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

Ladies and gentlemen, good day and welcome to the Kirloskar Oil Engines Limited Q1 FY '22 Earnings Conference Call hosted by Antique Stock Broking Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Dhirendra Tiwari from Antique Stock Broking Limited. Thank you and over to you, sir.

Thank you. Good evening, ladies and gentlemen. On behalf of Antique Stock Broking, I welcome you to 1Q FY '22 post, well, conference call of Kirloskar Oil Engines. To discuss the results, I'm glad to have with us today Mr. Sanjeev Nimkar, Managing Director; and Mr. Pawan Agarwal, CFO of the company, along with other senior members of the management team. Now I'll hand over the call to Mr. Nimkar for initial remarks, following which we can tend to question and answer. Over to you, Sanjeev. Thank you.

Dhirendra, thanks. I'll do the opening remarks. This is Pawan Agarwal, and good evening, ladies and gentlemen. I'm the Chief Financial Officer of the company. On behalf of the management of Kirloskar Oil Engines Limited, I welcome you to this conference call pertaining to the results for the quarter ended 30 June 2021. Present with me on this call are our Managing Director, Mr. Sanjeev Nimkar; [ Rahul Pravudisai ], who heads the strategy function at KOEL; Mr. Amit Gupta, the CFO of Arka Fincap Limited, the subsidiary in the financial services business; and Ms. [indiscernible], who leads the Investor Relations at Kirloskar Group. We hope you and your families are staying safe and healthy in these challenging times. We wish to start by qualifying that during the call, we may make some forward-looking statements, and 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 on the call, and we would not always be able to update on these forward-looking statements. Quarter 1 FY '22 saw a devastating second wave of COVID-19, which had a huge impact on our lives and health of our near and dear ones. The operating environment has been extremely challenging in this period. But since the lockdowns were more localized and staggered, the business impact was lower this time around. Once again, our entire team stepped up beyond their call of duty and delivered a strong performance. We want to thank each and every member of the KOEL family for their unstinting dedication and commitment during these difficult times. Quarter 1 FY '22 performance is a testament to the resilience of the organization. With continued focus on productivity and efficiency enhancement, we were able to counter very high commodity inflation and protect our margins to some extent. We remain committed to drive cost reduction and operational excellence at KOEL. Our operations and supply chain teams have done an excellent job of meeting the challenges and ensuring a smooth supply of products in spite of mobility restrictions during in the quarter. We are pleased with our performance during the quarter, especially when one considers the challenges one had to operate in given the second wave. While a large part of the quarter was disrupted owing to the second wave of COVID, we did see things improving by the end of the quarter following relaxation of restrictions in the light of ebbing of second wave. The recovery in the month of June led us to post a decent set of numbers for quarter 1 even in these difficult -- in these times of adversity. Volumes during the quarter were understandably low compared to the preceding quarter given the impact of second wave of pandemic. Also, the EBITDA margin declined sequentially owing to lower sales and higher input prices. As indicated in the earlier calls, the prices of most of the input materials, namely steel, copper, aluminum, et cetera, have been trending upwards over the past few months, in turn impacting the margins. Furthermore, lower capacity utilization levels during the quarter also contributed to the EBITDA margin compression. Overall, the company is continuing to focus on strengthening the Kirloskar brand, building scale, expanding distribution and product range, driving innovation and digitization and strengthening the organizational capabilities at all levels. We believe this will help us drive strong growth across all our business verticals and capture the opportunities in the marketplace while we build the organization for the future. Going ahead, we remain positive on the business outlook and believe the growth in housing, health care, industrial and infrastructure sectors provides a good visibility in terms of demand for our products. Now I come to the financial performance of the company. Our first quarter stand-alone sales at INR 639 crores was 103% higher compared to sales of INR 315 crores for the same period in the previous financial year. All business divisions, except large engine, what we call IPS, have delivered significant growth on a year-on-year basis. The outlook for the large engine business for the remaining part of the financial year is positive on the back of a good order book position. Our export sales in the quarter increased to INR 58 crores compared to INR 46 crores in quarter 1 of last financial year, though as a percentage to sales, it declined from 15% to 9%. Good growth in demand was visible in Power Generation and Agriculture segment in international markets. The extended credit period enjoyed by the company from many of its suppliers, vendors and service providers during the second half of the last financial year has gone back to standard credit periods in quarter 1. Also, due to COVID-led restrictions at various places and disruptions at some of our suppliers and customer locations, and in anticipation of potential third wave, we have built a little extra inventory in quarter 1 to ensure minimal business disruptions. This has led to an additional investment in working capital during the quarter. But this is only a temporary phenomenon, and going forward, we do not see major issues on the working capital side. During the quarter, the company has further invested INR 50 crores to our share capital, which includes share premium also in its 100% subsidiary, Arka Fincap Limited. At a consolidated level, sales improved by 95% from INR 415 crore in quarter 1 of last year to almost INR 810 crore in quarter 1 of FY '22. The EBITDA for the quarter was INR 83.5 crores as against approximately INR 11 crores in the same period, previous financial year. PAT for the quarter for the group was a little over INR 32 crore compared to a loss of approximately INR 7 crore in quarter 1 of the previous financial year. At the segment level during quarter 1, all the segments delivered growth in revenue on a year-on-year basis. The Electric Pump segment grew by more than 68%. Others segment, which includes farm mechanization and tractors, spare parts and oil business, grew by 19%. And the Engines segment saw more than 112% growth on a year-on-year basis. That's all on the financial side. With this summary, we may now commence the question-and-answer session. Thank you so much.

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

Sir, I have 3 questions. The first question, I'll come on the operating margin side. Clearly, as a gross margin, we have seen almost 400 basis point compression. So if you can help us highlight this Q-o-Q compression in gross margins. It's a combination of sales mix, commodities. And to compensate for this, what is the kind of price actions we are taking? And how should we look at the outlook of margins reverting back to -- at least the gross margins reverting back to 35% levels?

This is Pawan Agarwal. Thanks for your question. Yes, there has been a severe impact because of the input prices increase, as I mentioned in my opening remarks. Roughly about 2%, 2.5% impact is because of the input cost increase, which we could not pass on to the customers in the marketplace in quarter 1. And probably, it will get partly recovered in July and August because there is always a timing difference. And about 1% impact is because of -- a little less than 1% impact is because of the mix change. Now going forward also, we expect -- because the input prices are not coming down to the levels of the last year, still either they are flat or they're increasing, some of it is increasing, we expect about 1% impact could be there in quarter 2 as well. Of course, it is subject to many, many factors. But as of now, the visibility that we have, it appears that about a 1 percentage point impact could be there in quarter 2.

Sure. Secondly, on the domestic PG market, you did mention that recovery seems to be setting back from June onwards. So if you can help us get some color within the Power Gen portfolio. How is the performance for HHP and ultra-high HP engines? And how is the demand outlook? Are we now looking at the market getting back to normal? And in general, by when do you expect the demand momentum to come back to pre-COVID levels and start inching upwards?

Renu, this is Sanjeev Nimkar here. Good evening, ladies and gentlemen, to all who have joined on this call. I take this question. Power generation demand right from April, we have seen this year a very good demand. So it started actually from the month of January itself. So January -- that quarter was also good. And subsequent quarter, in spite of this May debacle, overall order booking and the demand is good. So it is continuing in that way. In fact, the COVID-related opportunities, which are related in the market like oxygen plants coming up very sharply, very high investments happening on that front. COVID hospitals again coming back because there was a time that COVID hospitals had come and then dismantled all. But again, they are coming back because people are anticipating some disruptions of wave 3 or something. But the pressure is much better. That is visible. And that is helping the PG business. So coming to your questions, PG is looking -- normalcy in PG. We are sensing the normalcy in PG. Even the inquiry bank is moving reasonably good on the Power Generation side. And again, a little bit touching to your earlier question on the price front, yes, there is a gap of when the commodity prices go up at the back end side and how much time we can pass on because we have continuous quotations and -- on the order or of 1, 1.5 months kind of thing. So it takes time to pass on to that, but it will eventually happen. And there will be marginal impact in this quarter, and maybe we will cover up going forward in the next quarter on the price front. But happy to report here that as the leader in the segment, like whether it is Power Generation or even in the industrial engine side or even in the electric pump side, we took lead in leading the prices also in the market. We were the first to push the prices up because we felt unless the leaders take these actions, the industry will not move ahead. And happy to inform that overall, industry in all segments, with a little bit plus/minus, has responded positively to pull the prices up in the market. Yes.

Sure. And lastly, sir, when we look at the broad-based industrial equipment demand, your comments on construction and acceptability of BS IV range of products has been very encouraging. So how we -- how should one look at this by improving going ahead given that the infrastructure activities are picking up? So comments on this would be helpful.

Yes, you are absolutely right. The -- despite of this second wave and whatever we have gone through last 1 year, overall government efforts on the infra we are seeing are sustainable. Now we are not seeing they have increased beyond a level, but they are sustained. So that actually is a positive thing. So -- and that is helping on our Industrial Engine side. In fact, what has happened in this domain is -- well, one needs to understand this, that the prebuy has happened in the months of February and March. And there was -- and this time, in the emission changes, the government had given almost 6 months of window to sell out the old engines. As long as they are not produced, you can sell it. Incidentally, last 2 -- the first 2, 3 months, that is April, May and by mid of June, all those earlier engines vanished from the market, and the demand for BS IV increased. So that is a very positive movement in this industry. And that demand continues to be good. And our products are well accepted in this market. So on the Industrial Engine front, our outlook for this quarter and going forward until the end of the year is on positive. We will be on our targets and on our plan. So that -- in fact, in this domain, even the tractor market is also doing very well. So that demand also continues to be good. So that's the positive story out there.

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

Sir, I'm going to ask a couple of questions that will be critical to the performance, so please bear with me. Firstly, on the Power Gen side, I noticed that performance was much weaker versus our competitor. We have declined in a much sharper way. So have we ceded some market share? Or has competition become more aggressive in terms of giving price discounts? If you can share some more color on that, please.

Sandeep, what data points are you referring to? Is it a published report or something you were referring to?

No, sir. It is basically the market leader has also reported their results for first quarter where their power gen segment decline on a sequential basis was almost flattish. It was not much of a decline, while we have reported a very sharp decline of about 25% in the Power Gen business on a sequential basis.

Okay, okay. On a sequential basis you are talking about. Because we had a tough time in the month of May only. But after that, in the month of June and even going forward in July also, we have recovered reasonably. I'm not too sure. I will be looking into the depth of whether we have lost some share. It is -- a momentary impact can come because in the month of June also, we pushed up prices in the market. We took the lead to push the prices in the market. So whenever it has happened in the past also, that whenever we pushed the price, it -- 2 months, 3 months' time, there is a hiccup in terms of our sales. And again, eventually, it comes back. So that's what we observe. So there may be a momentary blip. But if you ask me, I'm not worried on Power Generation at this point.

Okay. Okay. But there is no big disruption in terms of aggressive discounting by...

Sandeep, our order board (sic) [ book ] on the medium horsepower engines is reasonably -- I'm not able to supply actually. To that extent, it has gone up.

Okay. Understood. And secondly -- second question was on this new opportunity slide that you have shared in the presentation. Actually, sir, we have been speaking of 2, 3 different business areas. Like we have been speaking in the previous calls about biowaste management solutions, the transformers and railways. And now we are talking about some battery-based backup. So it gives an impression that there are too many areas where the management -- so -- and amongst these 5,6 areas which you mentioned, what would be the top focus areas? And if you can share the opportunity size between water solutions, biowaste, battery-based backup and other things.

Yes. Yes, yes. Okay. First is water solutions as a segment, we are highly focused. So there is no question. So this domain has -- are already to us -- INR 1,000 crores-plus for us. So it is a -- definitely a focus area for the organization. In fact, in water solutions, we are going into the allied domains. So our acquisition of Optiqua, which we reported last time, that is into this domain of allied products. That is, flat cables, column pipes and similar domains we are getting into. So that domain, our focus will continue. Coming to the next, biowaste, what we reported last time. And this is the month we will be launching these products. So we are ready with all -- everything, whatever is required to be done. And we were waiting for our new brand refresh campaign, so -- which has happened now. So this month, you will see this product going to the market. This product is going to the market with 2 perspectives. One, there is a huge synergy with our Power Generation channel and the way -- the buying process as well as the selling process. So there is a huge synergy there. And the product also looks similar -- look and feel of the product is exactly similar in all respects. And it is a green product. So it will go to the market. Margin front, this product will be -- should be reasonably in sync with Power Generation or slightly ahead of Power Generation kind of a margin. So that's the reason why we will be there. The size of the market down the line, 3, 4 years, touching INR 100 crores in that segment, very much possible. Initially, it may start a little slow because it's a concept selling. Our country has not yet migrated to that level, but a lot of government initiatives are very supportive in that direction. A lot of municipal corporation bodies are already taking the decision that big society should manage their waste on their own. And that's where we come into the picture and we do the solutions to the society and -- which is a completely green solution. So that's on biowaste. With transformer, I think 2 calls back -- 2 quarters back, going back into a similar call, the transformer is only kind of a balancing approach from our side. It is not for the open market we are looking at. We are only looking at -- on the railways opportunity. And that, too, because the power car opportunity has gone down and transformer is going up in railway. So that's the limited play we will have on the transformer side. And backup power side is only for providing the hybrid solutions in that domain, but not beyond that. So these are basically to feed the customer requirements.

Okay. Understood. And last question, if I may. On the recent Supreme Court order which came -- or regarding to the Electric Pumps acquisition of KOEL, if you would like to share what are the steps forward from here on.

See, I think -- well, I don't think that this matter is in this call because as far as KOEL is concerned, we have clarified multiple times that this is a personal-level matter and not the -- of course, someone is trying to bring that into that thing. But from all the perspectives, it looks like it is not going to impact our fortune and future because we are marketing these products in a completely different brand name. So it's not going to be interfere to each other. It's completely a nonconflict area.

Okay. And one more thing. On the Electric Pumps...

One -- just I missed out on that. We will be aggressively looking for motor as a domain because that goes in sync with our water management solutions. We have already mastered the art of handling the motors. So we may be introducing now the induction motor stand-alone to the market. And we see that as a big opportunity for us.

Okay. What is the size you're looking for here, sir, over the next 2 to 3 years?

On the motor segment?

Yes, sir.

Motor segment, post our launching in 2 to 3 years, at least it will reach INR 100 crores, INR 150 crores in motors. But eventually, it should look at INR 500, crores, INR 700 crores down the line a few years, 5, 7 years. And we will be aggressively expanding things in motor domain.

Got it. And just one more point was there on the KOEL Electric Pumps business, which are -- which is basically a stand-alone entity. If we do the Electric Pump minus LGM sale, there is a very sharp jump. It has gone from INR 50 crore to INR 150 crore sequentially. So is that number correct? And if you can share what is driving this huge jump in first quarter.

You are looking at segment revenue, Sandeep?

So the segmental revenue of Electric Pumps less LGM revenue, what we shared in the call, there is a very sharp jump on a sequential basis. If you can share the numbers. And what is driving this jump?

So on Electric Pump segmental revenue, 30 June versus 31st March, KOEL has done INR 42 crores in June quarter. And sequentially, last quarter was INR 49 crores. LGM has done INR 145 crore in the current quarter. Last quarter was INR 156 crore. And then there are certain intercompany reconciliation items. So overall in Electric Pump segment revenue that we have reported, INR 175 crore for June quarter, and March quarter was INR 187 crore.

[Operator Instructions] The next question is from the line of [ Rohan ], retail investor.

Sir, my question is regarding the news that came up about the patent that we filed along with IIT Delhi. So are we allowed to comment on that right now? It was not in the nascent stage.

Yes, yes. Yes, it isn't in the nascent stage. But that's hydrogen engine which is developed. So hydrogen technology is a futuristic technology, and we are looking at that domain as an alternate to diesel-based engines.

Okay. And sir, like are there any chances? Or like for our scrappage policy in our government also as we are -- we also have oil engines and diesel engines together. So...

No, no. Can you repeat this question, please?

So like do we -- like we have an automobile scrappage policy that came out recently and which is in [indiscernible].

No, no. Actually, in our industry, that policy doesn't exist. But we are requesting, suggesting government time and again that the time is up that we should have such policy in power generation and even diesel engines. We should. But it doesn't exist at the moment.

Okay. And final question for me. Sir, so do we -- for the commodity that we use, so do we, in any way, like hedge it or...

No, we don't play with the hedging at the moment in whatever businesses we are not doing that. So we don't do that.

[Operator Instructions] The next question is from the line of Akash Kallur from HDFC Mutual Fund.

Coming to the equity, okay, you mentioned about -- if you look at Americas Corporation, the sales are currently quite small, and you're selling more of agri followed by gensets and air cooled. Now the assumption in India is that since all of you are going for CP 3, 4+ (sic) [ CPCB 3, 4+ ], it is quite close to the developed world norm, so the exports will be easier. What's your view, sir? And when could -- in the world of CPCB 4+, what is the deadline that you are hearing? And the supply chain at your end for CPCB 4+, how near it is?

Yes. I think 3 questions and all pertinent questions. Thanks for that. CPCB 4+, different bodies are working right now for the notification. KOEL is also a participant in that world forum. So our anticipation is that 2 months down the line, the notification should be out. But that's, again, a guesswork there. If that happens, we expect by October '22, CPCB 4+ can be a reality. But looking at current semiconductor market, you touched that question very, very aptly because in CPCB 4+ domain, the solutions which all the competitors in -- or all the players in this industry will be offering will have a large bearing on the semiconductors, usage of allotments of semiconductor-based products like DCUs and things like that.

Yes.

And currently, the whole semiconductor global market is in a complete disarray. And we anticipate that if this is insisted within that 1-year's window, probably the industry will be constrained. So now till yesterday, we were thinking 1 year window is good enough and we should go for it. But as of today, morning, looking at the current situation, I'm just giving an analogy, it looks like if 1.5 years is what government gives, that will be better for that as far as supply chain is concerned. Coming to your first question on the opportunities in U.S. and Europe, yes, with CPCB 4+ and now BS IV, we have migrated to industrial engines very -- in the near time frame. We can see BS -- 5 of us who will be going by 2023 or '24 will be at BS V. So opportunity to export engines or the solutions from India to developed world will be far more achievable for us. And as far as we are concerned, last 4 years, we're actively working on adhering to emission norms required for U.S.A. So we are passing one by one milestones there. They are all called EPA norms. So we are right now working on EPA Tier 4 Final (sic) [ EPA Final Tier 4 ]. So another 2 quarters, we will be there. Once that happens, our products largely can be sold in U.S. market, stand-alone U.S. market. Right now, whatever you are seeing, the agri-related movements happening there, are not per se in U.S., but in Latin America and nearby countries. So that momentum is reasonably good. But yes, going forward, the U.S. and surrounding opportunities will be better, and our ability to service that will have to be better.

Okay. And then just one question on the Industrial Engine side. So there's talk of that MNCs are opening up -- or for the possibility in India to manufacture the parts. Does an Indian company like ours have a good chance of winning those contracts from any Japanese or any other MNCs [indiscernible] or exhibitors or [indiscernible] further or wind handling further?

No. Only for Indians you are talking about?

Yes, Indians. Yes, Indians.

Yes, yes. So I think you were -- on -- that said, also you are right, we have a chance there. We are, in fact, in touch with some of the global OEMs for that perspective. And if everything falls in place, you will hear something on that. But there is definitive a possibility because the way -- we have migrated upside on the emissions and on -- and our capability in terms of robust supply chain. So there a lot of developed world -- big OEMs have observed that we are a good option to China and good option to them themselves in their own country. So having noticed that there is a good possibility in next 3 to 5 years horizon, that many such OEMs will be here. And even we have that opportunity [indiscernible].

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

I had a couple of data point requests. If you can share the DV series volume and value data that you share every quarter, please.

Yes, just a moment. I'll give it to you. Give me a second, Sandeep.