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Delivering results

Kirloskar Oil Engines’ (KOEL’s) results were ahead of our estimates with the company reporting a YoY growth of 21%/80%/81% in revenue/EBITDA/PAT for the quarter. For the full year FY24, revenue/EBITDA/PAT grew 18%/32%/34% YoY and export revenue crossed the INR5b mark. The B2B segment revenue growth for the year was aided by industrial, distribution, and export sectors. The B2C segment growth was driven by water management system. We expect KOEL also to continue to benefit from strong demand across segments. We revise our estimates upwards by 6% to factor in improving trends in powergen, exports, and distribution. Consequently, we revise our SOTP-based TP to INR1,220, valuing core business at 25x Mar’26E earnings. KOEL continues to be re-rated due to its consistent delivery on key parameters of improved product mix, increased penetration of HHP (sold 17 models of Opti-prime gensets) as well as a higher share of exports (at 10.8% of sales). We maintain our BUY rating on the stock.

Better-than-expected performance

KOEL’s revenue at INR13.9b grew 21% YoY/23% QoQ, led by 28%/19%/70% YoY growth in industrial/distribution/export sectors. Powergen segment growth stood at 11% YoY. In FY24, all segments reported growth in the range of 15-32% YoY. Gross margin expanded ~330bp YoY to 33.8% on a higher share of CPCB IV+ gensets and exports in the overall revenue mix. Other expenses as a percentage of sales declined on improved operating leverage. EBITDA at INR1.8b grew 80% YoY, while margin came in at 12.8% (+420bp YoY and 110bp QoQ), ahead of our estimate. PAT at INR1.2b grew 81% YoY, led by robust operational performance. For FY24, revenue/EBITDA/PAT grew 18%/32%/34%. Export revenue crossed the INR5b mark and cash stands at INR2.6b (net of debt). FCF grew 13% to INR1.6b. Borrowings increased from INR751m to INR2.1b, on higher capex.

B2B segment performance remains strong

KOEL’s B2B revenues were up 22%/18.5% YoY in 4QFY24/FY24. Within this, all segments registered healthy growth. Particularly in powergen sales, the momentum was driven by vigorous demand from manufacturing, infrastructure, and data center sectors. Nearly 80% of sales are from CPCB2, while the remaining from CPCB 4+. Industry will be shifting toward CPCB 4+ sales soon as inventories get over for CPCB2. The company is already working on multi-fuel engines and has also seen good traction from the recently launched Opti-prime series. It sold nearly 17 models of Optiprime. Within B2B, industrial segment revenues grew 28%/18% YoY for 4QFY24/FY24, driven by railways, infrastructure, and construction sectors. Future growth areas for KOEL would emerge from mining, railways, defense, construction, fisheries, etc., for the industrial segment. The distribution segment witnessed a revenue increase of 19% for both 4QFY24 and FY24, while exports soared 70%/32% for the same period.

Within B2B, exports grew 32% YoY for the full year

Exports have witnessed a notable 32% YoY increase for the full year, with the export share improving to 11% of sales vs. 7.6% in FY22. The company is evaluating geographies carefully with key focus on the Middle East and the US. It has appointed GOEM in both the markets and would look to export CPCB 4+ products along with Optiprime gensets. KOEL has already applied for a certification for CPCB 4+ products in the US and is also foraying into the US market through a 51% stake purchase of Engines LPG LLC (Wildcat), an entity focused on Powergen manufacturing and selling.

B2C margins are inching up

In the B2C business, the water management solutions segment (WMS) is growing much faster (+22% YoY), while the farm mechanization segment (FMS) continues to be tepid (-46% YoY). Overall, B2C grew 10% YoY in 4QFY24, while FY24 saw 15% growth. EBIT margin trajectory is on an upswing with 4.6% in FY24 vs. an operating loss of 0.8% in FY22. Management aims for further improvement in the coming years. Notably, LGM PBT jumped 4x YoY from INR80m to INR340m in FY24.

Valuation and recommendation

The stock is currently trading at 30.4x/23.6x FY25E/26E earnings. We increase our valuation multiple to 25x for KOEL from 22x earlier and revise TP to INR1,220. This is still at a 45% discount to the industry leader. Enhanced valuation multiples take into account improved product mix, higher export sales, improving margins in B2C operations, and the promising performance of Arka Fincap, which presents ample opportunities for monetization.

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