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Kirloskar Oil Engines Ltd

Strong Q3; core growth levers intact
Powered by the Sharekhan 3R Research Philosophy Capital Goods Sharekhan code: KIRLOSENG

3R MATRIX + = -
Reco/View: Positive  CMP: Rs. 315 Upside potential: 16-18% 

Result Update
Right Sector (RS) ü á Upgrade  Maintain â Downgrade

Right Quality (RQ) ü Summary

Š We stay positive on KOEL and expect a 16-18% upside, given reasonable valuations and strong growth
Right Valuation (RV) ü prospects aided by favourable macro environment.
+ Positive = Neutral – Negative Š Standalone results were strong but fell marginally short of estimates on profitability front. Revenue
growth was driven by power-gen, industrial and after-market segments. OPM rose by ~483 bps y-o-y to
10.9%, net profit was at Rs. 68 crore (+169.8%).
Š Demand outlook continues to be promising in domestic business across its key segments. Exports is
seeing some softness although there is no major red flag at this juncture.
What has changed in 3R MATRIX Š Implementation of CPCB-IV plus norms, exports ramp-up, growth in after sales services and margin
expansion are the key growth enablers for achieving 2x revenue by FY26.
Old New
Kirloskar Oil Engines Limited’s (KOEL’s) standalone results lagged expectations particularly on
RS  profitability front. Revenue grew by 19.5% y-o-y to Rs 1,000 crore. Its B2B sales grew by 21% y-o-y to Rs
867 crore, while B2C sales grew at a moderate pace of 9% y-o-y to Rs 122 crore. Strong growth was seen
RQ  in the power generation, industrial, after-market & distribution. International markets also grew by 35%
y-o-y to Rs 120 crore. GPM improved by 329 bps y-o-y to 32.3%, however it declined sequentially by 100
RV  bps. Operating profit increased by 114.8% y-o-y to Rs 109 crore (vs our estimate of Rs 118 crore). OPM
improved to 10.9% vs 6.1% in Q3FY22 but was lower by 53 bps on q-o-q basis. Net profit grew by 169.8%
y-o-y to Rs 68 crore (vs our estimate of Rs. 75 crore) led by strong operating performance.
Key positives
Company details Š Power generation, industrial, after-market & distribution grew by 23%/15%/13%, respectively.
Š Exports sales have registered 35% y-o-y growth.
Market cap: Rs. 4,555 cr Š OPM has improved y-o-y on account of decline in raw-material cost and other expenses.
Š Its subsidiary La-Gajjar Machineries (P) Ltd (LGM) turned EBITDA positive this quarter.
52-week high/low: Rs. 372/124
Key negatives
NSE volume: Š LGM registered flat sales of Rs. 251 crore.
7.3 lakh
(No of shares) Š The performance has been below expectations q-o-q owing to product mix and rise in employee cost and
other expenses.
BSE code: 533293
Management Commentary
NSE code: KIRLOSENG Š Powergen segment grew by ~23% y-o-y backed by robust demand. The gas gensets launched in Q2 are
generating good response. There is also a good traction in the telecom segment.
Free float:
5.9 cr Š Exports rose by ~35% y-o-y and the company launched two new firefighting models for international
(No of shares) markets.
Š The q-o-q decline in OPM is a result of product mix and higher employee cost.
Š Export demand has softened in some international markets, but the management does not see a sharp
decline in the near to medium term.
Š 35-40% of company’s total product portfolio in power generation would be impacted due to implementation
Shareholding (%) of CPCB- IV plus norms from July 2023 onwards.
Promoters 59.4 Š The company expects to see pre-buying in Q4FY23 before implementation of CPCB-IV plus norms which
would lead to substantial increase in prices of gensets.
FII 3.6 Revision in estimates – We have broadly maintained our FY2023-FY2025E estimates.
DII 14.7 Our Call
Valuation – Maintain Positive view; expect 16-18% upside: KOEL has been consistently performing well
Others 22.3 since the last two-three quarters driven by robust demand. Further, changes at the top management and
the company’s focus on pursuing various growth opportunities have been yielding satisfactory results.
We maintain our Positive view on KOEL as we expect the growth momentum to continue, given sustained
demand across business verticals and expansion of product range. The company’s strategy to grow 2x
revenue in three years would be driven by demand generation from CPCB-IV plus norms, export growth, and
Price chart scalability of its customer support business. In addition, the company is well poised to benefit from sector
400 tailwinds such as PLI schemes, infrastructure spending by the government, and power deficit. Hence, strong
growth levers in the core business as well as subsidiaries give us confidence about its long-term prospects.
325 Hence, we maintain our Positive view on KOEL and expect 16-18% upside valuing it on SOTP basis.

250 Key Risks

Slowdown in the domestic and overseas macro-environment can negatively affect business outlook and
175 earnings growth.
100
Valuation (Standalone) Rs cr
Oct-22
Jun-22
Feb-22

Feb-23

Particulars FY22 FY23E FY24E FY25E

Revenue 3,300 3,722 4,156 4,653
OPM (%) 8.2 9.8 10.2 10.8
Adjusted PAT 156 220 260 314
Price performance % YoY growth -12.2 41.5 18.0 20.7
(%) 1m 3m 6m 12m Adjusted EPS (Rs.) 10.8 15.2 18.0 21.7
P/E (x) 29.2 20.7 17.5 14.1
Absolute 5.4 15.1 103.3 100.2 P/B (x) 2.5 2.4 2.2 2.1
Relative to EV/EBITDA (x) 15.8 11.7 10.1 8.4
5.3 15.5 100.0 96.2
Sensex RoNW (%) 8.6 11.6 12.6 14.5
Sharekhan Research, Bloomberg RoCE (%) 11.9 15.6 16.7 19.0
Source: Company; Sharekhan estimates

February 10, 2023 1

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Another strong quarter barring marginal miss on OPM and net profit fronts
Kirloskar Oil Engines Limited’s (KOEL’s) standalone results lagged expectations particularly on profitability
front. Revenue grew by 19.5% y-o-y to Rs 1,000 crore. Its B2B sales grew by 21% y-o-y to Rs 867 crore,
while B2C sales grew at a moderate pace of 9% y-o-y to Rs 122 crore. Strong growth was seen in the power
generation, industrial, after-market & distribution. International markets also grew by 35% y-o-y to Rs 120
crore. GPM improved by 329 bps y-o-y to 32.3%, however it declined sequentially by 100 bps. Operating
profit increased by 114.8% y-o-y to Rs 109 crore (vs our estimate of Rs 118 crore). OPM improved to 10.9% vs
6.1% in Q3FY22 but was lower by 53 bps on q-o-q basis. Net profit grew by 169.8% y-o-y to Rs 68 crore (vs our
estimate of Rs. 75 crore) led by strong operating performance.

Bright outlook remains intact

The company has been pursuing growth and market share gains opportunities in all its segments to achieve
its goal of growing 2x in three years, with sales of Rs. 6,500 crore and double-digit OPM. The company has
re-aligned its focus on export markets and expects its revenue share to increase to 15-18% in the next 2-3
years. The company has launched gas gensets, which have been received well in the domestic market. It
has also launched two new firefighting models for international markets. Its subsidiaries have also turned
profitable and its witnessing traction in exports from LGM. Hence, we believe the company is on a sustained
long-term growth trajectory.

Investor Update and Conference Call Highlights

Š Change in product mix led to OPM decline on q-o-q basis: In Q3FY23, different product mix has led to
marginal decline in OPM on a q-o-q basis. Further, increase in employee and other cost has also led to
decline in OPM. However, the company has not taken any price reduction.
Š Focus on data centres – The company is looking to pursue opportunities in the data centres in 500 KVA
and upwards.
Š Order book strong in B2B business: The company has a good order book in B2B business driven by
demand from construction, healthcare and hospitals.
Š Working capital cycle and cash balance: The company has a working capital cycle of 90 days and net
cash position is Rs 200 crore.
Š Capacity utilisation: Currently, the capacity utilization is at 60%. The company would not require any
substantial capex to achieve its target of 2x top line by FY26. The capex target is Rs. 60-80 crore for the
next couple of years as the company would largely spend on technological improvement in its products.
Š Investment in Arka Financial Holdings: The company has only Rs 36 crore remaining to be invested out
of Rs 1000 crore that it planned to invest in Arka Financial Holdings.
Š CPCB IV plus update: KOEL is geared for CPCB-IV plus emission norms. The company has in-house R&D
and is focused on product development. Most of the components are localized. Changing of these norms
is an opportunity for large companies to grow their business. The company expects 25-40% cost increase
due to change in emission norms. Pre-buy demand is expected in Q4FY23 as prices would go up post the
implementation.
Š Farm mechanisation: Farm mechanisation sales grew by 16% y-o-y to Rs 79 crore. The company carried
out successful trials of innovative harvester product in paddy and its channel expansion activities are
gaining momentum.

February 10, 2023 2

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Š LGM update: For LGM, Q3 was a good quarter in terms of profitability, while the revenues remained flat at
Rs 251 crore. Margins have improved to 5% from -1.3% due to higher price realization, wider reach and cost
control. There has also been traction in exports. The company expects further improvement in margins
going forward.
Š Exports update: The company has witnessed a slowdown in some of the global markets. Currently,
proportion of exports in total business is ~13%. The product portfolio which will be compliant with new
emission norms in India would help the company market its products internationally as well. Thus, the
company expects growth momentum to sustain in the export markets in the long-term.
Results (Standalone) Rs cr
Particulars Q3FY23 Q3FY22 YoY (%) Q2FY23 QoQ (%)
Net Sales 1,000.1 836.9 19.5 1,010.4 -1.0
Operating Profit 108.9 50.7 114.8 115.3 -5.6
Depreciation 21.2 19.0 12.0 21.3 -0.4
Interest 1.9 2.2 -14.0 1.0 84.5
Other Income 6.0 4.8 24.9 4.8 26.0
PBT 91.7 34.3 167.4 97.8 -6.1
Total Tax 23.6 9.0 160.5 25.2 -6.4
Reported PAT 68.2 25.3 169.8 72.6 -6.1
Adj. PAT 68.2 25.3 169.8 72.6 -6.1
EPS (Rs.) 4.7 1.7 169.8 5.0 -6.1
Margin (%) BPS BPS
OPM 10.9 6.1 483 11.4 -53
NPM 6.8 3.0 380 7.2 -37
Tax Rate 25.7 26.3 -68 25.7 -7
Source: Company; Sharekhan Research

February 10, 2023 3

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Outlook and Valuation

n Sector View – Continued government focus on infrastructure spending to provide growth opportunities
It is estimated that India would need to spend $4.5 trillion on infrastructure by 2030 to make itself $5 trillion economy
by FY2025 and to continue growing at an escalated trajectory until 2030. To achieve the desired goal, the government
has drawn up National Infrastructure Pipeline (NIP) through a bottom-up approach, wherein all projects costing
more than Rs. 100 crore per project under construction, proposed greenfield and brownfield projects, and those at
conceptualisation stage were captured. Consequently, total capital expenditure in the infrastructure sector in India
during FY2020-FY2025 is projected at ~Rs. 111 lakh crore. During the same period, sectors such as energy (24%),
roads (18%), urban (17%), and railways (12%) amount to ~71% of the projected infrastructure investments in India. The
huge outlay towards the infrastructure sector is expected to provide healthy growth opportunities for infrastructure
companies.

n Company Outlook – Domestic market expected to perform well

For KOEL, the power generation segment and growth in sectors such as roads and real estate (residential and commercial)
will drive demand for high and mid-horsepower diesel gensets. Further, with the availability of electricity in rural areas,
demand for electric pumps is expected to improve. KOEL, being one of the leading players, is in a sweet spot to leverage on
demand pick-up. Further, the industrial segment’s sales will be driven by demand from Railways, Metro Projects, Roads (off-
highway equipment), and bottoming-out of diesel generator demand for water well rigs. Improvement in core business and
increased outsourcing of maintenance services by clients will also boost the distribution business. The company expects
healthy growth from the commercial realty segment as demand for office spaces and commercial establishments continues
to increase. However, the expanding portfolio of domestic players as well as manufacturing footprint of international
players continues to increase competitive activity.

n Valuation – Maintain Positive view; Expect 16-18% upside

KOEL has been consistently performing well since the last two-three quarters driven by robust demand. Further, changes
at the top management and the company’s focus on pursuing various growth opportunities have been yielding satisfactory
results. We maintain our Positive view on KOEL as we expect the growth momentum to continue, given sustained demand
across business verticals and expansion of product range. The company’s strategy to grow 2x revenue in three years would
be driven by demand generation from CPCB-IV plus norms, export growth, and scalability of its customer support business.
In addition, the company is well poised to benefit from sector tailwinds such as PLI schemes, infrastructure spending by the
government, and power deficit. Hence, strong growth levers in the core business as well as subsidiaries give us confidence
about its long-term prospects. Hence, we maintain our Positive view on KOEL and expect 16-18% upside valuing it on SOTP
basis.

One-year forward P/E (x) band

52.0

42.0

32.0

22.0

12.0

2.0
Feb-15

Feb-16

Feb-17

Feb-18

Feb-19

Feb-20

Feb-21

Feb-22

Feb-23
Aug-15

Aug-16

Aug-17

Aug-18

Aug-19

Aug-20

Aug-21

Aug-22

1yr Fwd PE(x) Avg 1yr fwd PE Peak Trough

Source: Sharekhan Research

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About company
KOEL is the flagship company of the Kirloskar Group, one of India’s largest engineering conglomerates. The
company is one of the world’s largest generating set manufacturers, specialising in manufacturing of both air-
cooled and water-cooled engines (2.5HP to 740HP), and diesel generating sets across a wide range of power
output from 5kVA to 3,000kVA. The company has four manufacturing plants – at Kagal, Pune, Nashik, and
Rajkot. KOEL has a sizable presence in international markets, with offices in Dubai, South Africa, and Kenya, and
representatives in Indonesia and Nigeria. KOEL also has a strong distribution network throughout the Middle
East and Africa. KOEL caters to power generation, agriculture, and industrial and machinery sectors. Of late, the
company has diversified into the NBFC business through its subsidiary, Arka Financial Holdings (P.) Ltd.

Investment theme
KOEL is one of the leading genset players in India with lead market share in medium and large gensets. The
company has a strong technology/innovation track record. The company’s diversified business presence
across power generation, industrial BU, exports, and distribution contributes to reasonable long-term growth
prospects with healthy return/cash flow profile. While the recent drop in demand, both domestic and exports
market, has posed near-term challenges, demand has gradually improved with improvements seen across
key segments such as powergen, wherein industrial consumption of power demand has gone up (relatively
slow earlier) and infra-related demand (airports, agri processing, and consumer space industry) is moving
very well and bodes well for KOEL. Further, the company is well geared up to handle the transition to CPCB4
plus norms. We believe the stock offers favourable risk-reward for long-term investors, given vast product
offerings, management’s focus on efficiency/cost, and a healthy potential scale from domestic infra and
global market pick-up.

Key Risks
Š Slowdown in domestic macro-environment can result in slower-than-expected growth for the company.
Š Global market demand weakness poses key downside risk to exports.

Additional Data
Key management personnel
Mr. Atul C. Kirloskar Executive Director-Chairperson
Ms. Gauri Kirloskar Managing Director
Mr. Aseem Srivastav Chief Executive Officer
Source: Company Website

Top 10 shareholders
Sr. No. Holder Name Holding (%)
1 Franklin Resources Ltd 7.41
2 Mahindra Manulife Investment Management Pvt Ltd 1.76
3 L&T Mutual Fund Trustee 1.46
4 General Insurance Corporation Of India 1.38
5 Nippon Life India Asset Management 0.81
6 Dimensional Fund Advisors LP 0.75
7 BlackRock Inc 0.15
8 Investment Trust Of India 0.10
9 LIC Mutual Fund Asset Management Co Ltd 0.09
10 Achyut & Neeta Holdings & Finance Holdings Ltd 0.09
Source: Bloomberg (Old data)

Sharekhan Limited, its analyst or dependant(s) of the analyst might be holding or having a position in the companies mentioned in the article.

February 10, 2023 5

Understanding the Sharekhan 3R Matrix
Right Sector
Positive Strong industry fundamentals (favorable demand-supply scenario, consistent
industry growth), increasing investments, higher entry barrier, and favorable
government policies
Neutral Stagnancy in the industry growth due to macro factors and lower incremental
investments by Government/private companies
Negative Unable to recover from low in the stable economic environment, adverse
government policies affecting the business fundamentals and global challenges
(currency headwinds and unfavorable policies implemented by global industrial
institutions) and any significant increase in commodity prices affecting profitability.
Right Quality
Positive Sector leader, Strong management bandwidth, Strong financial track-record,
Healthy Balance sheet/cash flows, differentiated product/service portfolio and
Good corporate governance.
Neutral Macro slowdown affecting near term growth profile, Untoward events such as
natural calamities resulting in near term uncertainty, Company specific events
such as factory shutdown, lack of positive triggers/events in near term, raw
material price movement turning unfavourable
Negative Weakening growth trend led by led by external/internal factors, reshuffling of
key management personal, questionable corporate governance, high commodity
prices/weak realisation environment resulting in margin pressure and detoriating
balance sheet
Right Valuation
Positive Strong earnings growth expectation and improving return ratios but valuations
are trading at discount to industry leaders/historical average multiples, Expansion
in valuation multiple due to expected outperformance amongst its peers and
Industry up-cycle with conducive business environment.
Neutral Trading at par to historical valuations and having limited scope of expansion in
valuation multiples.
Negative Trading at premium valuations but earnings outlook are weak; Emergence of
roadblocks such as corporate governance issue, adverse government policies
and bleak global macro environment etc warranting for lower than historical
valuation multiple.
Source: Sharekhan Research
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