Kirloskar Oil

Kirloskar Oil Engines reported a robust Q2 FY25 with stand-alone net sales growing 13% year-on-year to INR1,184 crores, despite an 11% quarter-on-quarter decline influenced by Q1 prebuy volumes. Consolidated revenue from operations increased by 15% year-on-year to INR1,500 crores. The B2B segment was a key driver, with stand-alone sales up 17% to INR1,059 crores, including a 34% increase in Powergen revenue. Conversely, the B2C segment experienced a 13% year-on-year decline in stand-alone sales to INR125 crores, primarily due to a planned plant transition and softened demand.

The company demonstrated significant margin improvement in Q2 FY25. Stand-alone EBITDA grew 35% year-on-year to INR148 crores, with the EBITDA margin expanding to 12% (14% including one-time^📎 recoveries), up from 10% in Q2 FY24. Stand-alone net profit, excluding one-time^📎 provisions, increased 48% year-on-year to INR98 crores. Consolidated net profit, excluding exceptional item^📎s, also rose 23% year-on-year to INR106 crores, reflecting the positive impact of B2B performance and strategic initiatives.

The B2C segment's decline was attributed to a production lag caused by the transition to a new state-of-the-art manufacturing facility in Sanand, Gujarat, which consolidated five previous units. This segment registered an approximate loss of INR6 crores before interest and tax. Management expects production to stabilize by December, reaching around 60% of mean capacity in November. The aspiration is to achieve double-digit EBITDA margins for the B2C business by Q4 FY25, driven by cost efficiencies and improved delivery times from the new facility.

Arka Fincap, the financial services arm, continued its strong growth trajectory, with revenue increasing 54% year-on-year to INR195 crores. Assets Under Management (AUM) stood at INR6,284 crores as of September 30, 2024. The new MD, Samrat Gupta, outlined a strategy to build a more granular, secured retail book, shifting emphasis from the current wholesale book. While a potential hive-off was raised by analysts, management stated it was not ready to comment on such plans, focusing instead on balancing wholesale and retail growth and ensuring strong ROA metrics.

The Power Generation segment is adjusting to the new CPCB IV+ emission norms, which led to a 12-15% industry-wide volume dip in Q2 FY25 as the market adapted to new pricing levels and corrected for prior prebuy sales. Management noted that pricing has held so far but remains watchful of evolving market dynamics and increasing competition from established players in various kVA nodes. The company is confident in its product portfolio and aims to maintain its dominant position, particularly in high horsepower gensets, where its share has grown from less than 4% to over 15-20% of the portfolio.

Kirloskar Oil is strategically focusing on international business expansion and high horsepower (HHP) gensets. While B2B international revenue saw a slight 2% decline due to challenges in markets like South Africa, B2C international business nearly doubled to INR13 crores. The company is actively shipping its K4300 platform (1,500 kVA) to international markets and has executed orders for 2,000 kVA gensets in Dubai. Efforts are underway to obtain necessary certifications (e.g., EPA for the US market) to penetrate more advanced markets, with a commitment to growing exports beyond last year's levels.