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

Ladies and gentlemen, good day, and welcome to the Kirloskar Oil Engines Limited Q1 FY '26 Earnings Conference Call hosted by Antique Stockbroking Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Amit Shah from Antique Stockbroking Limited. Thank you, and over to you, sir.

Yes. Thank you, Shruti. On behalf of Antique Stockbroking Limited, I welcome you all to Kirloskar Oil Engines Limited 1Q FY '26 Earnings Conference Call. To discuss the results, we have the senior management team of the company represented by Ms. Gauri Kirloskar, Managing Director of the company; Mr. Rahul Sahai, CEO of the company; and Mr. Sachin Kejriwal, CFO of the company. I would now hand over the call to Ms. Gauri Kirloskar for her opening remarks, post which we can open the floor for Q&A. Over to you, ma'am.

Thank you very much, Amit. Good evening, everyone, and thank you for joining us today. In addition to Rahul Sahai and Sachin, we also have with us Kiran Khapre, our Chief Human Resources Officer; and Farah Irani, the Company Secretary. And from Arka, we have Ridhi Gangar, CFO of Arka. I will begin with business and operational updates, and then Sachin will provide a brief overview of the financial performance, following which we will answer any questions you may have. We've had a strong start to fiscal year '26. I'm happy to share that the first quarter has been a record-breaking one for us. We closed Q1 with the highest ever net sales in GOL's history at INR 1,434 crores for the stand-alone business and INR 1,751 crores for the consolidated business. What makes this particularly noteworthy is that Q4 has traditionally been our best performing quarter. To surpass that in Q1 reflects strong demand, sharper execution and a clear alignment to our long-term aspirations under the [indiscernible] billion strategy. Also to put the numbers in context, in the same quarter of the last financial year on the power gen side, we were at the peak of the prebuy phase right before the CPCB 4+ transition. Despite the prebuy impact, we still grew at 6% plus. And if we normalize the prebuy effect, the growth is 22% in comparison with the same quarter of last year. We see that despite all the challenges in global markets, tariffs, geopolitical uncertainties, the Indian economy remains resilient and strong. We see strong tailwinds domestically, and we see the demand staying strong for us as a business. During the quarter, we made a regrouping within segments. The farm mechanization business, which was earlier classified under the B2C segment is now grouped under the industrial business within the B2B segment. Accordingly, you will see the numbers regrouped for the current and prior quarters in the presentation. Looking at the stand-alone sales breakup, the B2B business witnessed 8% year-on-year growth with all subsegments except industrial, recording double-digit growth. The B2C business grew 4%, with WMS sales remaining flat at INR 154 crores, while international B2C business grew at a strong 76%. In terms of geographic mix across both B2B and B2C segments, domestic sales stood at INR 1,298 crores registering a growth of approximately 6% year-on-year. Export sales stood at INR 136 crores, reflecting a 21% growth year-on-year. EBITDA for the quarter stood at INR 190 crores, reflecting a margin of 13.2% versus 13% last year. Numbers for the previous period are excluding reversal of provision for overdue receivables made for a customer towards sales made in earlier years. EBITDA margin at stand-alone level for the previous period, including reversal for overdue receivable provision was 14.8%. In the current period, there is no such reversal. Let me now take you through what drove this performance. The Power Generation business saw a strong revival in demand. We recorded our highest ever Q1 sales in this segment at INR 609 crores. This renewed demand, coupled with a good traction in high horsepower products helped us build solid momentum. The new products that we launched, including the Sentinel range and the OptiPrime range is seeing good traction. There is customer acceptance and the products are performing well in the market as per specification. We also hosted our PowerGen Conclave this quarter, which was very well received. It gave us a valuable platform to reinforce trust amongst our partners and showcase the next leg of our innovation road map. As I had mentioned in some of our earlier calls, our product range on the power gen side is one of the most exhaustive globally, and we have products that cover the entire range of the gen [indiscernible] industry. We also are making significant inroads into markets where we have not traditionally been strong, and we are closely monitoring the progress, and this will be a journey. Moving to the Industrial business. We progressed on 2 strategic projects, one for NPCIL and another for the Indian Navy. These are deeply aligned with our long-term ambitions. We are very keen to participate in the indigenization program that our defense agencies are focusing on. We believe that this is not just a great opportunity from a business standpoint, but also an opportunity to participate in nation building. In our Fluid Dynamics business or the B2C arm, we had a stable quarter. We believe that operationally, we are on good fitting now. We see the business now delivering consistent results with double-digit EBITDA margins and positive cash generation, which is good news for us. There has been a lot of work done post the plant consolidation on operational efficiencies, and this is showing results. We have to make sure that this consistency in results is maintained as we take the next steps of increasing market share. On the international front, our performance continues to be very encouraging. The Middle East and North Africa region saw strong demand. Our run rate has been consistent in this region, which is good news for us. International business remains a key focus area for us, and we will continue our journey of building out this business. Now a few updates on the consolidated business. Also within B2C business, we have successfully closed the divestiture of our cables and pipes business, which is called Optiqua as I had mentioned in my earlier calls as well, we have set out on a strategy that is clear on what is our core and what are the businesses that we will get into, and we will focus on those. There is a product road map in place. And over time, we will build out the product portfolio in line with this road map. This action of divestiture of Optiqua is in line with that strategy. At Arka, we had outlined the strategy to build out a granular retail book to complement the stable wholesale book that we currently have. In line with the strategy, we are making progress. You will see more presence of Arka many Tier 2 and Tier 3 cities across the country. As I mentioned earlier, it is in our ethos to build businesses that sustain generations, and it is also our expectation that each of our businesses remain successful in their own right. This principle will apply as well as we grow this business. Looking at the consolidated performance, net sales for the quarter was at INR 1,751 crores, registering 8% year-on-year growth. Net profit from continuing operations for the quarter was at INR 134 crores. That's approximately a 1% increase year-on-year. Please note that the numbers for the previous period are excluding exceptional items and including reversal of provision for overdue receivables made for a customer to a sales made in earlier years. Net profit for the previous period, excluding exceptional items and excluding reversal for overdue receivable provision was INR 133 crores. In the current period, there are no such exceptional items and reversals. 3 years before, I thought of COL as a 75-year-old start-up, and that was how we had to operate to build out the organization that we have today and the product portfolio. Now I call [indiscernible] a 75-year-old incubator of many start-ups. We have many areas that we are working on, many products that we are introducing that are new, many new markets that we are trying to enter, non-internal combustion engine technologies that we are trying out to fast track our progress. Whatever we do is in line with our strategy, and we will not lose focus on the path that we have set out for ourselves. And I'm very confident in Team KOEL to deliver on what we have set out to do. With that, I'll hand it over to Sachin, who will walk you through the financial performance in detail. Thank you.

Good evening, everyone. Thanks, Gauri, for the update. I will now give a quick walk-through of the financial performance for the stand-alone and consolidated business. The results and the presentation for today's call has already been uploaded on the exchanges and our website. Q1 top line registered growth of 8% year-on-year and 2% quarter-on-quarter. As Gauri mentioned, we believe this is a good start for the year. Even though we had a really good quarter in Q4 last year, we have surpassed it and grown marginal this quarter. Coming to the financial performance, I will start with the stand-alone performance first. Net sales at INR 1,434 crores for Q1 FY '26 versus INR 1,334 crores for Q1 FY '25, that is 8% increase year-on-year. EBITDA at INR 190 crores for Q1 FY '26 versus INR 175 crores for Q1 FY '25, that is 9% increase year-on-year. EBITDA margin at 13.2% for Q1 FY '26 versus 13% for Q1 FY '25. Net profit at INR 123 crores for Q1 FY '26 versus INR 117 crores for Q1 FY '25, that is 5% increase year-on-year. Cash and cash equivalents of INR 639 crores by end of this quarter. Please note that cash position is net of debt and includes treasury investments. Numbers for previous period, that is Q1 FY '25 are excluding reversal of provisions for overdue receivables made for a customer towards sales made in earlier years. EBITDA margin at stand-alone level for the previous period, that is Q1 FY '25, including reversal for overdue receivables provision was 14.8%. In the current period, that is Q1 FY '26, there is no such reversal. With payable at 76 days and receivables around 41 days, we are maintaining healthy working capital levels. Inventory is now at a comfortable level of 53 days, marking an improvement over quarter 2 and quarter 3 of last year when we were navigating the transition to new emission norms in both the Power Gen and Industrial segment. Now here is a further breakdown of the stand-alone sales for the quarter. The B2B sales were at INR 1,262 crores, that is 8% growth year-on-year. Power gen was at INR 609 crores, which was 15% increase year-on-year. Power gen sales for the quarter first time have crossed INR 600 crores. Industrial at INR 310 crores, that is 8% decrease year-on-year. Please note, we have reclassified our FMS business into B2B industrial business unit from this quarter, which was earlier part of B2C business. Distribution and after market was at INR 223 crores, that is 12% increase year-on-year and international business of B2B was at INR 120 crores, that is 13% increase year-on-year. The B2C sales were at INR 172 crores, registering a 4% increase year-on-year. WMS was at INR 154 crores at almost same level as previous year quarter. International business of B2C was at INR 18 crores, that is 76% increase year-on-year. Now looking at the consolidated performance for the quarter. Revenue from operation at INR 1,764 crores for Q1 FY '26 versus INR 1,632 crores for Q1 FY '25, that is 8% increase year-on-year. Net profit at INR 134 crores for Q1 FY '26 versus INR 133 crores for Q1 FY '25, that is 1% increase year-on-year. Please note numbers discussed here represent continuing operations only. Numbers for the previous period that is Q1 FY '25 are excluding exceptional items and reversal of provisions for overdue receivables made for a customer towards sales made in earlier years. Net profit for the previous period that is Q1 FY '25, excluding exceptional items and including reversal for overdue receivables provision was INR 151 crores. In the current period, there are no such exceptional items and reversal. Now let us have a look at consolidated segment performance now. B2B segment revenue for the quarter was at INR 1,276 crores, which is 9% growth year-on-year. The segment PBIT was at INR 139 crores, reflecting approx 7% decline year-on-year. The decline was due to onetime factors such as reversal of provision for overdue receivables. PBIT for the previous period, excluding reversal for overdue receivable provision was INR 126 crores, that is 11% year-on-year growth. In the current year, there are no such exceptional items in reversal. Operationally, we remain confident in the underlying strength of the business. B2C segment revenue for the quarter was at INR 292 crores, flat year-on-year. The segment PBIT was INR 28 crores, that is 18% decline year-on-year. Also within B2C business, the disinvestment of our cables and pipe business, Optica was effectively completed. This moves free up capital for redeployment into higher growth areas aligned with our core strategy. Financial Services segment revenue for the quarter is at INR 196 crores, reflecting 18% year-on-year growth. The segment PBT was at INR 14 crores, that is 28% decrease year-on-year. The asset under management was of June 30, 2025, stood at INR 7,231 crores. Please note numbers discussed here represent continuing operations only and the reclassification of our FMS business into B2B and B2C business. The PBIT and PBT numbers are before exceptional items. With this overview, I would like to reiterate that we have made a steady start to the year. As we move forward, our efforts are increasingly aligned with our long-term B2B vision. We are progressing with major steps in shaping a strategic road map that not only accelerates growth, but also ensures it is sustainable, securing long-term value for the business. With these key updates, now we will open the forum for the Q&A session.

[Operator Instructions] The first question is from the line of Balasubramaniam from Arihant Capital Markets Limited.

My first question regarding defense and Navy. And we got some 6-megawatt marine engine orders. I just want to understand what is the pipeline for similar orders and how we will manage execution risk in terms of IP development delays or any other risk we have. My first question.

So this order is for the development of a 6-megawatt marine propulsion medium-speed engine and it's an order for a prototype development. So at this stage, the orders just for prototype development, we have a certain amount of time to be able to execute that and build that engine. And if we do that successfully, then we are in line for further orders of that same type of engine.

Okay. And, secondly, finance plant consolidation B2C margin to double digits. I just want to understand whether it's early double digits or high double digits? And how will agro demand cyclicality impact water management solutions?

Yes, it's a good question. So the margins are at -- like low double digits. And we see that sustaining. We do think that it's a margin that we can sustain over the long term and even improve. And in terms of agri cyclicality, it certainly does exist. But I think at the kind of market shares that we are at, we are aiming to improve those market shares. So we will aim for the cyclicality not affecting us too much also as we build out the product portfolio to look for products that could work when the agri cyclicality is not in our favor.

In PS5 transitions, we did some 20% kind of price hike. So whether we are gaining volumes or customers absorbing these price hikes or we are losing some marginal accounts? Okay.

I'll request Rahul to answer that question.

So if you look at the [indiscernible] transition that has happened, we have actually very successfully emissionized our full portfolio on the construction equipment side. And we are not only gaining volumes with our customers that we currently have, but we're also gaining traction with customers that were not there with us earlier, and we're also entering new applications. From a revenue impact standpoint, you will see those impacts eventually coming in, but we are seeing a lot of positive response.

Our next question is from the line of Jason Soans from IDBI Capital.

Congratulations on a good set of numbers. First question just pertains to, I mean, PG segment, the Power Generation segment has done really well with the 15% growth. Just wanted to know in terms of verticals, in terms of the infra verticals, where is the demand emanating from and like, for example, real estate or is it broad-based? Just some color on that.

Yes. Thank you for your question. So yes, I mean, it's the same segments, which is infrastructure is essentially real estate and whether it's commercial or residential developments, these are the normal sectors that we look at in terms of demand. And it's actually broad-based. It's across the board that we've seen better demand.

Yes. Okay. And my next question is pertains to -- I mean, we're seeing some -- after some good growth in the industrial segment, we saw a degrowth in the 1Q, some weakness here. And similarly, on the same line, we saw good growth in the international, where I can see if you club the thing, it's basically 19% Y-o-Y growth. So just wanted to know what -- I mean, international was seeing some weakness in the past quarters. So just wanted to know the reason why the pickup in the international one and why the weakness in the industrial side of things.

Yes. So the industrial, what we're seeing actually is, if you compare it to last year, there was a prebuy that we saw in railways in the last year for industrial for Q1. So that's what's impacting the increase that you see. And on the international side, if you recall, on some of the earlier calls, we had talked about the business model change that we had done in the Middle East region, which was essentially to appoint a genset OEM called MySpan in that region, and we will be operating through them, and we had aligned all of our dealers and distributors in the Middle East and North Africa region to MySpan. So there was some -- like -- I mean, essentially, as that business settled down because we had introduced one more party in the mix. So what we're seeing now is the pickup happening that whole thing has settled down. We're seeing that the strategy that we had for the Middle East market in terms of appointing a [indiscernible] and that being the right strategy for power gen and growing up the power gen market in the Middle East is playing out. So it's settled down. We're seeing that traction, and I think we will continue to see that traction as we go forward.

Yes. And also, just wanted to know, I mean, the last quarter, you had given the HHP sales. So would it be possible to give it for this quarter as well, the HHP sales for 1Q?

Generally, we don't share the volume -- share the value for each segment within the power gen. And we have given overall value for the power business. So stick to that at the moment.

Yes. But we are tracking HHP node by node very closely and it's obviously a new market for us. And I can say that we are seeing our market shares increase node by node with our presence in those segments with the product portfolio that we have now.

Yes, sure. Last year, you had given that it's -- you have done INR 110 crores of sales in the whole year. So I just thought -- anyway sure. And just lastly for this first set, I just want to know when I go to the annual report, the loss for the Kirloskar Americas Corporation, KAC has widened compared to '24, and it has widened by quite a large amount. So I just wanted to know what is the reason for the sale. I understand you have Wildcat, et cetera, as well in that subsidiary. So yes, I just wanted to know what is the reason for that.

Happy to answer that question. So the business and the U.S. market is the largest genset market in the world. And it is a market where -- which is new for us, and we have to continue to invest in building out what we want to build up there to have a significant presence. So today, our presence is pretty negligible. And what we will see is we will continue to make investments, and that's why you're seeing the gap in the numbers. But it's a strategic call where I think that we have to continue to do that so that at some point, we are present in that market in a meaningful way. So that's what you're seeing.

Our next question is from the line of Suraj Malu from [indiscernible].

So when we gather that multinational companies spend over $1 billion in developing a new engine platform. So my question was what is our plan in developing new engine platforms for, let's say, 1,500 kV, 2,000 kVA kind of high node single engines. Obviously, we have this through our Optic offering right now. But if you could talk about like some time lines and budget for developing these platforms, these large engine platforms.

So the platform you talked about, we already have single engine nodes for 1,500 as well as for 2,000 [indiscernible] shortly. So we -- of course, we're not spending the same amount of money, as you mentioned, for the global companies. But we continue to invest in our R&D programs across the product portfolio that we want to build. And we already have some of the nodes that you mentioned.

Could you share some sort of client wins or any -- yes, any success stories with these nodes or, let's say, large engine nodes in the recent quarter?

Yes.. So for example, if you look at 1,500 kVA, we routinely do several of these on a month-to-month basis. And we are selling it to government clients as well as to private companies. It may not be appropriate for me to give out names of customers, but it's almost a routine for us at this point.

Could you share some industry applications, like which industry is going into?

Yes, yes. So it's right across, it goes into manufacturing, it goes into airports, it goes into construction, for real estate developments, all across.

Our next question is from the line of Umesh [indiscernible] from Nomura.

My first question is pertaining to [indiscernible].

Sorry to interrupt. Umesh sir, your voice is sounding very low. Not clearly audible also.

Is it audible now?

Yes. Now it is better, sir. Please go ahead.

My first question is pertaining to Power Generation segment. So if I look at current demand for power generation, especially from reality segment. So in your view, how we are seeing that demand currently looking like, whether we are more closer to peak kind of a demand, how we are setting it in terms of cyclicality? And also, if you can talk about other emerging sectors as well, data center, QSR, retail, hospitality, how do you see demand over the period of, say, next one year or so?

So as I mentioned in my opening notes, we see sustained demand in the domestic market, and it's actually across all of these segments. And specifically you mentioned some of these segments like real estate, et cetera, there is no -- we're not seeing any cyclicality. We're seeing sustained demand.

Got it. And the reality demand, is it broad-based in terms of geographies? Or are you seeing differential demand with respect to any one particular region or any one particular kind of a breakup between urban and rural? And similarly, I mean, if there is any action on the pricing side during the quarter? Have you seen any discounts given to the distributors because we have seen correction in the key raw material price that is [indiscernible] and other things.

Yes. So I mean if you look at in terms of pricing action, we are watching the market closely, and we are correcting in case there are minor corrections required, but there's nothing significant that we've done, and there are no significant changes that have happened. The market is stabilizing.

And your first part of your question, which is on demand, we're seeing it across. Certainly, in terms of the higher KVA nodes, it would be more prevalent in urban centers rather than rural because of the kind of developments and the size of developments we're talking about. But yes, no particular location or pockets, it's across the board.

Got it. Got it. My second question is pertaining to distribution or aftermarket. So do you see a consolidation happening in terms of branded players now more and more since last few quarters and especially with the launch of CPCB 4+ where electronic content could be relatively higher. So demand prospects could be relatively better for distribution business going forward?

Yes. So I think with the -- on the aftermarket and distribution side, what's happened with the CPCB IV+ emissions change and which you mentioned in your question is that all of the platforms, all of the engine platforms have moved to electronic engine. And that means the service has become proprietary. So certainly, wherever there would have been freelancers or people who are out of our, say, service dealer system who are servicing the engine, that's not really possible anymore. So to that extent, yes, consolidation has happened on the aftermarket and distribution side where the service for our engines has become proprietary for the CPCB IV+ range.

Got it. One clarification here. If you can share whether you are servicing aftermarket for new engines through your in-house team or you are doing it more on the outsourcing basis?

Yes. So when it comes to our service operating model, we do both. So we have our own service dealers, and we have service engineers that are part of the leadership organization, but then are certified and trained by us. So we do service via them. And then we have service contracts and service manpower that we also have directly on Kirloskar Engine. So it's a composite model depending on what kind of contract or what kind of service operations need to be done.

Got it. My last question is pertaining to power generation again on the bookkeeping side. If you could share number of percentage contribution from CPCB IV+ products in terms of overall turnover for power generation.

So see, we have transitioned completely to the CPCB IV era. So up to 800 kilowatt, all our products that get shipped out are CPCB IV+ compliant. Anything over and above that qualifies under the pollution -- state pollution control norms and our products comply with that. We're not really giving out segmental cuts at this point. But just to answer your question, every product that is CPCB IV compliant is being shipped out. So only CPCB IV compliant products up to 800 kilowatts are being shipped out.

Exactly. So my question was your revenue contribution from KV rating below 800 within power generation.

Yes, we're not going to go into the segmental split.

[Operator Instructions] Our next question is from the line of Teena from Motilal Oswal Financial Services Limited.

Congrats on a good set of numbers. My questions are related to the industrial and the distribution segment. So on the industrial segment, what would be the levers for long-term growth in this particular segment? Like what kind of traction can you expect from the existing projects, which are like NPCIL and even the marine order and even from the newer areas? So if you can elaborate a little bit more on how different segments are looking in this particular industrial side?

So if you look at the industrial business, and as you're aware, each of the segments have their core business as well as projects that we are working on. Now the industrial segment comprised of our Construction segment -- now within the construction, we also were working on adding mining equipment into that engine for mining equipment into that. So construction and mining, there is defense, marine and nuclear, that's another segment that we focus on. And even there, so if you look at whether it is the NPCI order or [indiscernible], which is the main propulsion engine order that we've got to the Indian Navy, there are strategic opportunities that could open up for us upon our successful completion of these projects. So defense, marine and nuclear presents interesting project type opportunities for large engines. Now we also have railways. And in railways, we largely do power cars, but we are also looking at other applications at this point. So if you look at each of the segments, and I won't go into every segment at this point, there is a core business that we routinely do, and we continue to focus on that as well as there are strategic programs that we've launched and we hope to see some positive impact coming up in the subsequent quarters or years.

So within these segments, you continue to see a fairly decent traction, particularly for your construction, mining and even for the marine side and railway side?

Yes, yes, absolutely.

And how would the revenue execution from these [indiscernible].