Kirloskar Oil Engines -- Managemement meeting takeaways : Credit Suisse,

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Kirloskar Oil Engines (NOT RATED) ---------------------------------------------------------------------
Managemement meeting takeaways


● We met Mr Sanjay Parande, KOEL’s CFO for an update on
business. Management highlighted that demand outlook was not
strong given weak ordering from the telecom segment, disruptive
competition from the Chinese in low KVA engines and likely
switch of one off-highway customer (JCB) to own engines(7-8% of
sales). The agri pumps business is also getting impacted by
competition from unbranded players (Chinese).
● KOEL currently operates at 65-70% utilisation and plans Rs1 bn
capex in FY11 and Rs1.2 bn in FY12. Sales tax reimbursed
(capital subsidy on Kagal facility) is being routed through balance
sheet (Rs1 bn on accruals). KOEL has Rs2 bn of cash.
● Margins have been under pressure due to RM price impact,
impact of competition and inventory clearance. Despite the
cautious view, management hopes to achieve 10-15% sales
growth in FY12 and expand margins (mix change to mid-high end,
cost initiatives).
● KOEL’s exposure to low KVA segment could be the key reason
for a relatively cautious outlook. While JCB is also a customer of
CIL, given the diverse range of end users, impact on sales should
not be high. CIL benefits from dominant positioning in the midhigh
segment and strong exposure to the export market.
In CY09, KOEL demerged its wind power and investments business
into Kirloskar Industries (KIL) and engines and bearings business into
Kirloskar Engines India Limited (KEIL). KEIL was again renamed as
Kirloskar Oil Engines Limited, and the firm got relisted in Dec 10.
KOEL operates in three major business segments:
Agriculture (5% of sales) and Off-Highway segment (18% of
sales). KOEL manufactures engines for pumps and diesel gensets
(market share up from 8% in FY09 to 17% in FY10). The company
has launched low maintenance ‘Varsha’ pumps in FY10 (30,000
pumps sold in year 1). KOEL competes with firms such as Greaves
Cotton, other local enterprises (Premier Agencies, Lalita Pumps,
Rohan Agro and Punjab Diesels) and Chinese engines (priced at half
the market price). In the off-highway segment, (18% of sales)
management highlighted that market share increased to 54% from
52% in FY09. Some major clients include JCB, L&T, Volvo, Escorts,
Sany Heavy and Hyundai. JCB contributes to ~35% of segment sales
and is now switching to their own engines next year.
Power Gen (40% of sales). These engines are mainly used for power
generation in large residential and commercial establishments and for
standby power for industries, power backup for telecom base stations.
KOEL has now launched DV-Series engines to cater to the mid-high
end of the segment and has exclusive sales agreements with 14
OEMs.


Scaling up the value chain
KOEL has a dominant positioning in the low KVA segment but has
now started expanding into the mid-high segment where margins are
much better. (320 KVA, 400 KVA, 500 KVA and 600 KVA engines are
now available) CIL is the market leader in the large engine segment.


Margins under pressure
Management highlighted that apart from increase in commodity
prices, price competition and inventory clearance of Bharat Stage 2
engines, (market switching to Stage 3 by April-11) impacted margins.
Capital subsidy on the Kagal facility (Rs4.7 bn capex. sales tax
incurred will be repaid by 2017 up to the level of capex done with a
cap of Rs6 bn.) is being routed through balance sheet. KOEL also
pays Rs0.2 bn rent to Kirloskar industries on account of use of the
Khadki premises.


Capex is planned at Rs1 bn for FY11, of which Rs0.6 bn has been
incurred so far. KOEL intends to spend Rs1.25 bn in FY12, mostly on
capacity expansion in the Khadki and Kagal plants.