KRN Heat Exchanger and Refrigeration Ltd - Feb 2025 Earnings Call Transcript Analysis

February 7, 2025 · 5 min read

Earnings Call Transcript Analysis Report #

Key Metrics:
- Q3 FY25 Revenue: INR 116.36 crores (73.67% YoY increase)
- Q3 FY25 EBITDA: INR 15.81 crores (34.76% YoY increase)
- Q3 FY25 Net Profit: INR 13.73 crores (74.44% YoY increase)
- 9M FY25 Total Income: INR 305.88 crores (32.96% YoY increase)
- 9M FY25 Net Profit: INR 38.01 crores (39.02% YoY increase)
Comparison: Significant YoY growth in all key metrics for both Q3 and the 9-month period. Revenue and net profit showed the most substantial increases. Quarter-over-quarter comparison indicates a dip in EBITDA margins.
Revised Guidance/Forecasts: The company expects the running quarter (Q4 FY25) to be “almost same or maybe we will try to increase like 5%-10% on last.”
Areas of Growth/Decline: Revenue growth driven by increased volume, HVAC phase 1 contribution, and some new North American customers. EBITDA margin saw a dip, attributed to increased employee costs (new hires for upcoming facility) and a temporary rise in raw material prices due to China withdrawing export subsidies.

Major Strategic Announcements: Transformational capacity expansion in Neemrana, Rajasthan, under subsidiary KRN HVAC Products Pvt. Ltd. (INR 300+ crores investment).
New Products/Services/Markets:
- Entering high-growth sectors: railway electrification, heavy earth movers, and industrial cooling.
- Introduction of Bar and Plate heat exchangers for applications like electric locomotives, off-road vehicles, compressors, and lifters.
- Expanding export focus to Europe and North America.
Operational Changes: Solar energy adoption at the new plant to reduce power costs.
Ongoing/Completed Projects: Civil work nearly complete at the new plant, machinery trials underway. Sample production expected to begin in April 2025.

Industry Trends: Rising demand for energy-efficient cooling solutions, increased investment in data centers, and a push towards electrification in key industries. Global shift towards “China plus one” sourcing strategy.
Competitive Positioning: Aims to be the largest professional heat exchanger manufacturer in India (excluding OEMs) with the new facility.
Market Challenges/Opportunities: Sees significant export opportunities due to favorable trade policies and the China plus one trend. The USA putting a 25% duty on Mexican imports is seen as a positive. Competitors in Europe and North America are acknowledged, but confidence is expressed in competing effectively.
Market Share: Not explicitly stated, but implied to be significant in the Indian market, especially in Rajasthan (over 40% of revenue).

Concerns/Challenges: Raw material price volatility (temporary impact from China’s policy change). Employee cost increases due to hiring for the new facility.
Regulatory Issues: Tracking the government’s PLI scheme for white goods; their application is under review.
Supply Chain/Operational Constraints: Acknowledged capacity constraints in the existing facility, limiting ability to take on new customers.
Market Uncertainties: Potential impact of geopolitical changes (e.g., US regime change) is acknowledged but considered a potential positive.

Outlook/Projections: Expects to generate peak revenue of 5x to 6x the current level once the new facility is fully operational, within the next 3 financial years.
Commitments/Targets: Aims to meet the INR 1000 crores MOU with the Rajasthan government in the next 5 years.
Planned Investments: INR 300+ crores investment in the Neemrana facility. Future investments will be reviewed based on internal profits and working capital.
Strategic Priorities: Capacity expansion, export growth, margin expansion (through advanced coatings, manufacturing efficiencies, solar energy, and export-driven growth), and leveraging government incentives.

Pressing Analyst Questions:
- Reasons for the increase in the share of evaporator coils and the decrease in condenser coils.
- Adoption of bar and plate heat exchangers in data centers.
- Timeline for reflecting the MOU with the Rajasthan government in financials.
- Current capacity utilization levels.
- Reasons for the 70% YoY revenue increase this quarter.
- Testing of new products (bar and plate, oil cooling units) with customers.
- Revenue guidance for FY25.
- Funding for future expansion beyond the current INR 300 crores.
- Plans to enter the nuclear energy sector.
- Dip in EBITDA margins.
- Current order book status.
- Working capital cycle.
Management Responses: Provided detailed explanations for most questions, emphasizing the strategic rationale behind decisions.
Indirect Answers: No specific growth percentage was given for FY26, only stating that growth would be there. Some financial details, like specific market shares and margin impacts, were not provided directly but offered to be shared offline.
New Information: Revealed that they had received a development order from BLW for bar and plate heat exchangers. Confirmed plans to potentially open a facility in South India. Revealed a strategy to add two new customers each month.

Overall Tone: Confident and optimistic. Management repeatedly emphasized the growth potential and the transformative nature of the new facility.
Areas of Confidence: Strong confidence in the company’s ability to compete in export markets, meet growing demand, and leverage its new facility.
Areas of Concern: Acknowledged the temporary margin pressure due to employee costs and raw material price fluctuations, but expressed confidence in addressing these issues.

Massive Capacity Expansion: The INR 300+ crore investment in the new facility is a game-changer, poised to increase capacity by 5-6x and enable entry into new, high-growth sectors.
Strong Financial Performance: Q3 FY25 saw substantial YoY growth in revenue and net profit, demonstrating strong execution and market demand.
Export Focus: The company is aggressively pursuing export opportunities in Europe and North America, leveraging favorable trade conditions.
Margin Pressure: A temporary dip in EBITDA margins was acknowledged, attributed to employee costs and raw material price volatility, but management expects to recover and even improve margins in the long term.
Confident Outlook: Management expressed strong confidence in future growth, driven by capacity expansion, new product introductions, and growing market demand.
Strategic Vision: The company is focused on entering a new, high-growth sector. The focus will be to enter the railway electrification, heavy earth movers, and industrial cooling.

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