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

Ladies and gentlemen, good day, and welcome to the Kirloskar Oil Engines Limited Q3 FY '21 Earnings Conference Call hosted by Axis Capital. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Vaibhav Saboo. Thank you, and over to you, sir.

Yes. Thank you so much, Tanvi, and good evening, everyone. On behalf of Axis Capital, we are pleased to host the management of Kirloskar Oil Engines for the Q3 FY '21 results. From the management, we have Mr. Sanjeev Nimkar, the Managing Director; and Mr. Pawan Agarwal, the Chief Financial Officer. Over to you, sir.

Thanks, Vaibhav. Thank you, everybody, joining the quarter 3 FY 2021 earnings call of Kirloskar Oil Engines Limited today. I'm 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 wish you and your dear ones great and safe 2021. We hope and wish everyone and their family members and colleagues are safe during this pandemic. We wish to start by qualifying that during the call, we may make some forward-looking statements. These statements are considering the business environment as we see today. And therefore, there could be risks and uncertainties that could cause actual results to vary materially from what we are discussing on the call today. And we would not always be able to update on these forward-looking statements. Safety of our employees and fulfilling our promises to our customer continue to remain our top priority in quarter 3. The business continued to stage an encouraging recovery and has almost scaled up to last year's pre-COVID levels. On a sequential basis, we have seen business normalcy getting restored in quarter 3. We have started quarter 4 also on a positive note. As of now, we are witnessing healthy growth across our business segments. We are pleased to report that quarter 3 FY 2021 has been one of the best quarters of the company, driven by strong operating and financial performance. KOEL has done well in quarter 3, both on a sequential as well as year-on-year basis in terms of top line and bottom line. Despite COVID, we have maintained business momentum gained over the last quarter and look forward to sustaining this performance as we go along. Now I will briefly touch upon the financial performance of the company. On a stand-alone basis, the total revenue from operations for the third quarter stood close to INR 798 crore, against INR 721 crore in quarter 3 of the previous financial year. Total income of INR 804 crore for the quarter was about 10.5% higher compared to INR 728 crore for the same period in previous financial year. Except power generation and large engine business divisions, most of our other businesses have delivered growth in quarter 3 on a year-on-year basis. We had informed you in our earlier earnings calls that KOEL had embarked upon a cost optimization exercise, which was made effective from quarter 1 FY 2021 itself, much before the impact of pandemic was fully understood. We were able to implement quite a few measures in quarter 1 itself. The impact of those is flowing through into quarter 2, quarter 3 and also will flow in quarter 4 as well to some extent. However, as we scale back to normal levels, some of these costs will get course corrected in line with the normal scale of business operations. Maintaining costs at this level is very difficult in the next financial year because 2020 was a radically different year. It was not a normal year. So whatever cost savings we could make on the other expenses and employee costs may not be possible in the next financial year. Having said that, we will continue to focus on maintaining and improving margins, prudent management of operating costs and working capital in order to improve the financial performance going forward. On EBITDA, which is excluding other income, for quarter 3 stood at nearly INR 94 crore compared to comparable INR 56 crore in quarter 3 of last year, an impressive 68% growth year-on-year basis. The company delivered PAT of approximately INR 61 crores in quarter 3 versus nearly INR 43 crores during the same period in previous financial year. Operating cash flows continue to remain robust in quarter 3, which further strengthened the company's fiscal health during the quarter. INR 177 crore was generated from operations in the third quarter of the current year vis-à-vis INR 70 crore in the same period last financial year. This is net of advanced tax. Looking at the uncertainty in the economic environment caused by spread of pandemic and as a measure of abundant caution to augment liquidity, during quarter 3, we once again raised INR 100 crores through issuance of commercial papers. These CPs have been redeemed in full on February 2, 2021. Operating cash flow grew significantly given our consistent focus on liquidity, cash management and strong collections in the current year. Our cash generation from operations was at INR 375 crore during the 9 months period ended December 2020 compared to just INR 86 crore in the same period last year, net of tax again. During the third quarter, the company has invested INR 45.39 crore towards share capital in its 100% subsidiary, Arka Fincap Limited by subscribing to the rights issue. As on December 31, 2020, the total investment made by KOEL in its subsidiary, Arka Fincap, stands at nearly INR 572 crore. At a consolidated level, the revenue from operations was INR 959 crore in quarter 3 of FY 2021 compared to approximately INR 835 crore in quarter 3 of FY 2020, registering a growth of nearly 15%. Total income for the quarter improved from INR 843 crore in the previous year to INR 966 crore in the third quarter of the current financial year. Profit before tax for the quarter at consolidated level was a little over INR 91 crore as against INR 51 crore in the same period previous financial year. At a group level, profit after tax for the quarter was INR 66.5 crore compared to INR 46.4 crore in quarter 3 of the previous financial. At the segment level during quarter 3, the engine segment grew by 5.5%, electric pump segment grew nearly 40% and other segment, which typically includes farm mechanization and tractor spare parts and oil businesses, grew by 88% on a year-on-year basis. As far as outlook is concerned, we are focusing on exiting FY '21 on a modest note. As you would have noticed across many industries, the commodity prices, including casting, steel, copper, aluminum, et cetera, and ocean freight are on the rise. And therefore, the company has taken a decision to hike prices in quarter 4 of FY 2021 to offset the impact of input cost increase to some extent. However, it is difficult to pass on the entire input cost increase on to the customers. Therefore, we anticipate some impact on the margin in quarter 4. That was all on the financial side. Lastly, ladies and gentlemen, 2021 brings a new ray of hope for people, economies and businesses. We are hopeful of a much stronger FY 2022 as we get closer to exiting the current financial year. We see a good demand environment across all key business segments. We believe we are well poised for the better future. We have the financial resources in terms of a strong balance sheet and a healthy cash position, a great set of products and a motivated and experienced team to capitalize on this opportunity. With this summary, we may now commence question and answer.

[Operator Instructions] The first question is from the line of Parikshit Kandpal from HDFC Securities.

Yes. Sir, my question was if you can give some outlook on the demand, so which are the key segments, which is driving the demand for the PowerGen business and other segments? And also if you can touch upon the impact of [ TEV ], BS4 and CPCB. So regards to that, when do you expect to take the price hike? And if any prebuying you've already started seeing?

Okay. Good afternoon to all of you. This is Sanjeev Nimkar here. Thanks for this question. The demand, as Pawan was explaining to all of you that last quarter was one of the best quarters for us, and the same momentum continues for even this quarter. So specific to your question, the Power Generation demand is primarily flowing. And this time, it's a mix of infra projects, which government is putting inputs in that. And as well as last 3, 4 years, we had seen a major slowdown on the capital formation related private sector projects. But last 4, 5 months, we are seeing that the confidence level of private sector has gone up in Indian economy and their future of coming 3, 4 years, whatever. And those projects are coming back on track. So those are putting the demand. So the industrial consumption for the Power Generation has started coming in, which was relatively slower earlier. When the infrastructure related things are moving, airports and the ports and a lot of things into the process industries are moving. Agriculture process industries are moving very well. Consumer space industries are moving very well. So all these sectors are adding to Power Generation demand. So that's the question to -- answer to your first question. Second point you asked about the BS4 and CPCB 4, what is the outlook and what is happening? In my -- in our last call on the investor call last quarter, we had indicated that BS4, our entire program is running absolutely as per plan. And that time, I had shared that we are across around 10,000 hours of trials of these 4 engines before even we launched the product in the market. And that number right now stands around 18,000 hours now. So we have reached to 18,000 hours of pre introduction trial. So we are pretty confident about what kind of solutions we have provided to our customers. And just for the sake of reputation, one of the important value add what KOEL has given to their OEMs is almost 0 change of the envelope of the machine. That means in spite of we giving the very high-technology BS4 solution, the envelop's change at OEM side is close to nil. So that's the biggest contribution we've done, and that's why most of the OEMs were able to retain in BS4. So that transition is running well. Not only that, this -- starting December onwards so December to mid of March, we have reasonable amount of prebuy demand of BS3 engines, which the OEMs are expected to convert into their machines, and they will sell these machines for next 6 months, or 3 to 6-month time frame. So that's a good story there. Coming to CPCB 4, as most of you are aware that the gadget is not yet out. So we are prepared for that. Rather we are preparing for it. But the gadget is not out, so the final date of implementation is unclear right now. But as I said in the last call also that BS4 working, almost 70% of that is going to be very handy for us for CPCB 4 transition because similar technology is implemented for even CPCB 4 also. So that way, we are geared up to handle this transition also whenever it happens. That's it from my side.

Sir, any sense on the price hikes which you are going to take for both I mean BS4 and CPCB 4, sir, anything has been finalized as of now in terms of what could be the price hikes the industry need to take to upgrade the technology to this level?

There are 2 things into this. One is the BS4 price hike from the technology perspective so that has already gone. Those negotiations and discussions happened almost 8, 9 months back because when we were finalizing with OEM by OEM, we finalized that. And roughly, you can say, 15% to 20% price rise are closed on that front, which had a technology impact. The second aspect is the recent phenomenon of commodity price rise impact of last 2, 3 months. So that is being under discussion. So Pawan referred to price rise, it was primarily on the commodity linked and not the technology linked. So the commodity linked price rise is under discussion. So most of the OEMs, our discussions are either closed or in the last stage of closure. And in the -- this month end or next month, it will start reflecting in our primary sales. Both Power Generation side as well as on the BS4, the -- in the industrial engine side.

The next question is from the line of Sandeep Tulsiyan from JM Financial.

Yes. Sir, my first question is on the PowerGen segment, you had indicated that activity level is back to 90% of pre COVID, as we can see in your results. And you were expecting that there will be a slight growth that you're expecting in fourth quarter. Where are we on that track? And if you could also highlight what is the current market share that we have at the end of 3Q versus the earlier quarter? And what is the quantum of price hike that we have taken in this segment on an average, middle average basis?

Sandeep, and nice to hear your voice on this call. You asked primarily 3, 4 questions. I will answer one by one. So coming to the Power Generation side of the story, the price rise, which -- what was the first question?

Market share, current.

So the market -- okay, I will answer the market share question first. We do have Q2 published figures with us, and Q3 figures are expected another 10 days' time. So not yet come. Till Q2, we are at 34% quantity market share and 23-point something on the value market share. So we are sustaining and maintaining our market share. So no worries on that. Minor changes plus/minus on the individual node by node, but holistically, we are at 34%. And in HHP, we have gained 2% market share. So that's on the market share front.

Price rise.

On the price rise front, around 4% to 5% price rise, which is going ahead in the market, we have already discussed and we have agreed with the different, different GOEMs, but we have not heard much from our competition yet. 1 or 2, 2nd or 3rd level competitors have indicated indication of 3%, 4%, but the main competitors have not yet indicated anything to the market. So that's a little bit worry, but we felt it's worthwhile to go ahead with the price rise to the market. So any other thing I have missed out?

No, that's -- it's helpful. And secondly, sir, on this electric pumps, we saw a 40% growth in the quarter on a consolidated basis. So you did highlight that in the presentation that you've grown in double digits in La-Gajjar Machinery. If you could split this growth between LGM and Kirloskar Oil, what are the numbers that we have done?

Yes. Sandeep, this is Pawan Agarwal. So electric pump KOEL, quarter 3 this year, we have done INR 37 crore roughly as opposed to INR 21 crore in last year. LGM, we have done INR 129 crore as opposed to INR 103 crore last year. Overall, combined 40%, roughly 40% growth.

Understood. Understood. And sir, lastly, if you could also help us the growth rates within industrial, how have we done within off-highway and tractors and the balance part or the construction fuel handling and all of that? Just to get a sense of which segment is the one which is driving the sales and how much percentage of portfolio will be impacted by this BS4 change or the industrial segment as a whole?

Okay. So let me address the first part and second part, probably Sanjeev can answer. So within Industrial segment, construction equipment in quarter 3 grew by 58% for us year-on-year. Earthmoving grew by 32% year-on-year. Fluid handling about 87%, material handing, which is a very small portion of the business, 41%. And exports within industrial business grew by about 14%.

And sir, this tractor is included in earthmoving here or where?

Yes. Tractor, I'll give you the tractor growth also.

No, tractor is not a part of earthmoving. Tractor is separate.

Tractor in quarter 3 year-on-year grew by 142%, 142%. And on a 9-month basis, tractor growth is 30% year-on-year.

Okay. Understood. Yes. And the second part for that question, sir?

Can you repeat your second part, please?

What percentage of this portfolio will be impacted by this BS4?

35%. 35% of the portfolio is impacted by BS4.

The next question is from the line of [ Nilesh Jethani from Envision Capital ].

Sir, my first...

Can you speak louder, please? Sorry?

Hello, am I audible now?

Yes, it's better now. Thank you.

Yes. Sir, my first question was on the expense side. So we have seen a sharp reduction in the other expenses on Y-o-Y basis for the last 2 to 3 quarters now. Sir, just wanted to understand, which are these line items, you are able to capture or reduce our cost in the other expenses? And by what proportion do we expect these to normalize again, say, starting FY '22?

Okay. Thanks. So basically, other expenses will have 3 broad categories. Which will have manufacturing, selling and admin. So on a 9-month basis, manufacturing is down by about 13.6% year-on-year. Selling expenses are down by 14% year-on-year. And admin expenses are down by 32% year-on-year, okay? Overall, for 9 months period, you can see about 19% reduction in expenses. Now as I mentioned in my opening remarks, as the business is slowly or is getting back to the normalcy, we are -- and with the opening up of economy and people started traveling, sales advertisement expenses, et cetera, kicking in. Now slowly, we are going back to the normal levels. We do not expect the old level of costs, which is FY '20 cost, calendar year FY '20 cost to continue in the next financial year. So it will be back to the pre-COVID levels. We do not see major change in the cost, maybe a few crores here and there.

Okay. Okay. Understood. And sir, we're also talking about we have taken price hike. But yes, there would be some impact on the gross margins. Typically, we are not passing on the entire impact to the customers. So what impact can we expect on the gross margin due to the rise in the commodity prices and be unable to pass the same to customers?

Sure. We are still evaluating, as Sanjeev indicated, we are in various stages of dialogues with our customers and also we are engaging with our suppliers. But at a very high level, we are expecting about 1% to 1.5%, somewhere in between impacting quarter 4.

[Operator Instructions] The next question is from the line of [ Pankaj Rawal from Ace Landstorm ].

First of all, congrats on the good set of numbers. So I have -- there is...

Background noise over there. We can't hear you clearly.

Am I audible now?

Yes, it's better. Yes, please, go ahead.

Yes. So first of all, congrats on the good set of numbers. So my question is, sir, we can see the good growth in the electric pump in Q3. So how much is the growth we are expecting in future, may be sustainable growth, if any guidance on that?

Electric pumps.

Yes. Electric pumps. Let's see, this question is coming on almost all calls in last 2, 3 conference calls. And we have been constantly telling that we are very strategic in our actions on the electric pump side. Because we have implemented verticalizations of different, different small businesses within electric pumps, and that is contributing to our results. So if coming straight to your question, at least next 2 to 3 years, I -- we are confident that this growth story, whatever, in double-digit growth story should continue on the pump side.

Sir, any ballpark on strong double digit, maybe -- because otherwise it becomes 40%.

Yes, yes, yes. We will be gaining market share in pump side for sure.

Okay. Okay. My next question is, what is the current market share in the kVA? Pardon my eagerness if I'm repeating myself, but...

Can you repeat your question?

What is kVA?

kVA, kVAs?

kVA?

kVA. LHP, MHP and HHP.

LHP, MHP and HHP. These are broad level we categorize. So in LHP side, which we talk up to 30 kVA. Our market share is around 39% to 40%. Then next, we put 30 kVA to -- up to 200 kVA, so which we call it as a MHP so there, our market shares are around 35%, 37%, in between. And then we have HHP segment. So which is 200 kVA and above till whatever, 2,000 kVA, we call it as a HHP segment. So collectively, we are at around 19% to 20% market share there.

19% to 20%.

Yes. .

Okay. And my last question is, sir, what is the company's preparation on the compliance with the emission norms? Maybe any CapEx or any other preparation?

No. So the CapEx is a routine. So for both BS4 and CPCB 4, our CapEx are already almost BS4 100% CapEx is utilized, which was in the tune of INR 72 crores to INR 75 crores for BS4. And for CPCB 4, the CapEx will be on similar lines, close to INR 100 crores. But out of that, INR 60 crores, INR 70 crores, we have already utilized because very close to the finance solutions. So we are prepared for that, and CapEx is already aligned for it.

The next question is from the line of Renjith Sivaram from ICICI Securities.

Yes. Congrats on good set of numbers. Sir, when we look at your segmental breakup, the PowerGen, there has been a decline. Sir, is it largely attributed to slowdown in railways? Or is there some in that LHP and in that MHP, there is a kind of overall demand slowdown. Can you just give some more granular...

If you look at for Q3, we have grown in PowerGen for Q3, only for the quarter. If you look at the YTD numbers, then Q1 and Q2 was very, very slow. So that was the reason. And you are right that this railway business, not only for us, but overall, industry railways have curtailed their requirements and their orders are curtailed right now. So when they will open up that time, we may get some orders from them. But that has not impacted much to us. And in Q4, we expect to grow on Q4 last year. So YTD level, we are down, but quarter-to-quarter, we are growing.

Yes. I mean, partly, you are right. Power car, quarter 3 last year was about INR 34 crores sales. And quarter 3 this year is insignificant, somewhere INR 2-odd crores. So about INR 30, INR 32 crores impact is there on account of power cars in quarter 3.

Okay. And has that segment started to recur? Or is it still in challenging?

No, no. The government has not given any indication till date. So we expect another 1 quarter may go like that only without any orders flowing from railways.

And how big is this Puna metro order, which you have indicated?

Not fair to talk on this call at this moment. But once we execute, we'll talk to you.

Okay. And you told that around 50% of your PowerGen will be subjected to the CPCB norms. Is that right?

No, no, no, it will be more than that.

How much percentage?

It will be more than that. See, the CPCB 4, only up to 19 KW is not coming under CPCB 4. Everything beyond that is part of CPCB 4.

So that will be almost more than 80% of your portfolio, right?

Yes, yes, yes, almost 80%, 75% to 80%.

So we have already come out with our own test engines and stuff, those processes are done and that could be ready for...

We are in the process of finalizing the right recipe, right solutions for that. We have not have built any prototype for CPCB 4 because it will be too early. Because CPCB 4, we expect sharp price rise, rather the sharp cost rise. And that's why there are multiple ways to achieve the same emission adherence. So different recipes are kept ready as and when the gadget is out, we will be coming out with our prototypes and settling out. So we are pretty confident on sticking to the deadlines, whatever government wants us to seek.

Okay. Because as such we are trying...

[Operator Instructions] The next question is from the line of [ Rishikesh Ojha from Lobo Capital ].

Just one question from my side. Could you please comment around your NBFC business with regards to the cost of funds or the gross loan book? And also your outlook for 2022?

Okay. Thanks, [ Rishikesh ]. This is Pawan Agarwal. So our NBFC arm Arka Fincap Limited, as we mentioned in the earlier calls also, it continues to do well. Quarter 3 has been pretty strong for Arka. And for a 9-month period, also, the company has delivered a decent performance year-on-year basis. We have delivered INR 5 crore of PAT in quarter 3 versus INR 2 crore of PAT in the previous year quarter 3 and on a 9-month basis, our PAT is about INR 12 crores as opposed to roughly INR 3 crore in previous year. So that is growing. Profitability is there. Now coming to the AUM, the -- Arka has a total AUM of about INR 1,160 odd crores. With loan book of INR 962 crore, roughly INR 200 crores is treasury book. It is primarily -- the loan book is primarily towards corporate. Corporate borrowers roughly about 59%, 60%. Real estate is about 35%, 37% of the AUM. And we have just started MSME in Arka. So it is just -- it has just started. So we expect this segment also to grow in a meaningful manner going forward. As far as the outlook is concerned, we remain cautiously optimistic on the performance of the company. And as we had indicated in the earlier calls also, we are looking every quarter very, very minutely at the KOEL Board level also. So as of now, we see buoyancy in the business. And next year outlook looks positive for Arka.

Okay. Sir what is the cost of funds?

The -- I can give you spread. Cost of -- average borrowing cost would be roughly about 9%, 9.5% in between. So that is our average borrowing cost in Arka.

Okay. And do you see that coming down in next year or remain flat?

It's difficult to comment at this stage on this area.

The next question is from the line of Bhavin Vithlani from SBI Mutual Fund.