IGI Logo

Transitioning quarter

KOEL’s 2QFY25 results beat our estimates, with 13%/67%/90% YoY growth in revenue/EBITDA/PAT. B2B segment growth was aided by powergen, industrial and distribution segments, while exports remained weak due to weakness in select markets. B2C segment growth was impacted by a planned plant transition. Powergen segment revenues declined QoQ on relatively lesser price hikes for lower-kVa nodes for KOEL vs. its competitor and a QoQ decline in market volumes due to norm shift. Going ahead, as genset market matures, we expect KOEL to gain in overall volumes in line with demand improvement. To bake in lower-than-expected exports and distribution segment growth, we cut our FY25/FY26/FY27 EPS estimates by 3%/3%/4%. We continue to value KOEL at 29x P/E on two-year forward estimates and revise our SOTPbased TP to INR1,500 (from INR1,540). Adjusted with subsidiary valuation, KOEL is trading at 28x FY25E/22x FY26E/17.5x FY27E EPS, which is still at a 45-50% discount to the market leader. We maintain BUY on KOEL as we expect it to benefit from improved sales from higher HP segments, distribution, exports and improving trajectory of B2C.

Results reflected sharp beat in performance

KOEL’s 2QFY25 revenue was ahead of our estimate at INR11.9b, up 13% YoY but down 11% QoQ. B2B segment grew by 17% YoY, whereas B2C declined by 13% YoY, due to a planned plant transition under which the company consolidated five of its manufacturing locations into a single unit in Ahmedabad. Reported EBITDA of INR1.6b (+67% YoY) beat our estimate, largely aided by a reversal of provisions for doubtful debts worth INR174.4m. Adjusted for this, EBITDA was in line. Accordingly, adj. EBITDA margin came in at 12.4% vs. 10.3% in 2QFY24 and 12.9% in 1QFY25. PAT came in at INR1.1b (+90% YoY), supported by higher other income (up 84% YoY) and a lower effective tax (24.7% vs. 25.9% in 1QFY24). For 1HFY25, revenue/EBITDA/PAT grew 9%/43%/52%, while free cash outflow narrowed to INR49m, from INR481m in 1HFY24. For 2HFY25, we expect a revenue/EBITDA/PAT growth of 24%/30%/31%.

Powergen segment growth lower than market leader

Powergen segment growth declined by 9% QoQ for KOEL in 2QFY25 vs. 12% QoQ growth seen for Cummins. KOEL management has indicated that overall powergen industry volumes were down by 10-15% QoQ in 2QFY25 owing to norm transition, but KOEL has maintained its volume market share. This implies that KOEL’s average realization would have been lower than Cummins’ during 2QFY25, which we attribute to two factors: 1) KOEL’s dominant presence in lower-kVa nodes, which saw lower price hikes than the nodes where Cummins is a dominant player, and 2) increased competition in lower-kVa nodes, which would have put pressure on realization. Thus, based on ‘value-wise market share’, the immediate competitor Cummins would have gained more in 2QFY25. We expect genset market to mature in 2-3 quarters in terms of pricing and positioning of players. We expect demand to remain strong and genset pricing to correct in the range of 5-8%. With this, we expect powergen revenues for KOEL to start improving from 3QFY25 onward.

For More Motilal Oswal Securities Ltd Disclaimer http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html

SEBI Registration number is INH000000412