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

Ladies and gentlemen, good day, and welcome to the Kirloskar Oil Engines Limited Q1 FY '27 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. Sanjeev Zarbade. Thank you, and over to you, sir.

Thank you, Anushka. Good evening, everyone. On behalf of Antique Stockbroking Limited, I extend a warm welcome to all participants joining us for the 1Q FY '27 Post Earnings Conference Call of Kirloskar Oil Engines Limited. We are pleased to have with us the senior management team of the company, comprising Ms. Gauri Kirloskar, Managing Director; Mr. Rahul Sahai, Chief Executive Officer; and Mr. Sachin Kejriwal, the Chief Financial Officer. The management will begin the call with their opening remarks on the company's performance during the quarter and the business outlook. This will be followed by a question-and-answer session, where participants will have the opportunity to interact with the management. With that, I would like to hand over the call to Ms. Gauri Kirloskar for her opening remarks. Over to you, ma'am.

Thank you, Sanjay, for the introduction. Good evening, ladies and gentlemen, and thank you for joining us for Kirloskar Oil Engines Limited's First Quarter FY '27 Earnings Conference Call. Joining me today are Rahul Sahai, CEO of KOEL; Sachin, our CFO; Kiran, our CHRO; Farah, Company Secretary; and from Arka, Ridhi Gangar, Chief Financial Officer. Thank you all for joining us. The first quarter of FY '27 reflects an important milestone in KOEL's transformation. While the quarter was characterized by significant geopolitical uncertainty and unusually weak export markets, our domestic businesses delivered broad-based growth across all our major operating segments. This reinforces our confidence that the strategic actions we have taken over the last few years are translating into stronger execution, improved market positioning and a more resilient business model. Our stand-alone revenue grew 16% year-on-year to INR 1,461 crores, led by robust domestic demand across power generation, industrial and distribution and aftermarket businesses. Power generation grew by 18%, industrial by 19% and distribution and aftermarket business delivered another strong quarter with 20% growth. These are not isolated performances. They reflect sustained execution across our portfolio, continued customer engagement and increasing market competitiveness. In the power generation business, one of the highlights of the quarter has been the continued strengthening of our position in the domestic power generation market. Over the last year, we have fundamentally redesigned our approach to the sub-30 kVA market. Rather than competing with individual products, we have created a comprehensive portfolio architecture covering multiple customer segments, technologies and price points. This strategy has significantly strengthened our competitive position in India's largest genset segment and has contributed meaningfully to our domestic market share gains. Alongside strengthening our core businesses, we continue to invest in building the next generation of growth platforms. Our OptiPrime modular power platform continues to gain momentum as customers increasingly evaluate resilient and scalable power architectures for data centers and mission-critical infrastructure. During the quarter, we secured an important order in the data center segment, validating both the market need and the differentiated capabilities of our modular architecture. Now coming to the industrial business. Our industrial business grew 19% domestically. Our Construction segment saw double-digit growth in spite of muted growth in the overall construction industry. Marine segment more than doubled, growing 125%. Railways grew 62%. Both marine and railway segments are businesses where we have built durable platform relationships and a strong spares and service annuity behind the first sale. But the more interesting development in industrial is that our growth is no longer confined to selling engines into applications we have always served. We received a landmark order from the oil and gas segment for natural gas gensets across ratings up to 500 kVA. This reinforces our presence as a credible gas power solutions partner and further strengthens our position in industrial gas-based power solutions and our investments in advanced fuel-agnostic technologies. Last quarter, we also established a dedicated subsidiary for our defense business called Kirloskar Advanced Systems Limited. India's defense opportunity is expanding rapidly, and our position here is unusual. The research, development and intellectual property are entirely indigenous. That allows us to offer global standard solutions that directly reinforce national capability. We are building this deliberately and for the long term. Now coming to the distribution and aftermarket business. The distribution and aftermarket business is in many ways, the truest measure of our franchise. It cannot be bought with a good -- with a quarter of good pricing. It grows only where the installed base is large, the service network reaches and the customer chooses to come back. This quarter, it grew across every channel, led by service, which brings resilience and healthy cash generation alongside that loyalty. And we completed our first end-to-end turnkey repowering high horsepower project. A 1010 kVA installation won in direct competition, a signal of how far the capability now extends. On the international business, as expected, our international business remained affected by geopolitical developments and delayed customer investment decisions across several regions. The Middle East region is an important export market for us, and it continued to operate below normal levels, impacting both business mix and operating leverage during the quarter. While these conditions affected our international performance, we remain committed to our EBITDA delivery for the full year. We remain confident in the long-term opportunity and continue to engage closely with customers while preparing for demand normalization. On KOEL Fluid Dynamics, our Fluid Dynamics business was broadly flat year-on-year at INR 294 crores with domestic sales up and exports down. Underneath that flat headline, however, the business strengthened materially. Channel pump business more than doubled, and we delivered our highest ever V8 submersible output. On the balance sheet, total borrowings reduced from INR 167 crores to INR 77 crores. Working capital improved by 11 days, and our credit rating was upgraded to AA. This is a business that is being made structurally healthier while it waits for its exports markets to recover. On Arka, Arka reported revenue of INR 210 crores, a growth of 9%. Assets under management stood at INR 7,651 crores at the end of the quarter. The team has crossed 1,800 employees across approximately 136 branches, which gives it a considerably stronger platform for the growth ahead. Now I'll talk a little bit about profitability. Turning to profitability. EBITDA for the quarter reflected 3 primary factors: lower export volumes, elevated commodity costs and the timing difference between cost inflation and price realization. Importantly, this is not a reflection of any deterioration in the competitiveness of our businesses. Across virtually all of our businesses, we have already implemented pricing actions. However, given the nature of contracts and customer agreements, realization occurs over different time frames. As these pricing actions progressively flow through over the coming quarters, supported by our ongoing cost optimization and operational excellence initiatives, we expect profitability to improve. On the consolidated level, KOEL delivered revenue of approximately INR 1,772 crores during the quarter, reflecting healthy growth despite a challenging external environment. Our Power and Energy businesses continue to perform well, while KOEL Fluid Dynamics maintained stable domestic performance despite export headwinds. and Arka Financial Services continued its growth trajectory with higher revenue, expanding assets under management and a broader national footprint. I'll make some remarks now on Engineering and Technology. Beyond delivering another quarter of strong domestic execution, we continue to build the next generation of growth platforms that will define KOEL's future. Our investments in modular OptiPrime power systems for AI data centers, gas-based distributed power, defense, high horsepower engines and advanced industrial applications are steadily expanding our addressable market and creating new avenues for long-term growth. The OptiPrime hybrid power systems, although developed with AI data centers in mind, the architecture is also relevant to microgrids, industrial prime power, utilities and other applications where fast-changing loads and resilient operations are essential. As we look ahead, we remain encouraged by the underlying momentum across our businesses. India continues to present attractive opportunities across infrastructure, industrialization, power reliability and manufacturing. At the same time, we are building entirely new growth engines through our global expansion, data center power solutions, gas-based power systems, defense, high horsepower engines and advanced combustion technologies. These initiatives, combined with the strength of our domestic franchise and disciplined execution, position KOEL well for sustainable long-term growth. In summary, while the external environment remains dynamic, the fundamentals of our business have strengthened considerably. Our strategy is delivering results. Our domestic businesses continue to outperform, and we remain confident in our ability to create long-term value for all our stakeholders. With that, I will now hand over to Sachin, who will take you through the detailed financial performance for the quarter. Thank you.

Good evening, everyone, and thanks, Gauri, for the update. I will give a quick overview of the financial performance for stand-alone and consolidated business. The results and the presentation for today's call have already been uploaded on the exchanges and on our website. Adding further on Gauri's remark, Q1 demonstrated the resilience of KOEL's business model, while exports faced global headwinds, our robust domestic performance confirms that our strategic transformation is delivering real execution and long-term value. Coming to the financial performance overview, I will start with stand-alone performance first for the quarter. Net sales at INR 1,461 crores for Q1 FY '27 versus INR 1,262 crores for Q1 FY '26, 16% year-on-year increase. EBITDA at INR 165 crores for Q1 FY '27 versus INR 172 crores for Q1 FY '26, 4% decrease year-on-year. EBITDA margin at 11.2% for Q1 FY '27 versus 13.5% for Q1 FY '26. Net profit stood at INR 99 crores for Q1 FY '27 versus INR 110 crores for Q1 FY '26, that is 9% decrease year-on-year. Net cash position, net of debt and including treasury investment stood at INR 485 crores. Our cash conversion cycle remained highly efficient at 25 days, while inventory days increased slightly at 264 to support business expansion. Our strong working capital position continues to ensure robust operational liquidity. Coming to the further breakdown of the stand-alone sales for the quarter. The strong sales momentum was backed by a double-digit growth across all the business units in the domestic business. So within B2B, power gen was at INR 720 crores, 18% increase year-on-year. Industrial was at INR 368 crores, 19% increase year-on-year. Distribution and aftermarket was at INR 268 crores, 20% increase year-on-year, and international business was at INR 106 crores, 11% decrease year-on-year. Now moving to the consolidated performance for the quarter. Revenue from operation at INR 2,000 crores for Q1 FY '27 versus INR 1,762 crores for Q1 FY '26, 13% increase year-on-year. Net profit at INR 111 crores for Q1 FY '27 versus INR 134 crores for Q1 FY '26, 17% decrease year-on-year. Please note numbers reported are for continuing operations only. Let us have a look at consolidated segment performance for the quarter now. B2B segment revenue for the quarter was at INR 1,488 crores, which is 17% growth year-on-year. The segment PBIT was at INR 115 crores, reflecting 18% decrease year-on-year. Moving to B2C. B2C segment revenue for the quarter was at INR 301 crores, which is 3% growth year-on-year. The segment PBIT was at INR 26 crores, that is 7% decrease year-on-year. Now moving to the Financial Services. Financial Services segment revenue for the quarter is at INR 210 crores, reflecting 9% year-on-year growth. The segment PBT was at INR 9 crores, that is 31% decrease year-on-year. In summary, our strong domestic execution and expansion into high-value mission-critical applications continue to drive top line performance while mitigating geopolitical volatility through disciplined cost optimization and operational excellence, we are confident that our strategic investment across our key operating segments position KOEL well for sustainable growth and value creation. With this update done, I would like to open the floor for Q&A.

[Operator Instructions] We take the first question from the line of Priyankar Biswas from JM Financial.

Congratulations to you that despite, let's say, the export headwinds, I would say, a very strong performance on the domestic side, first of all. My first question is, we have had this announcement on this large hyperscaler order. Can you just elaborate a bit more about that? Because there is this concern that probably the customer that from which we have secured the order from may not be having like significant experience in this space. And furthermore, otherwise, how do you see the data center prospects for you in particular because in the coming years, given that we have a very strong incumbent in the market? That's the first question.

Thanks for your question. So data center represent an important structural opportunity because they require high reliability and rapid response, robust control and strong life cycle support. all areas that are aligned with KOEL's power system capabilities. Q1 was strategically significant because as you mentioned, we secured our first hyperscale data center order of approximately 192 megawatts. We view that as a reference point rather than endpoint. Our immediate objective is to execute this order extremely well and establish KOEL as a credible HHP ultra-high horsepower alternates for hyperscalers, colocation players and EPC partners. We are strengthening product capability, testing, supply chain readiness, controls and service support around this opportunity, and we will be disciplined about distinguishing pipeline from actual orders and actual revenue.

No. What I meant about was, let's say, the customer profile that you -- for this particular order. So do they have any relevant experience in construction of data centers? Or what's the track record? So where do we get comfort on the customer in this particular case? And is there further orders that you are in negotiations on that we can see visibility in the coming, let's say, quarters. So the question was more around that.

Yes. I think, look, on the customer end, we continue to work with multiple customers. And in this case, there is one that has materialized with the purchase orders. Now we do checks and balances. Beyond that on further orders, that is internal and proprietary information. But at this point in time, there are many customers who are entering the data center segment, and we get queries all the time. So it's not unusual for us.

Okay. That's very helpful. And also, sir, if I squeeze one more in before I fall back into the queue. In this particular quarter, I see that there is a -- on the stand-alone numbers specifically, I see that there is a sharp increase in the employee cost. So roughly around, if I may say, like 22% quarter-on-quarter and let's say, close to 40% Y-o-Y. So is this the run rate that we should look at? Or is there some one-off element within that, if you can clarify?

I will elaborate this. So employee-related expense increased materially year-on-year. So our Q1 bridge indicates an increase of approximately INR 31 crores, and you rightly mentioned that is a 40% increase. And there are several components basically to this increase. The number one is annual increments. Number two is ESOP-related expense because we want to reward our high-performing employees. Then there is a capability additions and investments supporting future growth programs. So some of these costs are structural and some are timing related, and we don't want to characterize all of them as one-off. What matters is the return on that cost base as revenue scales, particularly in international high horsepower and aftermarket business, we need to demonstrate better fixed cost absorption going forward and productivity. And this is an explicit management priority right now.

We take the next question from the line of Ankur Periwal from Axis Capital.

Congratulations on a good set of numbers. First question on the revenue growth, especially on the power gen and the industrial side. Just trying to get your sense on, one, have we started seeing the revenue contribution from NPCIL and Defense, the marine contract that we had won in this quarter? And secondly, if you can directionally give some thoughts on what is driving the growth? Is it largely led by the OptiPrime or the HHP series or the LHP, MHP, how the growth is panning out there?

Ankur, just to give you clarity on this NPCL order execution, we have mentioned in the past several times that those are milestone based, and we are at the execution stage right now. And some of the revenue will start flowing in this financial year and the remaining will come in coming quarters -- coming years basically. And on Defense and Marine, we see a lot of opportunity even Gauri spoke in her opening remarks. So we'll continue to focus on those segments.

So no contribution in this quarter specifically, right?

No, Ankur. Especially on this NPCL order, there was no contribution in this quarter.

Sure. And on the growth in HHP and the mid and smaller ones, if you can suggest that, is the largest part of growth coming from HHP or it's well distributed across?

So we don't give out the individual numbers, but the largest chunk of growth, I mean, while it's coming from HHP, it's still lower in terms of -- because of the base. So I don't have anything specific to call out other than HHP, actually, we're seeing growth right across.

Okay. Fair enough. And just secondly, on the RM inflation pass-through. Now we are seeing around 60, 70 basis point decline on a year-on-year basis in our gross margin. One, was there any benefit of price hike in this quarter? And if you can suggest on the price hike side, are we largely covered off post the recent price hikes that we took?

Yes. So we have been proactively taking price rises. So if you look at power gen, it's different. It's different in industrial because in industrial, you have customer-wise contracts. It's different in distribution and aftermarket. And of course, on fluid dynamics side, it's totally different. Not all of the realization will come in this quarter. So the realization is going to be staged. But our effort is to ensure that we pass on the inflation to the extent that we can and protect our margins.

We take the next question from the line of Jeetu Panjabi from EM Investo Capital Advisors Private Limited.

Look, 2 pointed questions. One, we've seen weakness in the international business. Now can you give us a little bit of color which geos this happened in? And what are the current trends you're seeing? And what is your view on how this plays out over the next 3, 6 months? And two, the raw material attribution, Gauri, that you talked about in your opening comments as the reasons for margin decline along with possibly mix. Can you talk a little bit about if the pass-ons have happened? And when do you see reversion to recent trends in 6 months, 12, 9 months, I don't know. I would love your thoughts on that.

Jeetu, so just from the regions, a lot of our business today comes from the Middle East region. And due to the conflict in West Asia, we had logistics queues that were choked. And as a result, even where we had orders, some of the fulfillments could not happen. So that's one. And just from an inflation attribution standpoint, our endeavor, like I said, is just to ensure that we proactively pass on the price increases. realization of that has varied. So in Q1, we've seen some impacts. But as management, our full endeavor is to ensure we pass on price increases.

Is there a time line when you see this more normal -- I mean, greater normalization of both these metrics? Is a 3-, 6-month horizon reasonable to broadly say that happens?

Yes, I think so. I mean, look, we're all keenly watching out. We do see the queues opening up. So it's more a question of just ensuring that the supply chain and the fulfillment is happening properly. We do have demand, and we do have opportunities also available for execution, but we're carefully watching. But I would say 3 to 6 months is a fairly reasonable assumption.

We take the next question from the line of Teena Virmani from Motilal Oswal Financial Services.

So my question is related to the demand traction that you would have seen in Q1 and even going forward also. Like how is the demand traction panning out for KOEL in nodes below 750 kVA and also in the above 750 kVA nodes, particularly from the other HHP type of requirements may not be completely from hyperscaler or data center, but how is the demand panning out for your OptiPrime products and even the below 750 kVA nodes?

Teena, so nice to hear from you. Look, just from a domestic franchise that we are building out and the level of, I would say, strength that we are showing on the domestic side, especially if I, for a moment, leave out data center, we're quite satisfied with that. We are seeing -- we're present in all the opportunities that we need to be in. We may not win everything, but I think we're certainly gaining in strength in terms of our market presence, below 750 kVA for sure, I mean, overwhelmingly so. And our full focus is to also build that out over 750 kVA.

So basically that you mentioned that in your PPT that you have gained market share. So this gain in the market share would primarily be coming in, in the below 750 kVA node?

Yes. So that would be correct. Even above 750 kVA, we've gained market share, but it's just a smaller base. So it's not significant at this point.

Right. And also, you don't specify generally the pricing element. But in this 18% growth in PowerGen revenue, will that be possible to broadly quantify not maybe an exact indication, but a broad indication, how much can be the pricing-led element and how much can be the normal volume-led growth?

Teena, we don't normally specify that. And also the realization has varied across the quarter. So it's going to be hard for us to truly comment on that convincingly.

Okay. But the price increases that you would have taken, you have taken both in the HHP side also and even in the non-HHP side also. Is that the right understanding?

So the way to think about it is price increases can be readily passed on when the product is more distribution led. Otherwise, it is contract and tender specific. But as a theme, that could be a fair understanding.

We take the next question from the line of Prolin Nandu from Edelweiss Public Alternatives.

The first question would be -- since we have announced this order, right, in data center, how has been the interest from the prospective customers change, right? Because in a way, this is like a first proof of the pudding in some sense. So how has the conversation changed? And in the same breath, can you just tell us the journey through which Kirloskar Oil has been to arrive at this state, right? Because it required a significant change in the way we sell things and also on the product side, right, in terms of our product offering. So could you just help us understand how has the conversations changed since we have announced this order? And also how has been the journey so far and what all needs to be done from here to achieve our targeted market share in the high horsepower and specifically for the data center part of it?

Focusing on the data center segment, there's been a lot of effort that we put in. There are a lot of upskilling programs that we've internally driven. We are engaged with most data centers today. We've also executed a whole bunch of orders with -- whether it's edge or enterprise data centers. So all of that has already happened. This particular order just happens to be an order which is with the larger data centers. Now the conversations continue to progress with a lot of our customers. We are looking at a whole bunch of different solutions ranging from behind-the-meter solutions to hybrid solutions for our customers as well as OptiPrime that we spoke of earlier. So we have a fairly strong suite of products now. And we're fairly confident that we will continue to gain traction as we move ahead because the efforts are going in.

Okay. And on the employee cost side, right, while you mentioned that there have been some hikes and some capability building, but 40% is usually a very large number, right, in some sense, while it's a quarterly number, I agree with that. But there has to be some kind of a specific capability also which you are building, right, in some sense. So just some more texture on this 40% year-on-year growth in employee cost. Is it like a specific capability that we are building and which should probably normalize and probably either lead to revenue or normalize over the coming quarters? Some more color on that hike or that rise would help.

So as an organization, we mentioned that we'll continue to invest in our capability addition and invest in supporting future growth programs. And as I mentioned that as the revenue scales, particularly in the international HHP and aftermarket business, we need to demonstrate better fixed cost absorption and productivity.

We take the next question from the line of Bharat Shah from BCS Capital Idea Private Limited.