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Kirloskar Oil Engines’ (KOEL) 1QFY24 numbers came in line with our estimates. Standalone net sales stood at INR12.7bn, up 33% YoY, EBITDA came in at INR1.5bn; up 48% YoY and EBITDA margin stood at 12% (JMFe: 11.4%, +70bps YoY). B2B segment sales saw a healthy growth of 35% YoY though B2C recorded single digit growth 4% YoY. Management expects near term moderation in demand given pre-buying during the quarter though sales of CPCB 4+ gensets should start picking up from 4QFY24. Key growth drivers are improved demand from infrastructure segments, pricing growth and greater focus on exports and aftermarket sales. Implementation of stringent emission norms should drive market share gains for R&D backed organised players like KOEL. This is also likely to open up new export opportunities due to improved ability to comply with emission norms in such markets. Over FY23-25E, we expect KOEL to clock standalone sales/EPS CAGR of 16%/23%. The coverage stands transferred to Ashish Shah. We maintain BUY with revised TP of INR 580.

* Healthy growth during the quarter: Standalone net sales grew 32.7% YoY to INR 12.6bn, led by pre-buying in Powergen segment (55% YoY growth; 20% YoY normal growth). Industrial, aftermarket and exports segments posted growth of 17%/17%/27% respectively, with total B2B segment growth of 36% YoY to INR11bn. The company continues to focus on new product development and launches, e.g. OptiPrime series, Dual Fuel kits and Retrofit Emission Control Devices (RECD). B2C segment posted growth of 15% YoY to INR1.6bn led by standalone water management (+17.5%) and farm mechanisation (+4%). With implementation of new emission norms delayed by 1 year we expect demand for retrofit solutions to pick-up in next 1-2 quarters given that various state governments are likely to mandate such solutions for the older equipment

* Favourable product mix elevates margins: On a standalone basis, EBITDA was up 48% YoY/20.3% QoQ, as margins came in at 12.1% (+120bps YoY; JMFe: 11.4%). Segmentwise, biggest driver of margin improvement was the B2B segment, which reported EBIT margin of 12% vs 9.3% in previous year, while B2C segment reported EBIT of 5.6% vs 5.1% in 1QFY23. Hence, adj standalone net profit was up 60% YoY to INR1.0bn.

* Maintained stance on 2X3Y strategy: KOEL reiterated its growth strategy of growing revenue by 2x to INR 65bn in 3 years (starting FY23). This would be backed by a) robust growth in exports (10% of sales) and market share gains in UAE and Africa, b) new CPCB 4+ norms to open new export territories and drive higher value addition leading to 25- 40% price jump and c) focus on increasing aftermarket and service segment.

* Maintain BUY with revised TP of INR580: We maintain BUY with revised TP of INR580, as earnings growth at 23% CAGR over FY23-25 remains robust and standalone RoICs remain strong at 45%+. KOEL’s valuations are reasonable at 16x standalone FY25E EPS. Our TP assigns 16x PE to the standalone entity on better growth outlook, 10x PE to LGM (100% stake) and cash and investments (including Arka Fincap stake) at 1x BV. Key risks: A sharp drop in demand post CPCB 4+ implementation and surge in raw material costs.

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