Kirloskar Oil Engines Ltd


BSE: 533293 | NSE: KIRLOSENG | ISIN: INE146L01010 
Market Cap: [Rs.Cr.] 2,892 | Face Value: [Rs.] 2
Industry: Engines

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Management Discussions

Management Discussion and Analysis

Socio Economic Environment

The global economic environment continued to be a matter of concern during the year2012. Countries which are in severe sovereign debt distress moved deeper into recession.The downward spiral of high unemployment and weak aggregate demand compounded by fiscalausterity, high public debt burdens and financial sector fragility.

The fallout has been that the economic woes of the developed countries appear to spillover a country like India through weaker demand for exports and heightened volatility incapital flows and commodity prices. In turn, the slowing down of the economy in thedeveloping countries may have implications for poverty reduction and narrowing of fiscalspace for investments in critical areas of human development such as education, health,basic sanitation and other areas needed for accelerating the progress to achieve theMillennium Development Goals.

India’s economic growth rate in the last fiscal is estimated to be sharply lowerat 5%, the lowest in a decade, on account of poor performance of manufacturing,agriculture and services sectors. A weak monsoon affected performance of the agriculturalsector. Policy constraints, infrastructure bottlenecks and lack of sufficient demandresulted in a further slowdown in growth of industrial sector. The subdued growth of othersectors, coupled with continued weak external demand pulled down the growth momentum ofthe service sector. Going forward, the key to growth is incredible and sustainedimplementation of economic reforms.

The boost to consumption, coupled with supply side constraints led to higher inflation.Despite slowdown in other inflation indices, food inflation continued to be higher thanoverall inflation. The sticky food inflation puts pressure on the Consumer Price Indexinflation, which continues to be close to double digits. As a result, RBI continued tofollow a policy of monetary tightening, which has also impacted GDP growth, which isexpected to be 5% for the FY 2012-13.

Future outlook

Overall, the global economic environment continues to be fragile, although the balanceof risks is now less skewed to the downside than it has been in recent years. Globalgrowth is expected to be 2.4% during 2013 before strengthening to 3.1% in 2014.

The overall investor sentiment has been poor on account of continuing delays fromGovernment in ensuring timely project clearances, availability of funds for the variousinfrastructure projects and the various irregularities in the telecom and mining sector.While announcement of measures to reign in the fiscal and current account deficits havebeen made, it would take a lot more effort on the part of the Government, for the growthmomentum in the Indian Economy to improve in the short to medium term.

Company Performance

During the year 2012-13, the Company achieved sales of Rs. 2,319 crores as against Rs.2,276 crores for the previous FY showing a marginal growth of 1.9%. However, a sizablereduction in finance costs together with cost optimization and efficiency improvementprograms ensured a healthy improvement of 24% of net profit from operations (beforeexceptional items). The operating profit before tax and exceptional items in the currentFY is Rs. 290 crores as against Rs. 233 crores in the previous year.

Business Performance

The Company caters to diverse customer needs across three key sectors of economy viz.agriculture, industry and services.

1. Agri and Allied Business

The share of Agriculture and Allied sector in India’s GDP declined to about 13.6%during FY 2012-13 on account of higher growth in the non-farm sectors. Major cropproduction fell by 3.5% in FY 2012-13 after record setting achievements in the previousyear. Poor precipitation and drought like situation in some parts of Maharashtra, Gujarat,Rajasthan and Karnataka limited the production of both food and non-food crops.

However, despite the difficult environment, the Company’s Agri and Allied Businessposted a healthy top line growth of 23 % in FY 2012-13 as compared to the previous year.This growth was an outcome of aggressive retailer appointment drive and prospect basedmarketing taken up by the field team.

Competition in this sector is expected to remain tough and while the Company facesevere price competition from the unorganized players who sell at deep discounted prices,the real concern is in the portable pump set segment where low cost Chinese imports willpose a threat if the unabated dumping continues.

With the increase in area under irrigation, the opportunities and scope for growth inthe coming years look promising.

Though 94% of Indian villages are electrified, non availability of power continues todrive the demand for Engine driven pump-sets.

A normal monsoon remains a vital necessity for the agricultural sector. Drought riddensituations and a poor Rabi season have resulted in a slowdown and stock accumulation inthe Agri sector. Hence, a good Kharif season in FY 2013-14 is imperative to lift thesentiments of the farming community and boost overall demand in this sector.

2. Industrial Engines Business

The overall slump in the economy, took its toll on the Industrial sector, where theoverall market witnessed a sizeable drop of 20% compared to the previous year. From FY2011-12 market size of 80,000 engines (Rs. 1,201 Crs.) it dropped down to 64,000 engines(Rs. 1,088 Crs.). While the Company also lost volumes and revenue drop in this sector was23% as compared to the previous year, aggressive marketing and good customer relationshipsensured that we retained market share in terms of number of engines sold in FY 2012-13 ascompared to FY 2011-12.

Due to the economic slowdown major OEMs were saddled with finished goods inventory infirst half of FY 2012-13 and had accordingly tapered their engine off take. In the secondhalf of FY 2012-13, the Company worked closely with each OEM in ensuring that pipelinestocks were consumed, receivables were on track and fresh supplies were resumed therebyrestoring an overall sense of discipline.

For the short term, the Company is working with various OEMs, to ensure that theexisting engine builds, fetch us additional volumes. We are also exploring the bazaar salesegment through various Industrial Equipment Dealers. As a long term opportunity theCompany is focusing on excavator, tractor and crane segment to increase Company’sengine volumes.

3. Power Generation Engines Business

Despite shrinkage in the Telecom segment by 13% as compared to FY 2011-12, this segmentregistered a revenue growth of 9.4% as compared to the previous year. This was a result ofthe surge in retail and Institutional sales in Tamil Nadu and Andhra Pradesh (other thanTelecom). The major factors that have had/likely to have an impact on this segment are :

• Overall slowdown in the economy which impacted the infrastructure segmentconsumption of DG sets

• DGS & D off take was very low due to non-closure of Rate Contracts on time

• Continued power shortage in states like Andhra Pradesh and Tamil Nadu resultingin higher sale of DG sets

• Relatively low entry barriers, permit automobile manufactures to foray into thismarket with their engines at deep discounted prices

• The demand in high stable power situation market is shifting to high endinverters or renewable energy sources like solar

• Telecom is shifting to "Green sites" in some urban markets and hasadverse impact on DG consumption

During the fiscal, the sales and marketing team have worked on several initiatives thatinclude re-organizing and optimizing markets and territories, improving reach, moving toconsumption based supplies, improving product availability, enhancing the brand ownershipand consequently the value of "Kirloskar Green" brand. As part of the newproduct introduction, Kirloskar Chhota Chilli, a 5 kVA portable genset was launched in May2012. The product has met with good response in the market and the Company is now preparedto ramp up sales. All these initiatives have helped in the top line growth of 9.4% ascompared to the previous year. Going forward, the Company will further consolidate onthese initiatives.

4. Large Engine Business

In the FY 2011-12, the Company had received an order of Rs. 396 crores from the NuclearPower Corporation of India (NPCIL) for supply, erection and commissioning of 16 emergencyDG sets. During the year under review, the Company successfully completed all criticaltype tests of Institute of Electrical and Electronics Engineer (IEEE) at Nashik plant onthe first of these DG set powered with 18PA6V engine. Of the total 16 DG sets, two DG setswere manufactured and dispatched to NPCIL in the financial year under review.

Given the Company’s good track record and proven reliability in specificapplications like Stationary Power Plant, the Company has also manufactured and suppliedone X 16PA6V engine based DG set to provide emergency power using High Speed Diesel (HSD)as fuel for a refinery project.

The Company successfully commissioned first ship of naval OPV class at Goa ShipyardLtd, which is powered with 2 X20PA6B STC engines.

The continued upward spiraling of fuel prices has resulted in a steady shrinkage ofHeavy fuel Oil based DG sets. Existing Heavy fuel Oil DG set customers prefer to keeptheir sets on standby.

The Commercial marine segment has been adversely affected on account of the globaleconomic slowdown which has also had an adverse impact on the Indian ship buildingindustry.

5. Customer Support

The Company’s commitment to provide quality service to all its customers continuedunabated. An extensive network of 105 trained service dealers and 359 well equippedservice outlets spread across India ensured prompt and timely after sales service to allCompany’s customers.

To ensure that Company’s high service standards are maintained and furtherimproved, regular audits were carried out at the premises of service dealers followed bytraining to bridge gaps, if any. The Company also conducted 295 service training programsfor its channel partners where approximately 4,000 technicians were covered. As a steptowards further improving customer service and to further minimize any downtimeexperienced by customers, the Company has introduced Kirloskar remote monitoring for DVseries and this facility is expected to grow in the future.

Despite Company’s best efforts to curb proliferation of spurious spares, much ofit through education of our channel partners and customers, these continue to be freelyavailable and this together with freelancer service activities, continue to put pressureon Company’s service and spares. However, with organised customers opting for AMC,the Company sees a continuing opportunity to provide quality service with optimum leadtime to repair.

Retaining quality manpower at service dealer level remains a key challenge for thisbusiness segment and given an informed customer group with high service expectations,quality service and quick response time will be a minimum expectation. The Company howeverremains committed to its customers and will deploy a multi-pronged strategy which wouldinclude innovative solutions in both spares and service thereby ensuring high qualityservice at competitive rates.

6. Exports

On a Year on Year basis, export revenue in the current fiscal showed a marginalincrease of 2.4%. While there was substantial growth of 43% in the power generationsegment, the Industrial segment remained flat and the agriculture witnessed a dip.

The Company’s exports to markets like Saudi Arabia, South Africa, Nigeria, SriLanka, Zambia, Kenya, Tanzania, and Nepal grew by over 20% in the FY 2012-13. This was aresult of focused efforts and initiatives including working closely with the distributors.

Market instability in some of the Middle East and African countries has affected theperformance in those markets and political stability is expected to return to thesecountries in the coming FY. Iran market was the most affected by the US sanctions and isexpected to continue to underperform during the coming year.

Exports contributed 7.4% of total Company revenues during the FY 2012-13. Sustained andfocused efforts will be made to ensure that the share of export revenue increases.

IT and Infrastructure

The Company is making continuous investments in Business Process Automation andInformation Technology. Infrastructure capacity, data security, data centralization &business process controls are all high areas of focus. The Company’s IT strategy isfocused towards improving efficiency and providing a platform for a decision supportsystem that will provide for a competitive sustainable advantage and all this whileensuring the highest level of data integrity and security.

Work flow systems have not merely helped systematize work and helped in improved audittrails but also helped move towards a paperless office environment.

Research and Engineering

In order to meet customer needs and remain competitive, the Company continues to investin new product development programs and applications. Research often leads to innovativeofferings that provide cost effective solutions and value engineering upgrades toCompany’s existing and prospective customers. These offerings not only help open upnew segments and markets but often are necessitated merely to conform to new regulatorystandards and norms.

The Company is well on its way in ensuring compliance with the new CPCB II norms thatare likely to come into effect in the FY 2013-14.

Quality Assurance

Critical processes were simplified and implemented through automated systems in FY2012-13. Most of the significant field quality issues were diagnosed and resolved bytaking timely actions. The feedback from various customers on Quality related metrics showa high level of satisfaction.

The Company continued training its suppliers on Six Sigma tools, benefits of which havebeen realized in terms of reduced PPM levels. The Company remains committed towardsdeveloping and improving various supply chain related processes.

Vendor Development and material cost optimization

Vendor development remains a key focus area for the Company. The Company’s vendorsare an important link in the value chain and the Company’s belief is that they willplay a vital role in our growth strategy. Special efforts were taken on vendor trainingfor Quality systems and Six Sigma Tools. The Company organized a Supplier Quality Contestin FY2012-13 for the 4 consecutive year to provide a platform for its suppliers to sharetheir quality improvement projects and other best practices. Awards were presented to thewinners as a token of recognition of their sustained efforts. In all, the Company received91 presentations from suppliers in areas of Quality, Process Improvements and BusinessProcesses and EHS.

Consumption based, demand driven procurement of Raw material for regular consumptionparts which covers 200 suppliers and over 3,000 parts was initiated during the year. Thesystem ensures a balance of maintaining optimum inventory levels across parts andimproving the availability for production.

Model level value engineering projects were completed and new products like 4K 1080 for100/125 kVA were introduced in market. New platform projects like DV16 have been testfired and are under optimization. Generic item level cost reduction projects are completedand focus is given on inflation control through process improvements.

Human Resource and Industrial Relations

As on 31 March 2013, the Company had 2,376 employees on its roll. The Company continuesto maintain healthy and harmonious industrial relations across all manufacturing units. On30March 2013, the Company signed a Wage Agreement with the team members at its Pune Plant.This is the seventh consecutive wage settlement which was signed prior to the expiry ofthe earlier settlement, without losing a single man-day in last 50 years (Considering Preand Post Demerger period). This is a unique achievement for any manufacturing company inIndia.

The Human Resource strategy at the Company is to create a culture of sustained businessout performance while strengthening the core values of the organization. Greater employeeengagement, supported by an energizing performance management culture that holds peopleaccountable for results and behavior and rewards them for the value they generate, is afundamental component of the Company’s people strategy. Towards that, the focus is onenhancing both individual competencies skills, knowledge, attitude, and organizationalcapabilities processes, metrics, structure and culture.

Talent management and Leadership Development process which included DevelopmentCentres, Individual Development Planning, training and up-skilling remain areas of focus.

Environment, Occupational Health and Safety (EHS)

Environment

During the FY 2012-13, the Company undertook following environment initiatives acrossall its plants:

Kagal Plant:

Diesel consumption reduction in Engine testing by changing testing processes

• LPG consumption reduction of Powder curing process by avoiding unwanted heating

• Reduction in the noise level created by Siever during auto sieving cycle atpowder coating booth

• Green belt development in plant premises - 2000+ trees and shrubs planted

• ETP sludge reduction by using filter press machine (sludge drying)

• Installation of Bio-gas plant for cooking from waste generated by Kitchen

Pune Plant:

Noise level Reduction in surrounding area of Pune Plant 1 engine test house

• Up-gradation of emission level of 4R-1040 four Valve Engine

• Successful trials of cold washing media on 4 washing machines

• Up-gradation of emission level of SL90 CRDI 300 kVA Engine

Nashik Plant:

Installation of Paint booth to avoid pollution

• Stopped the usage of Liquid Ammonia and the ammonia printing m/c

• Fire hydrant-Sprinkler system installed and commissioned

• Oil fired furnace converted to gas fired system to reduce carbon foot print

Rajkot Plant:

Improvement in ETP processes to reduce power consumption and improvebiological treatment

• Additional sludge drying bed added at ETP to collect sludge from settling tankto purify effluent

• Reduced noise level by modification of engine test-cell doors

• Reduced generation of paint sludge by improving painting process

• Disposal of waste oil and sludge to authorized recycler

Besides all of the above, there was a concerted drive to minimize use of paper acrossall offices and manufacturing sites. Efficient work flow systems helped in eliminatingprinters and consequently resulted in sizable reduction of paper usage.

The Company’s third Corporate Sustainability Report (2011-12) was releasedin April 2013. The report, for the 3 consecutive year received A+ ranking, which is thehighest level check certification from GRI Netherland, under GRI 3.1 (new guidelines).

Health

Employees’ health and well being are of paramount importance to the Company.Medical check-up of employees are carried out regularly. Regular lectures on health,fitness, common ailments and diseases and life style improvement are made with a view toenhance employee awareness. Following are some examples of initiatives carried out acrosslocations, with a view to improving overall employee health:

• Installation of Fume Extraction system with Melting furnace in Heat Treatment atPune plant

• New Occupational health center started at Kagal Plant

• ELCB installation to reduce shock hazards on electrical panel at Rajkot

• Installation of additional Reverse Osmosis (RO) facility for drinking waterpurpose at Rajkot location

• Health checkup camps organized for company employees at all locations

Safety

Improving work place safety continued to be a high priority across all operations.Towards this, some of the steps taken to improve Company’s safety standards andenhance safety awareness included:

• Common OHS Policy in compliance with the Factories Act, was released on1 May2012, across all the Company factories.

• Machine Guarding audit and installation of guards for all Bandsaw machines inHeat Treatment plant completed

• EHS management system Internal Auditor Training conducted by Corporate Safety

• Safety Week celebration at all location on March 4, 2013

Corporate Social Responsibility

Whilst achievement of business objectives is important, the Company strongly believesin good Corporate citizenship and in Enriching Lives of people through itsCSR initiatives. The community initiatives span key areas of Health, Education,Environment and Livelihood and is largely focused around the surrounding communities ofall plant locations. The employees at each of plants volunteer and provide continuingsupport to the CSR initiatives. Some of these would include:

• Support for Kirloskar Foundation’s WASH Activity such as CleanDrinking Water, Use of Toilets, Hand Wash etc. where 79 Company’s employees worked asVolunteers in 17 Schools and devoted their 3012 Man Hrs

• Free Health Checkup Camps in Schools and Community

• Health Awareness Program like- HIV/Aids Awareness, Safety beyond Workplace,Adolescent Health and Hygiene.

• Computer Literacy Program

• "Disha"-Career Guidance Workshop

• Sponsored KOEL- Akanksha Center at Khadki

• Sponsored Educational expenses for 80 Orphans/Deprived children and otherprimary school children

• Teachers Training Program

• Tree Plantation

• PUC Checkup Camps

• Environment Awareness Program , Waste Management workshop

• "HasatKhelatParyavaran" in Pune and Kagal

• ENCON an Energy Conservation Initiative

• Livelihood Generation Activities through Self Help Groups (SHGs)

"SAAKAV"- Life Skill Training Program for AdolescentBoys and Girls

• Vocational Training for Youth

The Company achieved an overall perception score of 97% in Community Perception Surveyacross all locations, in the areas where these initiatives were taken.

Internal Audit, Internal Controls & their Adequacy

The Company believes that good internal control is an intrinsic part of the overallgovernance framework. The Company remains committed to ensuring an effective internalcontrol environment that provides efficacy of operations and security of assets.

Internal audits are carried out by a leading auditing firm as per the plan approved bythe Audit Committee. The Internal Audit Plan covers all significant areas of theCompany’s operations. The Internal Audit process includes review and evaluation ofeffectiveness of the existing processes, controls and compliances.

The Company has established a strong internal control framework for key businessprocesses which are tested and validated during the internal audit. Significant findingsand action plans are presented to the Audit Committee for its review. The Company hascontinued its efforts to align all its processes and controls with industry bestpractices.

Key risks are identified as part of the Enterprise Risk Management Framework andaddressed through specific mitigation plans. The Risk Management Framework & InternalControl Framework are updated periodically and presented to the Audit Committee of theBoard bi-annually.

Risks, Opportunities and Threats

The Company aims to address the opportunities offered and threats posed by its businessenvironment strategically by maintaining a sustainable and robust business model andcontinually improving on them. The risk canvas is revisited periodically by the Companytogether with the help of the Internal Auditors and presented bi-annually to the AuditCommittee together with appropriate mitigation plans and their status. Some of the risks,opportunities and threats in the Company radar are detailed below:

• Continuing recessionary trend in domestic and global markets causing demanddestruction especially in the Infrastructure segment and in Company’s exports n Cashshortage together with high interest rates may lead to deferring capital purchases andresorting to hiring for the short term

• Low entry barriers across segments together with easy availability of cheaperChinese imports leading to an unhealthy price war

• Inadequate / delayed rainfall affecting Kharif crop, may adversely impactsentiment in the farmer community which could result in lower off-take in Company’sAgri segment

• Prolonged slowdown in the automotive segment may cause some of the playersdiverting their engines and resorting to deep discounting for short term gains

• De-control of diesel prices may cause a continuous spiraling of price andeventually lead to customers looking at alternate energy sources like solar

• Attracting and retaining right talent continues to be an area of high challenge

• The stationary power plant segment of the large engine business group willcontinue to be affected by high furnace oil prices. Generation of power at these pricesbecome economically unviable.

• India’s peak power demand continues to grow at approximately 8% annuallyand this associated with power shortage especially during high peak will continually raisedemand for DG sets

Prospects for the Current Year

Government is expecting increase in the GDP growth in FY 2013-14 against the previousyear. This gives a favorable signal for the country’s economy.

Power deficit is likely to continue at 10% on as average on All India basis. This willgenerate good seasonal demand. This however could be marginally negated by a continuousupward movement in diesel prices resulting in adverse customer sentiment in procuringgensets.

Since CPCB stage II norms are likely to be operational in the course of the year, thereis expectation of consolidation in the manufacturers of gensets. Technology and brand willbe the price driver in the market.

In the run up to an election year, the Government is likely to put impetus on some ofthe deferred infrastructure projects across the States. Government has set an internaltarget of awarding contracts for 8,500 kms during FY 2013-14 and construction of over6,500 kms.

There is a good order board for large engines business for FY 2013-14 resulting fromthe NPCIL order.

   

Peer Comparison

Company Market Cap
(Rs. in Cr.)
P/E (TTM)
(x)
P/BV (TTM)
(x)
EV/EBIDTA
(x)
ROE
(%)
ROCE
(%)
D/E
(x)
Cummins India 15,470.53 23.92 6.48 12.17 30.3 39.3 0.00
Kirloskar Oil 2,892.00 15.38 2.51 6.68 18.2 22.0 0.08
Greaves Cotton 2,114.77 53.79 2.87 6.31 20.0 27.8 0.02
Swaraj Engines 871.33 14.12 4.50 4.72 29.2 41.6 0.00
Wartsila India 727.69 22.80 2.77 0.00 13.4 14.8 0.00
Hind.Powerplus 334.96 57.60 2.77 20.20 4.9 7.7 0.00
Mintage Electro 1.10 0.00 0.21 6.23 2.5 5.9 0.25

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Key Information

Key Executives:

Atul C Kirloskar , Executive Chairman 

Gautam A Kulkarni , Executive Vice Chairman 

Rahul C Kirloskar , Non Executive Director 

R R Deshpande , Executive Director 


Company Head Office / Quarters:
Laxmanrao Kirloskar Road,
Khadki,
Pune,
Maharashtra-411003
Phone : 91-20-25810341/5341
Fax : 91-20-25813208/0209
E-mail : investors@kirloskar.com
Web : http://www.koel.co.in
Registrars:
Link Intime India Pvt Ltd
BNo 2 Akshay Compl
Off Dhole Patil Road
Near Ganesh Mandir
Pune-411001

Fund Holding


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