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Kirloskar Oil Engines Ltd Research Report - 02nd Feb 2016

Capital Goods | Published on Feb 02nd 2016


Kirloskar Oil Engines (KOEL) reported a disappointing set of numbers for 3QFY2016. Its top-line for the quarter declined by 1.8% yoy to Rs601cr. Employee expense as a percentage of sales increased by 34bp yoy to 8.5%, and other expenses as a percentage of sales increased by 181bp yoy to 19.6% of sales. This resulted in the EBITDA margin contracting by 137bp yoy to 8.1%. There was an exceptional expense of Rs10.4cr during the quarter related to Voluntary Retirement Scheme (VRS) for employees. Adjusting for the VRS expense, the net profit declined by 14.9% yoy to Rs29cr. Outlook to remain subdued in the near term: In the near term, we expect the company to witness some pressure on account of overall slowdown in the Genset industry. In addition, the absence of NPCIL orders in large engines segment has been impacting the top-line and profitability. The company has guided that although the near term outlook remains muted, it is hopeful about the longer term prospects. KOEL has expanded its capacity in the past and is positioned to successfully cater to improvement in demand once the operating environment changes in the longer run. KOEL also has taken measures to increase its focus on exports which should aid growth. Cash rich position: KOEL is a debt free company with cash and cash equivalents of ~Rs835cr as of 1HFY2016. With ample capacity in place, there is no major capex expected in the near future. Consequently depreciation expense is also expected to remain low which will aid the bottom-line. We expect KOEL’s cash and cash equivalents to be at ~Rs1,038cr in FY2018E which is ~30% of the current market cap. Outlook and Valuation: We expect KOEL’s revenue to recover post FY2016, ie to Rs2,800cr in FY2018E. With recovery in the top-line, we expect the EBITDA margin to recover to 10.0% in FY2018E. Consequently the profit is expected to grow to Rs175cr in FY2018E. At the current market price, the stock trades at 19.5x its FY2018E earnings. We maintain our Neutral view on the stock.

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CMP 235
Target Price
Investment Period12 Months

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Shareholding Pattern (%)

Public & Others27.0
Grand Total100.0

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