Earnings Call Transcript Analysis Report #
Kirloskar Oil Engines Limited Q3 FY'25 Earnings Call Analysis #
Financial Performance #
- Key Financial Metrics:
- Stand-alone Revenue (Q3 FY25): INR 1,154 crores (3% YoY growth)
- Stand-alone EBITDA (Q3 FY25): INR 117 crores (10.1% margin, 9% YoY decline)
- Stand-alone Net Profit (Q3 FY25): INR 65 crores (17% YoY decline)
- Stand-alone 9M YTD Revenue: INR 3,672 crores (7% growth)
- Stand-alone 9M YTD EBITDA: INR 438 crores (11.8% margin)
- Stand-alone 9M YTD Net Profit: INR 280 crores (10% YoY Growth).
- Consolidated Revenue (Q3 FY25): INR 1,454 crores (4% YoY growth)
- Consolidated Net Profit (Q3 FY25): INR 58 crores (37% YoY decline, excluding exceptional items)
- Arka (Financial Services) Revenue (Q3 FY25): INR 212 crores (43% YoY growth)
- Arka AUM (as of Dec 31, 2024): INR 6,740 crores
- Interim Dividend: 125% (INR 2.50 per share)
- LGM 9M YTD: Revenue: INR 350cr, EBITDA margin:1.4%
- Comparison with Previous Periods:
- Q3 FY25 Stand-alone revenue grew 3% YoY but declined 3% QoQ.
- Q3 FY25 Stand-alone EBITDA and Net Profit declined YoY.
- 9M YTD revenue,EBITDA, Net Profit Showed growth.
- Consolidated Net Profit significantly decreased YoY (37%).
- Areas of Growth/Decline:
- Growth: Industrial segment (16% YoY), Distribution and aftermarket (15% YoY), B2C International (18% YoY), Arka’s revenue (43% YoY). 9M YTD Standalone Net Profit (10% YoY).
- Decline: Power Gen (-2% YoY), overall B2C stand-alone sales (-3% YoY), Farm Mechanization sales (-55% YoY), B2B International Business (-17% YoY), B2C Consolidated revenue (-14%YoY).
Strategic Initiatives & Business Updates #
- Major Strategic Announcements:
- Completed plant transition/consolidation: Five manufacturing units in Ahmedabad consolidated into a single plant at Sanand.
- Evaluating and correcting the business model for the Farm Mechanization business, including manufacturing strategy, product line, channel, and overall business strategy.
- New Products/Services/Markets:
- Continued focus on the Optiprime range of gensets (117 kVA to 3,000 kVA), emphasizing their value proposition for customers.
- Expanding High Horse Power Segment.
- Operational Changes:
- The Sanand plant is now fully operational, and production has ramped up.
- Ongoing Projects: Continued effort to setup substainable operations in International Business.
Market & Competitive Landscape #
- Industry Trends:
- Significant contraction (40%) in the Low and Medium Horsepower (LMHP) Power Gen market due to the CPCB IV transition and pre-buy effect.
- Strong demand in the High Horsepower (HHP) segment.
- Strong demand from the infrastructure sector due to CEV BS-V going live.
- Telecom segment, is extremely commoditized price sensitive segment.
- Competitive Positioning:
- Acknowledged a temporary decline in market share in the LMHP segment, but expressed confidence in recovery.
- Emphasized a strong product portfolio, covering a wide range of gensets (3 kVA to 3,000 kVA, and 6.3 MW for industrial power systems).
- Market Challenges/Opportunities:
- Challenge: Transition to new emission norms (CPCB IV) impacting Power Gen demand.
- Opportunity: Growth in the HHP segment, particularly from data centers and infrastructure projects.
- Opportunity: CEV BS-V going live from January 1 and the impact this has on infrastructure sector.
- Challenge: To set up and grow the international side of the business.
- Market Share:
- Market share, excluding the telecom segment, was 30.3% in Q3.
Risk Factors & Challenges #
- Concerns/Challenges:
- Subdued Q3 results, particularly in Power Gen, due to the CPCB IV transition.
- Impact of the plant consolidation on Q3 numbers.
- Profitability concerns in the Farm Mechanization business.
- International business is taking a long time to grow.
- Regulatory Issues:
- Impact of CPCB IV emission norms on the Power Gen market.
- CEV BS-V emission norms for the industrial engines.
- Operational Constraints:
- The complex plant transition impacted production levels in Q3.
- Market Uncertainties:
- Time required for the Power Gen market to stabilize after the emission norms change.
Forward-Looking Statements #
- Outlook/Projections:
- Expects LMHP demand to pick up in the coming quarters and return to pre-emission norm change levels.
- Expects to recover market share in the LMHP segment.
- Anticipates continued growth in the HHP segment.
- Anticipated improvement in overall demand, with the expectation that, in Q4, the demand would exceed Q3 levels and approach previous normal levels.
- Commitments/Targets:
- Focused on a strong end to the “2X-3Y journey.”
- Will provide an update on the 2X-3Y journey and learnings at Q4.
- Planned Investments/Priorities:
- Continued focus on setting up sustainable operations in the international business (channel, people, processes).
- Focus on High Horse Power segment.
Q&A Insights #
- Most Pressing Analyst Questions:
- Demand outlook and recovery timeline for the Power Gen segment.
- Pricing dynamics in the Power Gen market post the emission norms change.
- Impact of plant consolidation on financials.
- Plans for the Farm Mechanization business.
- Outlook for export growth.
- Market share trends, especially in the HHP segment.
- Margins and expense trends going forward.
- Management’s Responses to Challenging Questions:
- Provided qualitative explanations for market trends and expected recovery.
- Acknowledged pricing adjustments but avoided specific details.
- Explained the impact of plant consolidation and expressed confidence in normalization.
- Confirmed a strategic review of the Farm Mechanization business.
- New Information Revealed:
- The specific market share number (30.3%, excluding Telecom) for Q3.
- Quantitative estimates for industry volume changes in Power Gen (Q2: 28,000 units, Q3: 32,000 units, Q4 expected: 36,000-38,000 units).
- LGM 9M YTD Financials (Revenue, EBITDA).
Management Tone & Sentiment #
- Overall Tone: Cautiously optimistic and confident.
- Areas of Confidence:
- Long-term fundamentals of the business.
- Product portfolio and its performance post-emission norms change.
- Growth potential in the HHP segment.
- Areas of Concern:
- Short-term impact of emission norm changes on Power Gen demand.
- Profitability of the Farm Mechanization business.
- The speed of growth in international business.
Summary of Key Takeaways #
Short-Term Challenges, Long-Term Confidence: Kirloskar Oil Engines faced a challenging Q3 due to the CPCB IV transition and plant consolidation, impacting Power Gen sales and overall profitability. However, management believes these challenges are temporary and expresses strong confidence in the company’s long-term prospects.
Power Gen Recovery Expected: The company expects the Power Gen market to recover in the coming quarters, with demand returning to pre-emission norm change levels. The HHP segment is seen as a key growth driver.
Strategic Focus on HHP and International Business: Kirloskar is prioritizing growth in the HHP segment and is working to establish sustainable operations in its international business.
Farm Mechanization Business Under Review: The company is re-evaluating its strategy for the Farm Mechanization business to address profitability concerns.
Plant Consolidation Complete: The complex plant consolidation in Ahmedabad is complete, and the new plant is fully operational, paving the way for improved production efficiency.
Financial service business showing substantial growth.