Kirloskar Oil Engines Limited — Q3 FY25 earnings call

Call held 12 Feb 2025

Management summary

Kirloskar Oil Engines reported a mixed Q3 FY25, with consolidated revenue growing 4% YoY, but net profit seeing a significant 37% decline. The Power Gen business faced headwinds due to the CPCB IV transition and pre-buy effects, leading to a 2% sales decrease. However, the Industrial and Aftermarket segments showed robust double-digit growth. The B2C segment experienced a decline and a loss, impacted by a complex plant consolidation. Financial Services (Arka) continued its strong growth trajectory.

Highlights

  • Consolidated Revenue from Operations grew 4% YoY to ₹1,454 crores.

  • Standalone Net Sales increased 3% YoY to ₹1,154 crores.

  • Standalone EBITDA declined 9% YoY to ₹117 crores, with a margin of 10.1%.

  • Consolidated Net Profit decreased 37% YoY to ₹58 crores.

  • Financial Services (Arka) revenue surged 43% YoY to ₹212 crores, with AUM at ₹6,740 crores.

  • B2B segment revenue grew 3% YoY to ₹1,018 crores, driven by Industrial (16% growth) and Aftermarket (15% growth).

  • Power Gen sales decreased 2% YoY to ₹418 crores due to CPCB IV transition and pre-buy effects.

  • B2C consolidated revenue declined 14% YoY to ₹224 crores, registering a loss of approximately ₹21 crores.

Concerns

  • Subdued Power Gen Demand (LMHP segments)

Key financials

  1. Consolidated Revenue ₹1,454 Cr +4%YoY
  2. Consolidated Net Profit ₹58 Cr -37%YoY
  3. Standalone Net Sales ₹1,154 Cr +3%YoY
  4. Standalone EBITDA ₹117 Cr -9%YoY
  5. Standalone EBITDA Margin 10.1%
  6. Arka AUM ₹6,740 Cr

What they filed

Q1 FY27: revenue up 13.5%, net profit down 20.1% against the same quarter last year.

₹ Cr · quarterly
Line itemQ2 FY25Q3 FY25Q4 FY25Q1 FY26Q2 FY26Q3 FY26Q4 FY26Q1 FY27
Revenue1,505 1,454 1,749 1,762 1,948 +29%1,873 +29%2,116 +21%2,000 +14%
EBITDA298 255 312 327 382 +28%331 +30%376 +21%300 −8%
Net profit125 68 127 139 159 +27%109 +60%155 +22%111 −20%
How to read this

₹ crore, as filed. The percentage beside a figure is the change against the same quarter a year earlier — never the quarter before, which would make every seasonal business look like it collapses and booms each year.

Segment breakdown

Share of Revenue
₹1,454 Cr Total
  • Consolidated B2B ₹1,018 Cr 70.0%
  • Consolidated B2C ₹224 Cr 15.4%
  • Financial Services (Arka) ₹212 Cr 14.6%

Guidance & targets

Volume

  • Power Gen Industry Volumes Volume · Q4 FY25 · Medium confidence 36,000 to 38,000 units
    Now in Q3, we see that number has increased to about 32,000 units from an overall demand standpoint. And in Q4, our anticipation is we'll be closer to around 36,000 to 38,000.

    — Mr. Rahul Sahai, Chief Executive Officer

Market Share

  • LMHP Market Share Market Share · coming quarters · Medium confidence recover earlier market shares
    I see this as a temporary change, and I'm sure that we will recover our earlier market shares once the market stabilizes on the demand side.

    — Ms. Gauri Kirloskar, Managing Director

Growth

  • HHP Segment Growth Growth · coming quarters · Medium confidence continue with our growth
    we will continue with our growth in this segment in the coming quarters.

    — Ms. Gauri Kirloskar, Managing Director

Performance

  • B2C Sanand Plant Performance Performance · coming quarter · Medium confidence improvement in performance
    With the production ramped up, we are now manufacturing at the levels that we have planned for. We will see improvement in performance in the coming quarter.

    — Ms. Gauri Kirloskar, Managing Director

Profitability

  • B2C EBITDA Profile Profitability · immediately from Q4 · Medium confidence recovery back to pre-consolidation levels
    I would say that now the fact that this consolidation has happened at the plant, we should see a recovery back to the pre-consolidation levels as far as the EBITDA profile is concerned.

    — Mr. Rahul Sahai, Chief Executive Officer

Risks & concerns

  • Subdued Power Gen Demand (LMHP segments)

    high

    Q3 saw subdued results in Power Gen, especially low and medium horsepower segments, due to CPCB IV transition and pre-buy effects, leading to a 40% market contraction.

    Management acknowledged

  • Temporary Market Share Decline (LMHP)

    medium

    The company saw some decline in market share on the LMHP side, which management believes is temporary and will recover.

    Management acknowledged

  • B2C Plant Consolidation Impact

    medium

    Consolidating five manufacturing units into one at Sanand was a complex transition, impacting Q3 numbers and B2C segment performance, which registered a loss.

    Management acknowledged

  • Farm Mechanization Profitability

    medium

    Profitability of the Farm Mechanization business was a concern, leading to a pause in some sales and a 55% decline in FMS sales.

    Management acknowledged

  • Higher Inventory Levels

    medium

    Inventory level at 77 days is on the higher side due to CPCB norm changes and upcoming BSI upgradation for industrial engines.

    Management acknowledged

  • International Business Slowdown

    medium

    International sales declined 17% YoY due to large one-time orders in the prior year's Q3, which did not recur this quarter.

    Management acknowledged

  • Railway Electrification Impact

    low

    In the medium term, power car demand in the railway segment may potentially go down due to electrification, but the company is exploring other growth avenues.

    Management acknowledged

Areas of evasion (3)

  • Specific future revenue/margin guidance beyond qualitative statements
  • Detailed LGM segment profitability (PBT/PAT)
  • Specific market share numbers for HHP

Q&A highlights

2 direct
LGM (La-Gajjar Machines) 9M FY25 Financials (PAT/PBT/Revenue) Partial
Jason, coming back to your question on LGM year-to-date performance. From year-to-date basis for LGM, we did a sales of INR350 crores with EBITDA of 1.4%.

Analyst sought detailed profit metrics for the LGM segment, which management initially deferred but then provided sales and EBITDA margin, indicating some reluctance to share full P&L details for the segment.

Asked by Jason Soans

Power Gen Demand Outlook and Pricing Normalization Direct
if you look at Q4, I would -- I mean, I can't really give a clear forecast here, but I would see a further improvement to the 32,000. So, we would -- I mean, I would say we should be in the range of 36,000 to maybe 38,000. ... we do see that there is a general convergence of pricing in every node.

This question addressed the critical issue of demand recovery post-CPCB IV transition and pricing stability, providing specific Q4 industry volume estimates and confirming pricing convergence.

Asked by Teena Virmani

CPCB II Inventory Depletion and Market Share Impact Direct
As far as the entire -- I mean, the larger industry is concerned, we did see different players liquidating CPCB II in the last 2 quarters also. But all of that seems to have depleted now. ... the TAM definitely gets impacted depending on the state and depending on the level of enforcement of the emission change.

The analyst probed the impact of CPCB II inventory on market demand and the company's ability to regain market share, revealing that while the company's own CPCB II stock is depleted, the broader market's TAM is still affected by enforcement variations.

Asked by Parikshit Kandpal

3 min read 6 chapters

Detailed narrative

Q3 FY25 Performance Overview

Kirloskar Oil Engines reported a 4% YoY increase in consolidated revenue from operations, reaching ₹1,454 crores for Q3 FY25. However, consolidated net profit saw a significant 37% YoY decline to ₹58 crores. On a standalone basis, net sales grew 3% YoY to ₹1,154 crores, but EBITDA decreased 9% YoY to ₹117 crores, resulting in an EBITDA margin of 10.1% compared to 11.3% in Q3 FY24. The company achieved its highest-ever Q3 standalone numbers, with year-to-date sales for 9M FY25 at ₹3,672 crores, a 7% growth, and standalone net profit at ₹280 crores, up 10% YoY.

Power Gen Business Challenges and Outlook

The Power Gen business experienced subdued results in Q3, with sales decreasing 2% YoY to ₹418 crores. This was primarily attributed to the CPCB IV transition and pre-buy effects, leading to a market contraction of around 40% in the low and medium horsepower (LMHP) segments where the company is strong. Management expects LMHP demand to pick up in coming quarters, returning to pre-emission norm levels. The industry's overall volumes are anticipated to improve from 32,000 units in Q3 to 36,000-38,000 units in Q4 FY25. The high horsepower (HHP) segment, however, showed strong demand, and the company is making progress in improving its market share here.

Industrial and Aftermarket Segments Drive Growth

In contrast to Power Gen, the Industrial segment demonstrated strong performance, registering a 16% YoY growth with sales of ₹268 crores. This growth is supported by strong demand from the infrastructure sector, especially with CEV BS-V norms going live. The Distribution and Aftermarket business also performed well, growing 15% for the quarter to ₹208 crores, highlighting the company's focus on service penetration and dealer capabilities. These segments were key contributors to the overall B2B growth of 3% YoY, reaching ₹1,006 crores in standalone sales and ₹1,018 crores in consolidated revenue.

B2C Transition and Farm Mechanization

The B2C segment faced challenges, with consolidated revenue declining 14% YoY to ₹224 crores and registering a loss of approximately ₹21 crores before interest and tax. This was largely due to a complex transition involving the consolidation of five manufacturing units into a single plant at Sanand, which impacted production levels. The Farm Mechanization business, a part of B2C, saw a significant 55% decline in sales to ₹9 crores, as the company is re-evaluating its business model due to profitability concerns. Management expects performance improvement in the B2C segment in the coming quarter as the new plant stabilizes and EBITDA profile recovers to pre-consolidation levels.

Financial Services (Arka) Performance

The Financial Services business, Arka Fincap Limited, delivered robust growth, with quarterly revenue increasing 43% YoY to ₹212 crores. As of December 31, 2024, Arka's assets under management (AUM) stood at ₹6,740 crores. Despite strong revenue growth, the segment's EBIT declined 23% YoY to ₹29 crores. The Board of Directors approved an interim dividend of 125%, or ₹2.50 per share.

International Business and Working Capital

International B2B sales declined 17% YoY to ₹112 crores, primarily because the prior year's Q3 included large one-time orders that did not recur. International B2C, however, grew 18% to ₹10 crores, driven by agri engines and pump exports. The company's focus remains on building sustainable international operations across channels and geographies. Working capital levels remain comfortable with payables at 70 days and receivables at 43 days, but inventory levels are higher at 77 days due to CPCB norm changes and upcoming BSI upgradation, which the company is working to reduce.

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