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Volume growth coupled with price hikes drive performance

Kirloskar Oil Engines (KOEL) 4QFY22 results came in ahead of estimates on all fronts. Standalone net sales were 7% above JMFe (INR9.9bn; +8% YoY), while EBITDA and PAT saw sharp bounce back sequentially. On 3-year CAGR basis, sales/EBITDA/PAT grew by 7.5%/6.1%/5.1%. KOEL took aggressive price hikes in 4Q which helped resuscitate gross margins, while management highlighted they have been able fill all the vacant spots post exit of 3 business heads in 3QFY22. Going forward, management guided for a prudent capital allocation between acquisition of companies in adjacent businesses, expanding product range and paying out dividends. Capital infusion cap in Arka Fincap to be reassessed by management after reaching INR50bn loan book size. We maintain BUY rating given inexpensive valuations (10x FY24 PE), strong cash flow generation (FCF yield: 5.5%) and cash rich balance sheet (INR 5bn in FY22) with healthy RoICs (27%).

Volume recovery with price hikes sustained growth: Standalone net sales grew 8% YoY to INR 9.9bn, led by healthy volume growth and price hikes taken across segments. Engines segment saw a 9% YoY growth, while slowdown in agri-portfolio continued during the quarter leading to flat revenues. Financial services income was up 61% YoY. EBITDA declined by 13% YoY, as margins came in at 10.4% (-250bps YoY; JMFe: 6.9%). This was mainly led by sharp reduction in gross margins at 29% (-386bps YoY). Engines segment margins declined by 300bps to 10% YoY, while electric pump reported sharp decline in EBIT loss on sequential basis (INR10mn vs INR78mn). Financial services income was up 95% YoY, as capital infusion through rights issue helped to ramp up the loan book size to INR23bn. Overall, standalone PAT was down 15% YoY to INR 1.2bn.

New product launches to drive future growth: The Company announced new products and businesses: a) 2 new engine platforms in low kVa (R550) and high kVA (1250- 1500kva), b) entry in electric motors with launch of 3-phase AC induction motors and c) management of funds and advisory business under AIASPL. Besides, company intends to undertake capex of INR 850-900mn in FY23, to address new growth areas and meet specification of new CPCB norms. Mr Aseem Srivastava has joined as CEO and will predominantly looking after the B2C businesses, while Ms Gauri Kirloskar has assume the role of CEO for a period of 3 years

Growth opportunities in lending business to drive further investments in Arka fincap: ARKA Fincap reported sales of INR643mn and EBIT margins of 61.3% vs sales/EBIT margin of INR330mn/60.4% in 4QFY21. The total investment as on FY22 stands at INR7.53bn and management remains committed on investing further INR 2.5 bn considering strong growth opportunities in lending to MSMEs and SMEs. Further, attaining lending benchmark of INR 50 bn in next 2-3 years further capital infusion could be expected.

Maintain BUY with revised TP of INR225: We maintain BUY with revised TP of INR225, as we forecast 11.6%/17.6% CAGR in sales/adj PAT, while valuations remain inexpensive at 10x FY24E EPS. Our TP assigns 12x PE to standalone entity, 8x PE to LGM (76% stake) and cash and investments (including Arka) at 0.5x book value.

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