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

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

Thank you, Malika. Good afternoon, everyone. On behalf of Antique Stockbroking Limited, I welcome you all to 2Q FY '22 Post Result Earnings Con Call of Kirloskar Oil Engines Limited. Today, we have with us from the management, Mr. Sanjeev Nimkar, MD; and Mr. Pawan Agarwal, CFO of the company. I'll now hand over the call to Mr. Nimkar will just address the session earlier, and then we can open the floor for the Q&A. Over to you, sir.

Thanks, Amit. This is Pawan Agarwal. I will do the opening remarks and then both Sanjeev and I can handle the question also. So thanks, everybody, for joining the call 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, Ms. Smita Raichurkar. Our 2 other colleagues have also joined this call, but from different locations. Mr. Raul Prabhu Desai, who heads the strategy and business -- new businesses at KOEL, has joined this call from his residence in Pune. And Mr. Amit Gupta who leads corporate finance function at our subsidiary, Arka Fincap Limited, has joined this call from Bombay. And outset, let me first wish you a belated Dussehra and early wishes for Diwali. I hope you and your near dear ones are safe and keeping well. At KOEL, we have conducted COVID vaccination drive at all our locations and a large portion of our workforce almost 95% to 98% has already been vaccinated. We continue to take precautions like wearing mask and regular sanitization while continuing with our day-to-day operations. Now I wish to start by qualifying that during the call, we will 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. Let me now start with our sales highlights. Sales for the quarter grew by 25% year-on-year from INR 655 crores in quarter 2 of last year to INR 818 crore in this quarter. Further division-wide split and other details of the sales are captured in the presentation already uploaded under the website. Now I'll talk about the stand-alone performance of KOEL, followed by an update on major subsidiaries and summing it up with consolidated performance. On a half yearly basis, the sales grew by 50% from INR 970 crores in H1 last financial year to INR 1,457 crores in H1 this year. EBITDA at INR 115 crore against INR 72 crore for H1 in the last financial year, registered a 60% growth year-on-year basis. This results into H1 FY '22 EBITDA margin of 7.8% versus 7.4% for the same period in the last financial year. Steep increase in the prices of many inputs over the last few quarters continues to put pressure on the profitability of the company. Unfortunately, in our assessment, this commodity input cost pressure is unlikely to subside in the near term. Lastly, the net profit for H1 FY '22 was at INR 63.2 crores, registering a 73% growth year-on-year basis. Though this performance is against the lower base of pandemic at H1 last year, we believe our consistent efforts to grow the top line and prudent cost control measures has helped us deliver these numbers. We would continue with our efforts to protect the margins while growing the top line despite the ongoing commodity price and other supply chain constraints. Now coming to the working capital updates. Our inventory levels were at 46 days receivables of 35 days and payables of 66 days. With this, we continue to maintain a healthy working capital cycle. Moving on to subsidiaries. Following are some of the key highlights. Sales of INR 270 crores in the first half of current financial year at La-Gajjar Machineries Private Limited, in short LGM, registered nearly 18% growth compared to H1 of last financial year on a stand-alone basis. Other than government supplies all other business segments such as retail, exports, OEM witnessed healthy sales growth during H1. This steep increase in commodity input costs impacted the margins at LGM also as we could not pass on the entire input cost increase to the market. I'm happy to inform you that on the auspicious day of Dussehra, which is 15th October 2021, we have commenced our project of constructing a state-of-the-art manufacturing facility at the outskirts of Ahmedabad, Gujrat. This is a greenfield project, which will consolidate the existing manufacturing units of LGM and will enhance its manufacturing capacity and capability. We expect the new factory to be operational in the next 12 to 15 months' time. Our recently formed a step-down subsidiary, namely Optiqua Pipes and Electricals Private Limited, we started commercial operations in May 2021, and a good response from the market was noticed in quarter 2 for its various products, such as wires, cables, column, pipes and pumps. We are expecting about INR 40 crores to INR 50 crores of turnover in Optiqua in the current financial year. And we believe that EBITDA margins at Optiqua will stabilize at around 4%, 5% as we go along in the next few quarters. Optiqua also entered into a joint venture with ESVA Pumps India Private Limited by meeting an equity investment of INR 4.41 crores, thereby offering 49% stake in the company on 4th October, 2021. As you are aware, Optiqua was owned with a view to expanding our product offerings in a live category and wired cable, column pipes, electric motor even farms, et cetera, some of the products, which would likely serve the above stated objects. We will further strengthen our product portfolio under the allied category in the future. With the ESVA [TV] formation, we are not only securitizing the supplies of mini mono block pumps, which is one of the growth engines for the Water Management Solutions division of KOEL, but also adding on the manufacturing capabilities in this domain. Kirloskar America Corporation, our U.S.-based subsidiary, registered a sales growth of 57% year-on-year in H1. Sales that KAC grew from INR 10.7 crores in H1 last year to INR 16.8 crores in H1 of the current financial year. Another update is on Financial Services business. During second quarter, we have formed a wholly owned subsidiary, Arka Financial Holdings Private Limited. The idea being forming the subsidiaries to consolidate and bring the entire financial services business under 1 umbrella. This structure will help us sharpen our focus on building the financial services business. KOEL has infused INR 3.01 crore in Arka Financial Holdings Private Limited, AFHPL as share capital in quarter 2 of current financial year. AFHPL in turn has infused INR 80 crores of equity share capital in Arka Fincap Capital Limited, AFL. With a gross capital infusion, KOEL holds 100% and 90.21% equity stake in AFHPL and AFL, respectively. The remaining 9.79% equity stake of AFL is held by AFHPL. RBI on 14th October 2021 granted its approval to AFL for transfer of control in favor of AFHPL. In line with this approval as a next step, there will be a shareholding realignment at AFL, whereby, KOEL will cease to hold direct equity stake in AFL, but it will indirectly control AFL through its 100% subsidiary, AFHPL. The above mentioned realignment of structure of Financial Services business will open up many doors for future growth and expansion of this business segment at KOEL. As informed earlier, the total capital commitment of or towards financial services business continues to be capped at INR 1,000 crores, out of which, as on date, approximately INR 701 crores is invested in AFL and INR 83 crores in AFHPL. The key highlights of the financial performance of Arka Fincap Limited can be seen in the quarter 2 earning call presentation already uploaded on the website of the company. As far as consolidated performance is concerned, here are the key pointers. Sales grew at 46% year-on-year in H1 at INR 1,801 crores against approximately INR 1,233 crores during H1 of last year. EBITDA at INR 181 crores against INR 119 crores for the H1 of last year, registering a growth of 52% year-on-year. H1 FY '22 margin stood at 9.9% versus 9.5% for the same period in the last financial year. And net profit for H1 FY '22 was at INR 74 crores, 40% growth year-on-year basis. Now a quick update on various businesses -- on the power generation side, we have been gaining a good traction from health care and infrastructure. This quarter, we have seen some good bulk order booking in this business. We continue to focus on these promising sectors for strengthening our portfolio further. Industrial business, however, witnessed some impact in the quarter due to shortages in supply of semiconductors resulting in the postponement of some of the sales. Despite that, we have delivered a 13% growth in second quarter year-on-year basis in this business relation. The transition from BS III to BS IV has been quite smooth as expected. We are receiving positive and encouraging feedback from our various OEMs on BS IV compliant engines supplied by us. On the farm mechanization side, our readers are being well received in the market. We have strengthened our product portfolio in this business, with the recent launch of petrol leaders. We do unlike power pillars are not sold to farmers against government subsidiary. So in that sense, we expect a better margin profile in this product category going forward. With this addition, we now have a full range of product portfolio, both in terms of cost power and fuel options. On the institutional and project business, what we call Large Engines Business, we have a proven track record in defense and marine segments. We continue to strengthen our footprint in this domain. We have had a good breakthrough in some of the key projects for our esteemed clienteles during this quarter, which fetched us new orders in excess of INR 50 crores in quarter 2. The product business by nature is a long execution cycle business, and therefore, our strong on-hand order mode of approximately INR 150 crores will help us deliver good numbers in coming quarters in this business. Now on the new product development side, the following are some of the updates. As you know, we launched Kirloskar i-Land early September this year. This is an organic waste composter, OWC solution. It has attracted respectable number of inquiries from the market. We have started providing the OWC solution against these orders received from customers. The early signs are quite encouraging. We expect to see good traction in this segment in coming quarters. We have also launched induction motor under Varuna brand at LGM recently. We are in the process of launching similar motors under Kirloskar brand in KOEL over the next few months. Our R&D efforts are continuing on the higher kVA engine, as mentioned in the earlier earnings calls. Additionally, the development of gas based engine sets is also progressing satisfactorily, and we will soon announce its launch, hopefully in coming few quarters. With this, we come to an end of the updates, we may now commence the question-and-answer session.

[Operator Instructions] We have the first question from the line of Rohan who is an investor.

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Yes, please, go ahead.

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Okay. Amit, would you pick up the NBFC question first, and then we will respond on the second question?

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Only 2%, sir, growth?

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[Foreign Language] I'm also an investor. [Foreign Language]

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Amit, I think there are other participants on the line. So I mean, operator, could you please see and...

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[Operator Instructions] We have the next question from the line of Amit Shah from Antique Stockbroking.

Sir, firstly, I wanted to understand on the gross margin we have seen some bit of a compression in this particular quarter. And if I recall, during the last quarterly con call, you had mentioned that we have taken some price hikes in the month of July and August, which will be passed on and basically the margins will revert back to normalcy. So if you can just help us understand what has led to a sharp gross margin compression? I understand there has been a commodity price increase, a significant commodity price increase. But if you can just help us understand when can we see normal gross margin returning back and how much time it will take. If you can just help me understand that.

This is Pawan Agarwal. Yes, you are right, there has been -- as we have been informing on the earlier calls also, there has been steep increases in commodity input prices. And it has impacted various businesses within Kirloskar. As compared to last quarter, if you see the material margin is impacted by about 40 basis points -- 40, 45 basis points, not more than that. In different businesses within KOEL, we have power generation, industrial, customer support, agriculture, large engine, et cetera. So different businesses, different approach we have adopted in -- largely in quarter 2, we have taken price increase again in some of the businesses. And the cost increase has been accommodated to a large extent. Still, you could see about 0.5 percentage point impact in the current quarter. Going forward, looking at the markets, I think the commodity prices still continue to remain volatile. And it will take some time. As per our understanding and initial assessment, it is going to take some time before the margins go back to the earlier level. It is not going to happen very soon. So that is what our assessment is. It's very difficult to put a number to it at this point of time, looking at the external environment, but it is a difficult environment right now.

Sir, do we have any threshold margin that we keep in mind? Or do you feel that around the current levels of say, 35-odd percent gross margin could stabilize at least in the near future? And then from next year onwards, the price hike kicks in and basically gross margin starts improving.

See, Amit, whatever levels you are saying -- this is Nimkar here. The levels we are seeing in this quarter, you can see this is bottomed out. It is only going to stay here or improve further on that side. What is happening actually last 2, 3 quarters is we are playing kind of a catch-up game. Because commodities are continuously going up. In this last 6 months, 3 times in power generation, we have pushed the prices up in the market, 2x in industrial, 2x in water management solutions sorry, 3x in water management solution. But still, it is catching up because by the time you push it, implement it, you are seeing the commodities have further moved up. That is what has happened. But we are watching very carefully, and there is an ultimate limit also how much we can push up on the front-end side. So we have also initiated quite a few programs in each of the BUs to look at further cost cutting and very intense cost-cutting programs, we have initiated that. And if we get 1 quarter of where commodity stabilization, I'm not seeing commodity decline commodity stabilization. And in that quarter, it would push the prices up by little percentage. That will be the quarter where you see the upliftment starting. But I don't know whether it will happen in Q3 or it will happen in Q4. So that's -- but whatever you are seeing right now by all our assessment that the last you can see, it will be only better than this.

Sure, sir. And sir, 1 more thing I just wanted to understand, you mentioned that you have taken multiple price hikes. So at a broad portfolio level, what is the average price hike that we have taken YTD? And have we seen any impact on the volume because of the price hikes that we have taken?

Business to business, it is different. In the Water Management solution, our overall price hikes may be in the range of 16% to 17%. And it is the highest one we have taken in the last 9 months. And if you look at the power generation side, maybe at least 6%. Industrial may be around similar 6% or 7%. But the commodity impact can also be very little different in different dormants.

Sure. And sir, any volume impact we are seeing demand...

We see -- we had reached to a level where we had no time to think about volume impact. We said we are a leader. There is a complete fire on the back-end side of -- on the commodity market. We had to take this call. And as a leader, we took that call. We were anticipating there will be some hiccups happening. But fortunately, in almost every segment, Power Generation segment, the health care sector came very handy for us, and we continue to gain healthy order board and education because of our progress in supply chain management. So that helped us. In industrial domain, the BS4 momentum got caught up and that helped us. In the water management side, we had a good amount of stock with us. So those stocks helped us to carry on the market. So not even any segment we have lost any market share. In fact, some of the segments we must have gained only.

The next question is from the line of Bhagyesh from HDFC Mutual Fund.

So you just mentioned that you have not lost market share anywhere. But one of the agency peer did announce a large order for the data center segment. Is that a segment where MNC players have a natural advantage? And secondly, over the next 3 to 6 months, the electronics procurement strategy? And Now what is the latest deadline for the CPCB now?

Okay. So the first question, you talked about the data center. And I think in the last call also, I replied to one of the queries. On the data center side, I do not know whether to call a word fortunately or unfortunately, but the market has been shifting continuously on upward side. Three years back, the data centers in India were consuming in 750-1,500 kind of range, largely and then some 2 megawatt and 2.5 megawatt kind of thing. You could look at the last 18 months window, 2 megawatt plus requirement of data centers have sharply gone up. Of course, they do buy 750, 1000, 1500, we have entertained some of the data center inquiries or orders we have taken, we have restored that. But our share right now in data center domain is not that high at the moment because of the range limitation, but we are working out on that. And as Pawan was talking about in his opening remarks, very shortly, we will be offering 12, 15 and 1,500 to the market. So that is in the last stage of our plans. So with that, our ability to address data center will be few shares better than what it is today. So that's the answer to the first thing. Second point, you talked about CPCB 4 transition, as we are talking about, our related estimation is first July 2023. That's what is our estimation is on -- that will be the effect to date. And happy to just share with you people that as an organization, we are fully geared up to handle this transition for all the models whatever is required. -- because of our very successful transition of BS4. So that work, what we have done on BS4, 70%, 75% of that work is coming extremely handy for us for CPCB 4 transition as well.

So you do not foresee any component shortage or any chip shortage or whatever...

As per your third query, the component shortage, like you are tracking the market and all of us are seeing what is happening in the global market. So semiconductor situation is impacting. But in fact, if we are looking at first July 2023, by all estimation right now, the market will be stabilized by that time. Semiconductor market globally will be stabilized. Right now, people's anticipation is next 3 quarters can be dramatic for the chip related markets. but I'm talking about almost 18 months from now. So by that time, it will be reasonably stable.

[Operator Instructions] The next question is from the line of [indiscernible] from SBI Mutual Fund.

My first question is a clarification. The opening remarks, Pawan mentioned about reorganization of Arka Fincap and wherein Pawan mentioned 90% holding of AFHPL. But the presentation you mentioned the holding is 100%. Could you just help us understand the reorganization and the stakes, please?

Yes. Amit, can you just take this up?

Bhavan, just to explain the structure. We have got approval -- sorry, I'll start that we have incorporated this Arka Financial Holdings Private Limited as a CIC for its financial services business. Currently, KOEL holds 90% direct -- 90.2% directly and 9.8% indirectly by way of investments through Arka Financial Holdings Private Limited. The money invested by coil into Arka Financial Holdings is also ultimately invested into Arka Fincap Limited. So KOEL ultimately holds 90.2% directly, 9.8% indirectly. Going forward, what Pawan jee has remarked, the group has said in the beginning of the call that going forward, the existing holding of shares of Arka Fincap Limited in the books of KOEL will be transferred to Arka Financial Holdings Private Limited, so that KOEL will ultimately hold 100% of Arka Fincap Limited. -- through its subsidiary, Arka Financial Holdings Private Limited.

Sure. That helps. The second question is, if you could help us understand what was the kind of tractor engines business and with the reorganization of Swaraj Engines holding, what could be the impact on the total business?

Can you just repeat the question, please?

So KOEL actually had a holding in Swaraj Engines, and there was a supply of engines for tractors to that entity, with that now stake having been sold. So how is that impact going to be on KOEL Financial?

Got the query. Just a clarification to you, KOEL never had a share with Swaraj. So -- it was different site concern of Kirloskar Group, called Kirloskar Industry. So that company had some stakes with Swaraj Engines and that's their decision to sale or keep or whatever it is, so that the independent decision of that organization, nothing to do with KOEL. That's the first clarity. Second, this year, throughout, we have been supplying good quantities to Swaraj. And Swaraj buying from KOEL is a strategic tie-up for them. It's the derisking of some percentage of engines coming from a different place. So that works strategically for them. and we are pretty cost competitive and also extremely reliable supplier and our straight past with Swaraj is 99.8%. So that's the quality which we are giving. So this relationship will continue, and I do not see any linkages between the 2.

Sure. And on the industrial engine side, ex of the tractors, what could be the growth in the other segments if you could help understand now.

Yes. On the industrial engine side, as Pawan also brief in his opening remarks that last 2 quarters, we have been doing very well. Our BS4 transition has really more, I would say, beyond our own expectations. So it is the products are stabilized, more than 1,500 machines in this wave we have supplied into that domain, and those are moving through different OEMs to the market. So we have proven once again our promise of giving extremely cost competitive and our OEM-friendly solution. Because when our OEMs have taken our solutions, they did not have to do any changes in the envelope side of their equipment. That was a big value edition we provided, and we managed all the emission norms within that boundary conditions and our products are going. So that gave us a good traction this quarter. And I hope this will continue this quarter and the next quarter. Also, infrastructure demand is going on. So these products are very high in demand. Apart from that, the other Arka equipment are also moving well. So overall, demand on the industrial side right now, I'm seeing is in a higher teens and probably the both quarters may remain similar.

Sure. And lastly, just one request. I think on a consolidated basis, having an NBFC kind of clutters and as we have a subsidiary on the industrial side. So if you could give up financials P&L and balance sheet for the consolidated industrial business along with La-Gajjar, that will be very useful to understand the true value of the industrial business. That's it from my side.

Thanks, [indiscernible] for the suggestion, we will look into it.

[Operator Instructions] The next question is from the line of Sandeep, who is investor.

So my question is on the draft bill, the Power Ministry which recently came up like in the last year of this quarter. So will that have any impact on design tech business? So did that have any material impact on that? And I had a couple of questions on maybe Arka Fincap, i would ask those after the...

Okay. So coming to your query on this draft compensation or drop bill of -- or ministry, which was in circulation and now -- nothing more has happened on that. We have approached this in multiple ways. But coming straight to your question, will it have a material impact? Perceptually, yes. Factually, on ground, close to nil. Because whatever is proposed in that deal in all our wireless imagination of the implementation of any one of those suggestions on ground is practically impossible, whether that renewable energy solution to be applied in some small houses here and there or in 2 years, complete transition or something. We felt it was too early or whatever is in practical things. That's our opinion. We have put communication back to the Ministry through our IDMI body. So that is a common forum of a digital manufacturers association. So that team collectively is representing to the Power Ministry as well as Environment Ministry as well as CPCB and ARAS, so whichever bodies are involved into that. So it is that way. But at this point in time, yes, perceptually, it made some impact in terms of starring the mind shop some of the customers. But when they realize that it is not practical. So right now, it's still at that level.

So then there is some news on it, we get a disclosure like because that we to health because we got to go to relies like so if something impacts like request to disclose it next year.

Not clear what you are saying. Can you speak -- you're barely audible.

So what I'm trying to say is please give proper disclosures when event because it seems that it has an impact. That was my point.

So it is a drop level. It is a tall has not become a bill, and we have the representative of industry has written a mail to them. Sent a mail to them.

What I've seen from the Kirloskar Group part is like we leave from time to time basis disclosure, right? So even if you change the logo last to last month and last quarter, we had given a disclosure about the Kirloskar Limited and those sort of things. So is this sort of bill is going to a material impact. It's better to give disclosures in hand like that will help the shareholders, is what I'm going to say.

No, no, I agree. I agreed. Once we feel there will be a material impact, we will do the new pool. Right now, our assessment says it will not have a material impact.

Okay. So coming back to the Arka Fincap question. So sir, what is our average cost of capital like other funds that we have taken? And -- so like every INR 100 crores of, say, disbursement in Arka Fincap, so what is the non-finance cost increase, any numbers that we can put.

So I'm not able to get your question...

So for every INR 100 crores of increase in disbursement in Arka Fincap. So how much is the nonfinance cash Other than the interest like employee cost or any billing that will come up.

See I can give you [indiscernible] that, yes, we have been working on a 3.5% kind of a spread. And then we are maintaining ROA of 1.9% on the total AUM.

Hello, operator, could you please keep your speaker phone on the mute mode, please? Yes. Please, go ahead.

Yes. And sir, at the first question, like average cost of capital other than funds that were being...

Average cost of borrowed funding for Arka Fincap latest is coming in the range of 8% to 8.5%, whatever marginally we are borrowing.

[Operator Instructions] The next question is from the line of Amit Shah from Antique Stockbroking.

Yes, sir, just going back to the draft Ministry of Power's regulation, which has come out, draft bill. I just wanted to understand, in case if the -- this particular bill gets passed of banning diesel engine set over a period of 5 years -- do we have any strategy to do a tie-up and provide an alternative of a battery-backed storage. Any thought process on that, sir, that will be helpful.

Amit, irrespective of the bill, our strategies are in place. because we are a large organization, and we have a separate win with us, which has to continuously think about what are the alternates available with customers and what can we do about it. So we do have -- we very happy to inform you even if this will get passed tomorrow money, we will have sufficient alternates available for our customers in terms of backup power whether it will be battery based or it will be renewable based or it will be gas-based. Multiple options are available in this.

And this will be all in-house technology or sir, we have entered into a JV or a technology tie-up with a foreign partner.

So we will have a combination of things because some of the technologies we have already developed on our roles internally. And some of the things we are in discussions with people who have traveled some distance in that direction. So we do not want to reinvent that thing. So we'll have necessary tie-ups whether it's something in the back-end side or something in the front-end side.

The next question is from the line of Manish Goyal from Enam Holdings. The line got dropped. [Operator Instructions] As there are no further questions, I would now like to hand the conference over to the management for their closing comments.

Thank you so much. These are difficult times, but KOEL, as it has been managing the last 1.5 years, we will continue to tackle the situation graciously. And we once again thank you for taking interest in Kirloskar Oil Engines Limited. Thank you.

Thank you.

Thank you very much, members of the management. Ladies and gentlemen, on behalf of Antique Stockbroking, that concludes this conference call. Thank you for joining us, and you may now disconnect your lines.