Technology

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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