Kirloskar Oil Engines Ltd Q1 2025 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: Rishabh Sancheti - Sacheti Family Office - Analyst : Thank you for the opportunity. Sir, for the segmental revenue you shared, data center-related revenue comes in power generation, right? So I wanted to understand how much portion of power generation revenue is linked to data centers? Rahul Kirloskar - Kirloskar Oil Engines Ltd - Non-Executive Non-Independent Director Hi, Rishabh, so this is Rahul. I wouldn't be in a position to give out a specific number. But from a business standpoint, we are focused on the data center segment. Today, it is not extremely significant for us. Going forward, given the product ranges that we've entered into, it will be far more significant.

Question: Rishabh Sancheti - Sacheti Family Office - Analyst : No, that's fine. But let's say, a data center -- 1 megawatt data center, how like what would be a typical expense which a data center would be incurring on a genset? Like that is not confidential, right? That you can tell? Any broad number, sir. Rahul Kirloskar - Kirloskar Oil Engines Ltd - Non-Executive Non-Independent Director No. So is this information that I may not have handy like this, but I'm sure it's available when you check it online. So it may not be as directly relevant to this conversation.

Question: Rishabh Sancheti - Sacheti Family Office - Analyst : Just one question. What is the life of these gensets, like, how many years? Rahul Kirloskar - Kirloskar Oil Engines Ltd - Non-Executive Non-Independent Director So I could take a thumb rule of about 15 years.

Question: Rishabh Sancheti - Sacheti Family Office - Analyst : Service revenue. Yes, service revenue once it is installed, what kind of service revenues do you see from it, let's say, in a data center which has taken your genset? Yes. Rahul Kirloskar - Kirloskar Oil Engines Ltd - Non-Executive Non-Independent Director So are you expecting an answer in terms of percentage of CapEx?

Question: Rishabh Sancheti - Sacheti Family Office - Analyst : Thank you.

Question: Charanjit Singh - DSP Mutual Fund - Analyst : So my first question is in terms of when we look at the end market right now, how is the demand environment you are seeing as this transition is happening to CPCB 4? So maybe if you can just give some color from the various end markets perspective, the demand or the inquiry pipeline? And the second question is in terms of the inventory at the OEM level as we would have exhausted all the inventory and the refilling will start happening for CPCB 4 related gensets. How that inventory refilling will happen? And based on all these things, how can we see the market growth rate for the domestic power genset market? That's the question. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 08, 2024 / 11:30AM, KIRO.NS - Q1 2025 Kirloskar Oil Engines Ltd Earnings Call Rahul Kirloskar - Kirloskar Oil Engines Ltd - Non-Executive Non-Independent Director It's Rahul. So, if I look at -- and I'll answer the CPCB 4 ramp up with our GOEMs first. Just in this last quarter, we ramped up to very close to our normal CPCB 2 numbers with CPCB 4. Now the inference from that is that since the primary billing is happening, the demand continues to be strong because we operate on the replenishment model, theory of constraints. From a lead standpoint, and these are end customer leads, we are not seeing any major changes in terms of demand signals. So the demand continues to be strong. Gensets continue to be leveled to back up for critical infrastructure projects. And we are not seeing any softening happening. We are keeping a close eye on market developments. But at this point, we see that market continues to be strong.

Question: Charanjit Singh - DSP Mutual Fund - Analyst : Got it. And on the spare parts business, if you can touch upon that with the CPCB 4 compliance increasing and the entire provision happening. How do we see the spares business growing over the next two to three years? What could be the growth trajectory in the spares business as more and more now gensets come to the OEMs are more get serviced by our own service partners rather than going outside. So how does that positively impact the service business? Rahul Kirloskar - Kirloskar Oil Engines Ltd - Non-Executive Non-Independent Director Right. So you're right, it will definitely positively impact the service business. Now that is a function of two things. One is the technology becoming more complicated. So that's from the market side. And the second thing that we're doing is we are also ramping up on our service channel capabilities. So there is some restructuring work that we're doing there as well. To ensure that, we're able to respond to our customers in time. Now if you look at the last quarter's performance of our aftermarket business, it is substantial double-digit growth. And that is primarily because of these two key initiatives

Question: Jeetu Panjabi - EM Investco Capital Advisors - Analyst : Gauri, Rahul and team, great numbers, great going. Two questions. One, the international side numbers have been pretty good, 23% growth. I'd love to hear a little more color on what's working within that? What's not working within that? And do you think that this growth rate can sustain over the next 12 months? Rahul Kirloskar - Kirloskar Oil Engines Ltd - Non-Executive Non-Independent Director Jeetu, this is Rahul. So thank you for your compliment. We are very focused on the international side. And what we are doing is we are taking a very close look on the kind of competition we have, the kind of products that we need to create to win those markets. And most importantly, what is the channel and distribution structure that we need to have. So if you, for a moment, look at the investment that we made in Engines-LPG LLC, that is (inaudible) the brand. That is an outcome of one such analysis, and it is part of our Americas strategy. So there are different strategic moves we are making in different markets. They're seeing a positive payback of those initiatives and which is reflecting in some of the growth that we are seeing. And we remain pretty committed to that thought process. Because unlike India and while we club it as International business, but each of these countries are fairly unique with their own dynamics. And a thorough evaluation is needed. So that's basically where we are. So we're being very, very deliberate about that process.

Question: Jeetu Panjabi - EM Investco Capital Advisors - Analyst : Okay. No, I was more alluding to saying that this company can stand on its own feet after it touches INR5,000 crores.

Question: Jeetu Panjabi - EM Investco Capital Advisors - Analyst : And more alluding to that point. Yes.

Question: Anupam Goswami - Star Union Dai-ichi Life Insurance Company Limited - Analyst : So ma'am, congratulations on a good set of numbers. My first question is on the how much of you mentioned about focusing or improving margin improvement by focusing on high horsepower products. How much are we doing in terms of revenue in that segment? And what's our target in that? That is number one question. And second would be, we now have seen our CPCB 4 proper transition. And from now onwards, what are the kind of market share are we currently having? And what sort of gains are we looking at? And how do we place ourselves in a leading position over there? If you can just touch upon that? Rahul Kirloskar - Kirloskar Oil Engines Ltd - Non-Executive Non-Independent Director Yes. So what I will say is that to answer the first part of the question, if I look at high horsepower, I will classify high horsepower as above 750 kVA in the power generation market. And in that market, we have very minimal market share. So that's almost like a blue ocean for us. If I look at 750 to 10-10 that market share would roughly be around 15%-odd. So as we build out our portfolios, that's a clear opportunity for us. Overall, if I look at Power Generation, our market share is currently between 29% to 30%, so about one-third of the market. And in CPCB 4, we have an entirely certified built-out portfolio that spans across diesel and natural gas, CPCB 4 certified. So we are hoping to gain market share with the rate that we have. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 08, 2024 / 11:30AM, KIRO.NS - Q1 2025 Kirloskar Oil Engines Ltd Earnings Call

Question: Anupam Goswami - Star Union Dai-ichi Life Insurance Company Limited - Analyst : Okay. And just last if I can squeeze in. Since you mentioned about improving your margins, where do we see the margins from here? What sort of a room do we have in your 2030 sort of plan, $2 billion? Rahul Kirloskar - Kirloskar Oil Engines Ltd - Non-Executive Non-Independent Director So we remain committed to double digit. There is no specific numbers that we're giving out at this stage.

Question: Prolin Nandu - Edelweiss - Analyst : Thank you for taking my question. I'm sorry to again prove you further on the margin part. Now I'm not asking you for guidance, right? But if I look at your Q1 margin for B2B business, and if I call out the onetime provision, there is a year on year decline in margins. And the three tailwinds that you mentioned, Rahul, in terms of international, the second was spare parts and the third or maybe after sales and the third was higher HP. Both I mean all three are, in a way, tailwinds for us, right? All three are, in a way, growing at a faster pace than overall numbers. Despite that, this margin decline, if you can explain this? And again, maybe for the rest of the year or for the next couple of years, would there be -- I mean, more like a tailwinds to this margin level that we are currently? Or what are the headwinds, right? If you can explain as we go into FY25 and '26? That's my number one question. Rahul Kirloskar - Kirloskar Oil Engines Ltd - Non-Executive Non-Independent Director So thank you for that question. I don't think there is any margin decline. So what data are you stating? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 08, 2024 / 11:30AM, KIRO.NS - Q1 2025 Kirloskar Oil Engines Ltd Earnings Call

Question: Prolin Nandu - Edelweiss - Analyst : Okay. So you are saying that in the base quarter, the mix of CPCB was higher than what it is in this quarter?

Question: Prolin Nandu - Edelweiss - Analyst : No, I'm saying that you were saying the 40 bps decline in margin was because of the mix being adverse. And as we move towards CPCB 4, the margins will improve. So when you are looking at the base quarter, from there on that 40 bps decline has happened, was the proportion of CPCB 4 in our overall mix higher than what it is in the current quarter? Rahul Kirloskar - Kirloskar Oil Engines Ltd - Non-Executive Non-Independent Director So our last quarter, the CPCB 4 was higher compared to the same quarter last year. Having said that, there is also a mix of LHP versus HHP. So that is what we are talking about. There's a product mix change. There is nothing significant from a business operation standpoint. That is leading to a margin 40 basis point margin dip.

Question: Prolin Nandu - Edelweiss - Analyst : That's it from my side. Thank you.

Question: Mohit Pandey - Macquarie Group - Analyst : So firstly, my first question was on the demand trend. So in response to one of the earlier questions, you indicated demand continues to be strong. So if you could give more color around any particular end markets that hold out? Is it like manufacturing or property business being the strongest demand? Anything that stands up for PowerGen. Rahul Kirloskar - Kirloskar Oil Engines Ltd - Non-Executive Non-Independent Director Sure. So we are seeing strong demand from Infrastructure and Construction segment across our Power Generation as well as our Industrial business. And also, if you look at some other end markets like railways, we are seeing significant opportunities, defense. So we are seeing strong opportunities across the board, (inaudible) some key segments for us.

Question: Mohit Pandey - Macquarie Group - Analyst : Sure, sure. And secondly, if you could help us understand what would be the average price hike like-for-like CPCB 4 versus the previous project now? Rahul Kirloskar - Kirloskar Oil Engines Ltd - Non-Executive Non-Independent Director Sure. So we're seeing about 30% to 40% price change. There is significant scope addition. And we are closely watching the market dynamics play out. So we are being fairly cautiously optimistic as far as Power Generation is concerned.

Question: Mohit Pandey - Macquarie Group - Analyst : Okay, sir. So is it fair to assume that commissioning will happen over the next 2 to 3 years? Or is there a phase-wise commissioning planning for this new facilities? Rahul Kirloskar - Kirloskar Oil Engines Ltd - Non-Executive Non-Independent Director So all the execution is going to happen over the next two to three years.

Question: Mohit Pandey - Macquarie Group - Analyst : Understood, sir. Understood. And lastly, if it is possible. So you spoke about four technology track, right? So some color on the progress there. That would be my last question. Thank you. Rahul Kirloskar - Kirloskar Oil Engines Ltd - Non-Executive Non-Independent Director Sure. So I'll just give a quick recap for everyone's benefit. We have four key technology tracks. The first track is on internal combustion. The second track is on energy solutions. The third track is on electrification. And the fourth track is on hydrogen, and when I say hydrogen, I mean fuel cells and electrolyzes. So those are the 4 main tracks. In the last three years, we have made significant progress on the internal combustion track, which includes a patent on hydrogen internal combustion for power generation applications. So we have the patent for India. If you look at the second track, we have built out our own proprietary microgrid, and we are in process of launching that. If you look at the third track, on electrification, we're already present in single-phase motors and the ambition is to ramp up our capabilities. And if you look at the fourth track, there is significant work that we've done on the development side. I'm not in a position to talk about it at this point.

Question: Sourabh Arya - Oaklane Capital - Analyst : A couple of questions. The first is, I need some clarity on CapEx number. So for this year, CapEx was guided around INR400 crores to INR450 crores. And now we have announced this three-year plan of INR700 crores. So just some understanding just to get it better. So in this year number already includes some number for three-year plan or not?

Question: Sourabh Arya - Oaklane Capital - Analyst : Okay. That's fine. And second is what I observe is (inaudible) domestic sales have gone down. So obviously, that also had an impact on top line growth of the company. So any particular reason for that? Maybe is it related to shifting of factory, et cetera? And second, when do we expect this normalization? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. AUGUST 08, 2024 / 11:30AM, KIRO.NS - Q1 2025 Kirloskar Oil Engines Ltd Earnings Call Rahul Kirloskar - Kirloskar Oil Engines Ltd - Non-Executive Non-Independent Director So Saurabh, if you see our main focus in LGM was working on the margins. And what we have done, we have actually worked on product mix. We have worked on the international business and correcting some of the things that need to be corrected in LGM. So in that process, what has happened in Q1, our sales were slightly down. But now going forward, you will see improvement, and we will be able to come back to decent growth in the domestic market also.

Question: Sourabh Arya - Oaklane Capital - Analyst : Okay. That is helpful. Maybe one, two more questions if I squeeze in. One is on this what is the percentage of sales we had from CPCB 4 in this quarter? Rahul Kirloskar - Kirloskar Oil Engines Ltd - Non-Executive Non-Independent Director So in this last quarter, our CPCB 2 commitments to our customers remain to be strong. So we are trying to fulfill all of that. CPCB 4 was at approximately about 40%. But going forward, obviously, it's going to be 100% of our PowerGen portfolio.

Question: Sourabh Arya - Oaklane Capital - Analyst : Okay, sure. Thank you very much. all the best.