTI. So this is the institute which approves these power tillers for subsidies and going into the market. So we are very confident in another 15 days' time we'll get those approvals. And by the month of December, these power tillers will be in the market. And they are far more efficient and lightweight compared to our existing versions. So the story here is all across positive in this domain. Markets are also buoyant. In fact, in this segment, we are seeing weeder have very high market growth. The market itself must have gone up by 30% plus, and we have grown up around 44% in weeder segment. So that's very positive. So even power tillers is growing very well. And we have a good order board with us from some of the tenders which we have won 2, 3 quarters back, and we are still in the process of executing that. And in the retail side of the story, some particular states, which are opened up with subsidy, they made the money available, so we are gaining shares there by timely supplies in that market. Because of this China restriction, the supplies were in constraint, so we could catch on that. So that's the answer.

Just to add, Sandeep, in quarter 2, farm mechanization grew by 56% year-on-year basis. And on H1 basis, farm mechanization growth is 11% year-on-year basis.

Got it. And one small clarification, Mr. Agarwal, is that you mentioned other expenses are down 25% in first half in KOEL stand-alone. So you are excluding the provision of this INR 9.2 crore was contributed in the current quarter and around INR 6.5 crore contributed were added in these numbers, in other expenses, right?

No, no, no. That is inclusive of provision for doubtful debt, that INR 15 crore provision for the first half of the year, that is already included in other expenses.

Okay. So -- but it was matching with -- okay, all right. Got it.

Mr. Tulsiyan, do you have some more question?

No, that's it. I have some more. I'll come back in the queue.

[Operator Instructions] The next question is from the line of Renu Baid from IIFL.

Sir, I have a couple of questions on the core portfolio of PowerGen that we have. Sir, if you can share some inputs in terms of how has been the growth outlook of this business? And are orders now coming back to normalized levels? How is the order book tracking in this segment in the domestic PG? And what is the outlook for the next 6 to 12 months in this segment? That's my first question.

Yes. I think to some extent, I answered this question in earlier thing, but a few points I will repeat that order board on high horsepower segment and ultra high horsepower, the 750,000 segment, we have good order board for the next 3, 4 months, definitely. And continuously, we are able to get good orders on that. As I said, medium horsepower, the market itself is a little on a slow track. On the LHP, the things are moving better. Compared to H1 of last year and H1 of this year, we are around 80% now. And we hope this Q3, we may like to touch around -- Q3 last year versus Q3 this year, we may be 100% covering. And Q4, we expect growth over last year Q4, positive growth of maybe up to double digit. And going into Q1 of next year, definitely will be a much better year. And I expect a double-digit growth in Power Generation.

Sure. But sir, when we look at the demand drivers in the HHP, would this be largely coming in from the reality, hospitality segment or -- as in, what could be the key drivers of the demand pickup here?

Drivers, not so much onto the hospitality because you know last 2 quarters for hospitality was the worst disaster came through kind of a thing. So not much has happened from that side. But we are seeing on the infrastructure projects lot of good movements. So we are getting orders from airports, new airports which are coming, new ports which are coming in the country, new road constructions which are happening. Those are also taking this. The data centers are coming up very big way. So some of those segments also we are getting into. And industry is also taking the products forward. Lot of industries are going into greenfield and brownfield expansions. So what we were anticipating actually, and I'm making a little prolific statement, that once the new government came into power, last year, we were anticipating that things will turnaround and a lot of old projects will get rejuvenated, which didn't happen in the last whole of year. And now because of the pandemic, got another 6 months delay. But my judgment is all those projects which were on hold for the last 1.5, 2 years, 3 years, many industries and companies whose balance sheet can afford that, they are positively going for the revisiting and reopening of that. So that wave is very clearly visible right now.

Got it. So which will definitely be a positive for us in terms of medium- to long-term demand?

Yes.

Also on the construction equipment, especially the CEV BS-IV norms that you mentioned that we are very much on stream in terms of preparedness. Where are we in terms of the product approvals and launching them in the market? And do we expect a reasonable prebuy to kick back in terms of demand recovery in the second half of the year? And what could be the likely increase in the prices that you are expecting after the new emission kicks in?

So in 1 question, you have 3 questions. I will answer all 3 one of them. So this is the first question on the industrial side. Yes, you are right. The industrial -- current demand on industrial is very good. Coming to the BS-IV, we got a breather of 6 months. So all of you are aware of that, that -- which was supposed to be 1st October implementation of the new norms, which has moved to 1st April 2021 now and we got that breather. So we are happy about it. But we were fully prepared. So no doubt about it. As I speak to you, this is the first time in the history of at least KOEL whenever such emission changes happen, whether it is in Power Generation side or the Industrial side, this is the first time we will be doing the transition with our prototypes have crossed 12,000 running hours. So that's a big number. And that gives us enormous confidence that this transition is going to be one of the smoothest transition for KOEL and for our OEMs and our customers. So that's very positive news. And the price rise which you were talking about, it will vary from application to application, OEM to OEM. But I will give you a range of anywhere between 25% to 40%. So that's the price rise on the engine basis. And we have also ensured one of the significant value addition from our side to our OEMs, our customers, is even in such kind of a complex transition, none of our OEMs have to change any of their existing envelope of their product. So their cost is only for the testing of the new engine, but there is no modification required. So this is a big positive which we have offered to our customers in this transition. They had huge doubts that they have to go back to the drawing board and change their designs of the product and change a lot of fabrication work and things like that. Nothing of that sort has happened. So that's a big positive. We have added value to our customers at this time.

Sure. It is very positive. One last question, if I can ask. So now that commodity prices are heading northwards, especially steel, do we anticipate headwinds to the gross margins and profitability as business volumes look to improve in second half? And is the market comfortable enough to take pricing actions at this point in time? That's it.

Currently, you are right that the commodity prices are going up, but good part of the story is about 50%, 55% of our raw materials are indexed, and they are indexed for generally on a quarterly basis. So we didn't get much of the impact even if some of our suppliers have got the impact. So Q3 marginal impact we expect, a very small impact in Q3. But Q4, definitely, I expect some impact. And unfortunately, situation of passing on these prices to the market on the industrial side looks a little tough because all of us have lost the first quarter. So everybody wants to cover up for that, and they are mentally not geared up to pass on. Even the OEMs were not able to pass on to the end customer. So that is the story. Power Generation, we may attempt it in Q4. We will take the lead. As always, we will take the lead to take the prices up in Power Generation in Q4.

[Operator Instructions] The next question is from the line of Abhishek Puri from Axis Capital.

Congrats for a good set of results, sir.

Thank you.

Sir, I just wanted to check in continuation to the previous question, one of your competitor, a lead competitor has mentioned that they have taken pricing increases in some of the segments in previous quarter and they have seen a benefit of margin expansion in the previous quarter on the back of that. Have you seen any price increases? Or have you taken any price increase in any of your segments, sir?

Sorry, at least, it has not come to our notice actually. We didn't feel the change in the offering prices in the market of any of the competitors. And many times, I'm also proud about it. So last so many quarters, I have been on this investor call and many times, KOEL takes the lead in pushing the prices up in the market. So sorry, we have not seen that. But if it has happened, good thing for the industry. So -- and as I said, on Power Generation, we will be attempting in just a couple of months' time.

Right, right. Okay. And secondly, in terms of road segment -- the railways segment, how are your inroads? I read it in your presentation that you have IoT-enabled for all the railway related engines that are there. How are your inroads into KOEL given the competitor -- the large competitor earlier had very high market share? So how are we planning that entry to take market share there?

So now railways is a 3-year old story for us, and now we are clearly #2 player in railways. And in terms of the customer preference for our product and our offering and technology, happy to report that our customers are pretty happy with us. And what we just referred that we are the first company to introduce this kind of IoT-enabled technology in railways -- in Indian Railways first time. No other competitor has done that. And since -- we could do that because we have a long learning curve of last 3, 4 years giving IoT in open retail market. And because of that confidence, we introduced in moving parts because when we gave that in retail market, all the -- our products were stationary application that the genset is bought and it is kept at one place. So when we introduced in a moving application, we were a little skeptical but successfully implemented and it is working well. And in fact, the railway officials are very happy about using this technology because sitting at their cabin anywhere they are able to track all the power cars wherever they have deployed our power cars, the Kirloskar power cars. So that's a good part of the thing. Coming to the market share, we have been gaining market share, but there is some -- subtle change happening into the Railways' future strategy. So last 2, 3 months, this change has happened actually. Initially, rather till 3 months back, they were very buoyant on going ahead with 1 train having 2 power car as a philosophy. Now Railway is shifting to 1 train, 1 power car philosophy. They are saving 1 power car there. And they are using very proven technology in the international market called Head On Generation, HOG. So they are heavily driving that. And as a repercussion of that, their power car numbers are coming down. Not only that, they have put new power car purchase on hold for next 1 year time. But right now, we are executing the orders in hand. So that is one good part. Second, we will also be expanding our portfolio into the railways, not only power car, but some other domains also, we'll be offering our value -- our value offerings from our side to railways. And that will start adding to our revenues in a couple of quarters down the line. So that's all because we have built in excellent relationship with this customer. And since we have made these good inroads, we would like to cash on in the coming years.

Right. Very helpful to know, sir. And my last question on the emission norms, you've said that price increase can be anywhere between average 25% to 40%. The same was expected for the automobile segment as well when the transition happened earlier this year, but they could not raise prices because the end customers were not ready to take that. And hence, the effective price increase was much lower. So in our case, would we be able to push off this kind of price increase, I mean given where the customer demand is today?

This is a million-dollar question, actually. So right now -- and since this is an industrial off-highway domain, so what happens in end customers, where you are interacting with the end customers, it's relatively not easy to pass on. But here, with our industrial customers, this is also a competitive spectrum. So the way some of the leading competitors will behave, that will decide where the equilibrium will happen on the pricing front. So initially, as I said, it is different models, it's 25% to 40%. Now we need to look at it in a larger perspective. Now whatever engines we give in industrial engine spectrum, out of that 35% products are going -- undergoing this emission change. The 65% are not undergoing emission change. Those are on the old emission or not yet come to the emission side. So that is a different story. So this is impacting to 35%. Now within this 35%, there are some leading players in the market. If they decide to absorb such kind of cost or pass on the limit there, then our OEMs eventually may have a little say to increase the end customer price. And if the end customer price does not go up, the pressure will be put back on us to curtail the price or give further discount or things like that. But this will be very clearly visible somewhere in the month of August, September 2021, not before that. Because in some other call was asking us, what kind of a peaking we are expecting. So in this 35% segment, we expect good peaking from December through February, these months. And probably some of our OEMs may stock up next 3, 4 months kind of stocks for them. So even after the emission norm change, which will happen on 1st of April, the new prices will not be visible in the market till August start. That's my estimation -- or rather our company estimation. And August, September, prices will be visible. At that point in time, we will realize that which competition has baked in prices at what level.

The next question is from the line of Manish Goyal from Enam Holding.

Sir, just continuing on the industrial emission norm. So now this norm which gets implemented from 1st April, will OEMs be able to sell equipment with the old version after 1st April or that after 1st April, they need to sell all BS-IV engines as well?

No, this is the first time the notification authorities have made a clear distinction because all of you may be knowing, some of you may be tracking the automobile industry, what happens in that industry, and including our industry, in the previous version, the implementation and effective both days used to be the same date. Now what they have done, 1st of April is the implementation for production. So that means from that date onwards, the -- all our OEMs cannot produce any machine with old engine. But they can sell the already produced machines with old engines for a 6 months window, and that will continue till 30th September. So this is a big change this time they have done. And I think that's a very wise way of implementation. So there will not be any agitation or representation coming back to Supreme Court and things like that. So they have very well taken care of by giving this window.

So this will probably lead to probably a decent prebuying?

Yes, yes, that's what I said. So from December to February mid or March mid, we expect these industrial engines should pick up reasonably good.

Sure. Sure. Okay. Sir, coming on the agri portfolio, like we have seen growth across the board, if you probably look at the pumps or tillers, even tractors. So like would it be possible to kind of give a perspective as to now as an agri portfolio, what it would be of the total revenue -- of our total revenue size, like if you want to just look at the agri portfolio, including farm mechanization?

Yes. I think Pawan is responding to that in terms of percentage. But when we look at water solution as a vertical what we have come out, that, defining it as a complete agri will be unfair on that business. Because from the water vertical, to my understanding, 35% to 40% goes into the agri space. From the farm mechanization, almost 100% goes into the agri space. But from the water portfolio, 40% goes into the agri. 60% is still urban consumption. So we need to have that clarity. But overall, I think Pawan has numbers.

Last year, quarter 2, agri division was about 17% of our total sales. And quarter 2 this year, it has risen to about 20%.

Okay. So this will also basically segregate as Mr. Sanjeev was mentioning. On the pump side, you have segregated agri and urban side demand?

No. When Pawan is talking about, it is all, some increases are there. But I just wanted to clarify going forward because when we use the word agri loosely, then we should not get carried away by that word actually because our water management solution portfolio covers many things. But currently, it can be called as agri.

And the agri typically, when we are publishing these numbers in the investor presentation, what we mean is it includes crop irrigation division, which has diesel engine, electrical pump, alternators, spares, oils, et cetera, farm mechanization, where we sell tillers and weeders et cetera. We have tractor parts, oil also included in this. So these are the businesses which are combined under agriculture.

Agri business, yes.

And the farm tractor related engines are in industrial?

Yes. Tractor engines we cover under industrial because they go to OEM. So industrial, we have verticalized on the basis of we deal only the OEM customers.