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Focus remains on improving scale and margins

* Kirloskar Oil Engines (KOEL)’s 2025 Annual Report highlighted the company’s strategy to grow its business across divisions with new product launches and a focus on profitability.

* With the genset market now nearing stabilization, we expect KOEL to concentrate on volume growth and high-horsepower (HHP) product sales in the powergen space. KOEL remains committed to its industrial segment, particularly during the transition to Construction Equipment Vehicle (CEV) norms, while also focusing on securing larger orders. The company is continuously increasing its distribution touchpoints. We would wait for a broad-based recovery in exports in the future, which have been weak until FY25.

* We incorporate details of the Annual Report in this note and maintain our TP of INR1,150, based on 25x P/E for the core business and the remaining value from subsidiaries. Reiterate BUY.

Powergen segment: Strengthening control and focus on the HHP market

KOEL is actively deepening its technological capability in the Powergen segment, particularly with a strategic pivot toward the HHP market throughthe Optiprime range of generators, providing the company the ability to cater to sectors such as data centers, hospitality, and commercial spaces. The in-house development of genset controllers reflects its intent to move up the value chain and reduce dependency on external technologies. This shift is not just about cost optimization but also about gaining greater integration and customization flexibility across its product portfolio. We expect the powergen segment to clock a CAGR of 15% over FY25-27, as these initiatives are likely to drive growth by capturing higher-value projects and strengthening KOEL's position in premium genset markets. For the portfolio below 750kVa, we expect the growth to be largely driven by volumes, as pricing would remain broadly stable.

Industrial segment: Bolstering capabilities by expanding into high-value orders

The Industrial segment continues to be a growth engine for KOEL, with strong traction from construction and infrastructure demand. The timely launch of CEV BS V-compliant engines underscores KOEL’s regulatory preparedness. The engines are available in power ranges of 49HP, 74.5HP, and 110HP for applications in the construction sector. Additionally, the company has completed the development of 130HP CEV BS V engines. Moreover, KOEL is also developing the HHP series engines and 400 HP engines for rail maintenance. It also initiated the supply of 500kVA CPCB4+ diesel alternating sets for power car applications. Going forward, KOEL is likely to benefit from demand in the construction, concrete handling, railways, mining, and defense sectors. We also expect incremental revenue to flow from the execution of NPCIL orders and marine orders from the MoD. We thus expect the Industrial segment to clock a CAGR of 16% over FY25-27.

Distribution: Deepening customer touchpoints

The distribution segment provides services through service, direct, and retail channels. Through the service channel, KOEL provides remote monitoring services and diagnostic support. The company's innovative service offerings, such as Bandhan (branded AMCs for retail customers) and extended warranties, are developed to ensure long-term customer retention. KOEL now has around 450+ touch points, 400+ distributors, and 3,000+ trained service engineers. For the direct channel, KOEL has introduced a remanufactured line of products, known as Kirloskar Nulife. This Nulife brand helps the company to upgrade its genset to the current emission norms without having to invest heavily in a new genset. In the retail channel, the company intends to focus on strengthening its distributor network. We expect distribution to record a CAGR of 15% over FY25-27.

Exports: Gaining momentum through a wider reach

KOEL’s export performance was hit in FY25 due to a lack of orders during FY24. However, the company is expanding its footprint across Southeast Asia, Europe, the Middle East, and Africa. KOEL has ventured into the UAE market too, along with appointing marine business dealers in these regions. A larger portion of exports originates from the powergen business, particularly in the Middle East and Northern Africa (MENA), Sub-Saharan Africa, and Asia-Pacific (APAC) regions. KOEL is now executing the HHP orders also in the international markets. We believe that the export market opportunity is quite large, and KOEL has to channelize resources to expand its presence in exports. We project exports to clock a CAGR of 15% over FY25-27.

Roadmap to achieving the USD2b revenue target by FY30

KOEL has laid out a clearly phrased long-term growth strategy aimed at becoming a USD2b company by FY30. Rather than relying solely on topline expansion, the company plans to optimize manufacturing and improve B2C capacity utilization in FY26. Followed by a shift in FY27 toward a technology roadmap and expanding Arka’s retail contribution, indicating a push toward innovation and retail penetration. By FY28, the focus shifts to inorganic growth and international market expansion. FY29 marks a strategic step towards diversification into defense and rail, reducing dependence on legacy segments. The final phase in FY30 integrates these layers of transformation.

Financial outlook

We expect a revenue CAGR of 15% over FY25-27. Over FY25-27E, we bake in a 70bp improvement in margins to build in better product mix and operating leverage benefits. We expect an EBITDA/PAT CAGR of 18%/19% over the same period.

Valuation and view

The stock is currently trading at 27.0x/22.2x FY26/27E earnings. Adjusted for the subsidiary valuation, KOEL is trading at 23.2x/19.1x on FY26/27E EPS, which is still at a significant discount to the market leader. We reiterate our BUY rating on KOEL with a TP of INR1,150, based on 25x P/E for the core business and the remaining value from subsidiaries.

Key risks and concerns

A slowdown in order inflows, geopolitical issues, delays in the completion of mega and ultra-mega projects, a sharp rise in commodity prices, an increase in working capital, and increased competition are a few downside risks to our estimates.

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