Kirloskar Brothers Limited (500241) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to the Kirloskar Brothers Limited Q1 FY '26 Earnings Conference Call. [Operator Instructions]. Before we move on to the conference, a standard disclaimer. This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. I now hand the conference over to Mr. Sanjay Kirloskar, Chairman and Managing Director from Kirloskar Brothers Limited. Thank you, and over to you, sir.

Thank you. Good evening, everyone. On behalf of Kirloskar Brothers Limited, I extend a very warm welcome to everyone for joining us on our call today. I hope you've had an opportunity to go through the financial results and investor presentation, which has been uploaded on the stock exchanges and on the company's website. On this call with me, I have Mr. Alok Kirloskar, Managing Director, KBIBV; Mr. Rama Kirloskar, Joint Managing Director, KBL; Mr. Bhavesh Chheda, our CFO, and Strategic Growth Advisors, our Investor Relations Advisers. Let me begin my remarks by giving some business highlights. For the quarter, consolidated revenue stood at INR 979 crores, reflecting a 5% decline year-on-year. The quarterly performance was impacted by adverse seasonal trends and external geopolitical factors. The quarterly -- an early onset of the monsoon dampened our demand for our small comp segment, which primarily serves the agricultural sector. On a positive note, the Industrial segment continued to exhibit strong demand, highlighting the resilience and strength of our diversified product portfolio. On the international front, elections in the U.S. and Thailand caused a temporary slowdown in both markets as procurement decisions were deferred. We view this as a short-term disruption with underlying demand remaining strong. We expect momentum to improve in the coming quarters. EBITDA for the quarter stood at INR 128 crores, remaining largely stable on a year-on-year basis despite the challenging operating environment. Importantly, EBITDA margins expanded to 13%, compared to 12.3% in Q1 of last year, reflecting a 70 basis points improvement. This improvement in margins was underpinned by multiple factors. A key contributor was the softening of raw material prices, which helped ease input cost pressure. In addition, our strategic focus on operational excellence continued to yield results. We made progress in optimizing cost, streamlining processes and improving resource utilization across all business verticals. These initiatives collectively enhanced our productivity and ensured better absorption of fixed costs, thereby supporting profitability even in a subdued demand environment. During the quarter, we recorded good order inflows in both domestic and international markets, reflecting a year-on-year growth of 9%, amounting to INR 1,336 crores. On the stand-alone domestic business performance for the quarter, revenue from operations stood at INR 621 crores, reflecting a year-on-year decline of 7%. However, despite the top line softness, we delivered strong performance on the operational front. EBITDA grew by 10% on a year-on-year basis, reaching INR 79 crores. Our stand-alone EBITDA margins improved significantly to 12.7%, marking an expansion of 200 basis points. This improvement was primarily driven by favorable raw material pricing and the continued impact of our cost control and efficiency initiatives. As of June 2025, a stand-alone order book, excluding the small pump business stands at INR 1,929 crores, reflecting a healthy and strong pipeline that underscores sustained demand across key business segments. In our International business, we registered a modest degrowth of 2% in Q1 FY '26. This performance was primarily impacted by a temporary slowdown in the U.S. and Thai market, largely due to election-related postponement. However, offsetting the softness, SPP U.K. delivered a strong performance driven by robust execution of its healthy order book. The keen focus on strengthening our business outlook is supported by a robust order book, we remain optimistic about our future growth trajectory. Our overseas pending order book stood at INR 1,268 crores further reinforcing our visibility and momentum in the international market. With this, let me invite Mr. Bhavesh Chheda, our CFO, to discuss the financial performance highlights.

Thank you, sir, for the warm welcome. Good evening, everyone. Let me start with the financial performance highlights. On the revenue front, the revenue from the operation for Q1 FY '26 stood at INR 979 crores as against INR 1,031 crores in Q1 of FY '25. On EBITDA front, our EBITDA for Q1 FY '26 was INR 128 crores as against INR 127 crores in Q1 FY '25. EBITDA margin for Q1 for FY '26 stood at 13% as against 12.3% in Q1 FY '25. On profit after tax funds, our PAT for the Q1 FY '26 was INR 68 crores as against the INR 66 crores in the last year same quarter last year. This is all from our side. We'll now begin the question-answer session. Thank you.

[Operator Instructions] We have our first question from the line of Sani Vishe from Axis Securities.

So I understand this quarter maybe a seasonal thing given that we saw an earlier onset of monsoon. But is that the only factor concerning our domestic demand? And if that is the case, do we expect a clear recovery starting Q2?

Yes. We do expect to see a recovery in Q2. We believe that this was a seasonal phenomenon, and that should improve. It should pick up in the next quarter.

Okay. So I want to understand, because in terms of margin, this quarter is a slight improvement. But what would be the expected range of margins for the full year? I would assume it should improve further, right? In terms of EBITDA margin?

You know, I have always said that we should strive to improve margins. So we don't make such statements.

But directionally, I think if you compare it with Q4, I think there is scope for improvement. That's why I'm asking directionally, there is further scope, right?

I think you'll have to make your own judgment on that. I cannot make forward-looking statements.

Okay.

Because the record of the last few years, I think you'll have to make your own judgment.

Yes, yes. I can see that quarterly, there is a trend of Q4, we are going on to improve in Q4. So -- but my question is year-on-year improvement because we improved this year on the previous similar quarter. So that's what I'm trying to do that on quarter-on-quarter, can we see continuous improvement. So I'm not asking in the Q4 in comparison to Q1, but rather maybe Q2 on last year's Q2 and so on. But any ways, if you -- I understand that you are not making a forward looking statements. I just wanted a direction view.

Yes. We will strive to improve.

We have our next question from the line of Pratik Kothari from Unique PMS.

Since the last call, we had kind of called out some slowdown in our cash and carry model due to some liquidity issues at the client end. Is it past that or not yet?

Could you ask that question again? In the past quarter?

We had called out that in our cash and carry model, we were seeing some liquidity issues at the end customer level and hence we had to let go of some business. So just checking has on-ground things improved in terms of liquidity for our end customers?

Our cash and carry business is for both small pump business as well as small and medium pumps business. And we -- I think we've already said that the small pump business, we had some issues because of the monsoon. As far as the small and medium pumps business was concerned, some of our direct dealers were affected by the issues at JJM, Jal Jeeven Mission. So yes, we believe that, that will ease out.

Correct. And can you call out what was the industrial numbers of growth for this quarter? Ex of our retail pumps?

Expected growth for the...

Could you repeat that question, please?

Yes. My question is what was the growth of -- for the industrial segment in our stand-alone business. We called out that the degrowth that we saw was largely because of retail pumps. So ex of that, how did industrials do?

Sector-wise and application-wise data. I think we have explained earlier that each of our competitors -- none of our competitors compete with us all across our business lines. And therefore, we give -- we do not give certain data.

[Operator Instructions] We have our next question from the line of Raj Shah from Enam AMC.

Sir, my first question was regarding the U.S. business. I know you mentioned in the opening comments. But if you can explain in detail that what has led to the slowdown in revenue as well as I see that we have -- there is some 250 basis point margin contraction as well?

Alok, would you answer that?

Yes. Good afternoon. I would say that there are two aspects. Our U.S. business constitutes SPP Pumps Inc. which is the fire pump side of the business and SyncroFlo, which is the packaged solution side of the business. And both are SPP, fire pumps is about 55% of the overall business. So in this mix, we have seen that there is some packages that have got deferred on the SyncroFlo side because of the order book came about. I had mentioned I think last quarter because someone had asked the question about order booking after the election. And I had mentioned that the orders have got delayed into February time frame. So because of that, a lot of the jobs and orders have shifted out, and they are in the third quarter for the U.S. business, which is a second quarter for the Indian business through which the numbers are reported. So I would say that's shifted by a quarter and that's caused the -- effectively the revenue numbers to go down. And of course, with the revenue numbers, the general margin also to go down. Because usually, we get -- as you know, we've got good revenues coming out of the U.S. business, and that's also giving us operating leverage, which is what we're losing when we're not meeting the revenue thresholds. So I would say that the revenues have got shifted. I don't think there's a decline in margin. It's just because we're not getting the operating leverage at this point in time. And maybe I'll take the opportunity because -- to also answer another point, which may be to do with tariffs. The U.S. business, like I mentioned, 55% of it is SPP pumps, fire pumps. That depends on products coming out of India. But usually, the product is about 20% of the overall package value. So basically, you're looking at 20% of about 55% of the business being impacted from that point of view. So hopefully, I've answered a question that you wanted an answer for and maybe one that maybe others may have wanted an answer for. Have I covered the question properly or not?

Yes. Yes. Second question was regarding valves -- so if I see a stand-alone order book in the PPT, so the valve section is seeing continuous decline. So last year in the same quarter on around INR 87 crores, part of order book. Now it has come down to around, I guess INR 34 crores. So what has led to this continuous decline in the last 4 or 5 quarters?

There are some projects which they were working on, which have been delayed. We are expecting to get those orders in the next few quarters. And the other aspect is they've already got some orders, but we've not really pushed them into our system. So they're still pending because of the way that the customer has -- the timing of the customer when we receive the order. So this should increase in the next few quarters.

As you're aware, our -- most of our orders are for large valves and they come from EPC contractors. We are very careful about the commercial terms and everything matches our requirements. We do not book them into the system.

We have our next question from the line of Saurabh Mehta from East Lane Capital.

My first question was regarding -- you mentioned in the annual report regarding the new submersible turbine pumps for the petrol pumps, which we've launched. So just wanted to understand, does it require some specific certifications like the UL 79 ATEX approvals? And do we already have those? Just wanted to get some clarification on those?

Yes, we have already gotten all the required approvals, ATEX, and the likes because this is a petroleum application and all compliances have been done accordingly.

Okay. Okay. So does it open up the whole market for us, the India market from here then?

Yes, it would for retail petroleum application, yes.

Got it. Got it.

It would also open the export market for us in addition.

Okay. Okay. So if my understanding is correct, this market was basically two international companies were having almost 80%, 90% of the market. And now we'll be the third player who has all the requisite approvals, basically, all the requisite certifications to be able to bid for all the orders, right?

Yes.

Got it. Got it. Got it. The next two questions are for Alok. One was on the service business in U.K., the Thames Water opportunity, how is it progressing? If you could give some update on that?

I think the service business in the U.K. is, like I mentioned, when you mentioned Thames Water, we have general framework contracts across most of the U.K. water utilities. There are about 10 or 12 depending on how you count them based on the subsidiary, parent relationship. But we have a framework with most of them. And at the moment, as I mentioned last time, we are starting AMP8, Asset Management Program 8, which started 2 months ago. Each AMP cycle, as I mentioned earlier, lasts for about 5 years. So we are in the 40th year, starting the 40th year of the AMP cycle. Usually the first year of the AMP cycle have not been the best because companies are still evaluating their budgets and not spending all the money. They tend to be better going towards the second, third, fourth, fifth year, and of course, towards the end of the cycle, as we've seen until now. Of course, at the moment, but given the scenarios and as you know, with Thames Water, tethering on bankruptcy and may be rescued by the government, generally, the U.K. has been looking closely at how the U.K. water utilities have been using the subsidies they have been given via the AMP cycle. And so we expect this time that there should be a better spending. As you probably know, because it's available online, the AMP8 cycle is supposed to be GBP 88 billion in total spend. So I would say that it's still early in the cycle. We are not seeing heavy spend on the service or the CapEx side as yet on AMP8 because it just started like I mentioned 2 months ago. But since you asked me general service, I would say that general service in the U.K., while it has been strong, there are some things that have been worrying us over the last few months. One is with the high power prices. You would have seen that Jim Ratcliffe, who is the billionaire who owns INEOS, which is a large chemical company in the North has said that they are looking to close down a lot of their chemical plants. So as an example, we have a huge framework contract with INEOS. And if they close down their plant because one of the reasons of course, is net zero, with net zero power prices have gone up 3x in the U.K. And so a lot of heavy manufacturing, whether it is steel plants, chemical plants, they are sort of in a very difficult scenario and many of them are closing down. So I would say that, that deindustrialization of the U.K. because of these policies is definitely an area of concern for us, and we are seeing a little bit of a slowdown on existing framework contracts. At the same time, in line with net zero, there have been no renewal of the North Sea operation for many companies for their offshore platforms, because the labor government is right now wondering whether they should or they shouldn't renew them in the context of net zero? So again, because of that, there is a confusion on the operators, whether they should move into decommissioning mode of all those rigs, which, of course, as you would expect would further enhance the power prices. So given that scenario, I think it is a bit of a concern. We are keeping a lookout in terms of what happens. And so we do see reduced spending on existing framework contracts because there's not much happening on the sites. But that said, we have added new contracts in power stations and other areas. So we are trying to offset that as much as possible. Does that answer your question?

Yes, yes, absolutely. So one more thing, Alok. So Rolls-Royce has won that SMR competition, the Great British Nuclear. So how does it get progress from here for us and how large an important opportunity could that be?

So we are approved by GBN, and we are currently being approved by some of the large manufacturers of SMR in the U.K. So from that point of view, I think it is positive. Also, as you probably know, GBN requires almost 60% to 70% U.K. content for the SMR program in the U.K. So I would say that is also a positive from that point of view, given that we are Britain's largest pump manufacturers, and we have a good reference base in power plants. And of course, as you know, KPL, which is the parent company of SPP also has a good reference base in nuclear power plants. So I would say that if you look at all those together, we are quite well positioned for the SMR opportunity through Great Britain Nuclear, which is GBN.

Got it. So just a follow-up on that, to the India business, as you mentioned. So are we approved suppliers for primary cooling pumps in India. And like we're expecting some large orders from NPCI for the fleet orders. So are we -- like are we approved for the primary cooling pumps?

Saurabh, as mentioned earlier, we did receive a development order. A few years ago, we restarted work on that. And we are well within the delivery schedule. It is my expectation that the Indian Nuclear Program, if it has to replace the fossil fuel stations will be so large that a lot of players will have to be allowed to come in. So we believe that we will be one of them when the orders are to be released.

Got it. Got it.

And I think I've already explained that the development for the primary -- development order that I spoke about just now was for the primary heat transport program. There are many other pumps, some which we are working together with NPCIL to ensure that we are able to participate. So we are funding some of these pumps, 2 types of -- 2 or 3 types of pumps, which are required are self-funded because we want to ensure that these pumps when they are required, we do get some of the orders. And for the rest of the pumps, whether it's heavy water, fast breeders. I think we have all the approvals required to participate in the program. We've also developed the boiler feed pump and delivered them -- delivered the orders to RAPP. These were the first Indian designed and manufactured boiler feed pumps for the Indian Nuclear Program.

Sir, my last question was regarding like a general capital allocation that how do we plan to use the cash on the balance sheet. Like -- given we are so somewhat been quite keen at expanding our service business, especially internationally. Could we look to acquire a business there? Or are there any other areas which we are looking at to use the cash in the balance sheet?

This question was asked the other day in the shareholders' meeting as well. Whenever there's a good opportunity, that opportunity will be taken and that opportunity, obviously, the Board of Directors will have to look at to take it forward. But yes, there is a large amount of cash sitting in the balance sheet, which gives us the liberty or the opportunity to spend it either on CapEx, either on improving operational efficiencies or to grow organically, inorganically.

[Operator Instructions] We have our next question from the line of Nishit Master from Axis Securities. We'll move on to the next question from the line of Vishal from Bandhan AMC.

So my question is on the standalone business. Could you elaborate a bit more as to what were the issues that we faced because of which we saw a year-on-year decline in revenue?

So I think there were couple. For the retail business, it's a seasonal business. So because of the monsoon, we did see a dampening of sales in rural India. For our KOB business, there were some orders that did not go out. And that's one of the reasons for the lower sales this quarter. And as Chairman had mentioned earlier, there were some dealers in the distribution -- KOB distribution network that had cash stuck with the JJM projects, and that's one of the reasons why there was less cash for us in the market. So these were some of the reasons why our sales declined in this quarter. I hope that answered your question.

We'll move on to the next question. We have Nishit back in line. The next question is from the line of Nishit Master from Axis Securities.

So sir, two questions. One, if you could quantify the loss of business from Thailand and U.S. because of elections, percentage or amount, if it was a normal quarter, if you could quantify that?

I don't think there's a loss of business. Like I mentioned that the sales has shifted, but our order book position continues to be stronger than last year. So executable order book position is stronger than last year. So I don't think there's any loss...

Yes. So this revenue will come back in, say, Q2 or Q3.