Strong start to FY23, outlook positive; maintaining a Buy

KOEL made a good start to FY23. Q1 consolidated revenue/PAT grew ~45%/~154% y/y with a 14.5% EBITDA margin. With government focus on infrastructure and Atma Nirbhar, and strong end-user demand pick-up, we expect better growth in the medium to longer term. Further, its efforts regarding exports (aiming at 15-18% growth) and better B2C margins (higher demand and prices) would prove to be the additional kicker. Hence, strong demand across segments, a sharper focus on exports and efforts to enhance its presence augurs well for the company in coming years. The new leadership (MD, CEO-B2B, CEO-B2C) would bring a fresh vision and focus. We have a Buy rating on the stock, with a TP of Rs279 (13x FY24e EPS).

Strong all-round performance. Strong demand for low and medium horsepower products drove power-generation revenue 64% y/y. Industrials revenue grew 45% y/y with volumes growing 12% y/y, driven by construction and earth-moving equipment, fire-fighting pumps, etc., that delivered 62% y/y growth. Exports jumped 63% y/y mainly led by robust demand from GCC and Africa.

New management, vision. KOEL has been in a transformative phase, at the top-level management: with Ms Gauri Kirloskar appointed as managing director, and Aseem Srivastava as CEO-B2C. He aims to strengthen reach (deepening and widening) and profitability (with right price and product) in water-management solutions and farm-mechanisation. Rahul Sahai will join in Sep’22 as CEO-B2B. The appointment of a CFO is in process.

Valuation. The stock has been under pressure due to the top-level management transition. However, things are stabilising with the appointment of the MD, CEO-B2B and CEO-B2C. Moreover, domestic and export demand is healthy, for which a plan is in place. On this, we believe the stock is attractive at 14x/11x FY23e/FY24e EPS. We expect 16%/33% revenue/PAT CAGRs over FY22-24. Risk. Less demand than expected; negative margin surprise.

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