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Next 5 year plan aims USD 2bn revenue by FY30

Kirloskar Oil Engines (KOEL) reported quarterly number in line with our estimates with revenue of INR 13.4bn (up 6.2% YoY) vs JMFe of INR 13.3bn. Reported EBITDA appears to be higher at 14.7%, However, 1QFY25 has reversal of provision to tune of INR 240mn. Adjusting to this EBITDA grew 12.4% YoY to INR 1.7bn, inline with JMFe of INR 1.7bn. Adjusted EBITDA margins expanded 70bps YoY to 12.9% (JMFe 12.7%). Overall demand from domestic power gen segment continues to remain strong, with no sign of softness. On international front focus on expanding geographical presence is yielding results (exports grew 15% YoY) and will drive growth momentum going forward. KOEL is fully committed to 2x3Y despite delays in CPCB-IV norm implementation. KEOL has also released its new 5 year ambition plan called “2B2B”- which indicates to reach USD 2bn revenue by FY30.

* Revenue growth driven by Industrial and aftermarket segment: Std. revenue up 6%YoY to INR 13.4bn inline with JMFe INR 13.3bn. Export grew 15% YoY to INR 1.1bn. Industrial segment revenue grew 38% YoY to INR 3.2bn, Aftermarket up 14% YoY to INR 2bn, international business up 23% YoY to INR 1bn, while power gen segment declined 12.7% YoY to INR 5.3bn (due to high base). CPCB-IV variant product accounted for 40% of revenue in 1QFY25. Sold 250 units of 2000kva optiprime products. Expanding genset

* Favourable mix drives gross margins: Gross margins expanded 240bps YoY to 34%, mainly driven by increasing contribution from HHP segment and exports market. However Adj. EBITDA margins expanded only 70 bps YoY to 12.9% (JMFe 12.7%), due to higher employee cost as % of sales (up 100bps YoY) and other expenses as % of sales (up 70 bps YoY).

* 2B2B strategy by FY30: Grow the Kirloskar Oil Engines business to USD 2bn in the next 5 years at a consolidated level. Key strategy includes 1) Execution of manufacturing strategy, 2) complete execution of the technology roadmap, 3) increase share of business of Arka Retail, 4) inorganic growth opportunities in line with core strategy, 5) increase international market share, 6) market share improvement of B2C, 7) improve share of business in Defence and Rail, 8) expand to non ICE programs, but in line with the core business, 9) complete B2C product portfolio and 10) reach USD 2bn by FY2030.

* Maintain BUY with TP of INR 1,455: New product launches in high KVA segment (launched OptiPrime), thrust on aftermarket segment, push towards exports market, sustained demand in domestic powergen & industrial segment and improving margins in B2C segment augurs well for company in medium to long run. We expect margins to expand driven by 1) increasing HHP segment opportunity with launch of OptiPrime for sector like Data Center 2) growing aftermarket segment and 3) expanding reach in exports market. We expect revenue and earnings CAGR of 23%/35% over FY24-26E. Maintain BUY rating on stock with SOTP of INR 1,455, valuing standalone business at 30x FY26E (25x FY26E earlier).

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SEBI Registration Number is INM000010361