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Edited Transcript of KIRLOSENG.NSE earnings conference call or presentation 25-Oct-19 8:30am GMT

Q2 2020 Kirloskar Oil Engines Ltd Earnings Call

Oct 30, 2019 (Thomson StreetEvents) -- Edited Transcript of Kirloskar Oil Engines Ltd earnings conference call or presentation Friday, October 25, 2019 at 8:30:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Sanjeev Nimkar

Kirloskar Oil Engines Limited - COO

* T. Vinodkumar

Kirloskar Oil Engines Limited - CFO & Chief HR Officer

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Conference Call Participants

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* Abhishek Puri

Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power

* Bhavin Vithlani;SBI Mutual Fund Public;Analyst

* Deepesh Agarwal

UTI Asset Management Company Limited - Associate VP of Equity Research

* Manish Goyal

Enam Holdings Pvt. Ltd - Investment Analyst

* Renjith Sivaram

ICICI Securities Limited, Research Division - Assistant VP

* Sandeep Tulsiyan

JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, good day and welcome to the Kirloskar Oil Engines Limited Q2 FY '20 Earnings Conference Call, hosted by Axis Capital Limited. (Operator Instructions)

Please note that this conference is being recorded. I would now like to hand the conference over to Mr. Abhishek Puri from Axis Capital Limited. Thank you, and over to you, sir.

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Abhishek Puri, Axis Capital Limited, Research Division - Executive Director of Capital Goods, Infrastructure and Power [2]

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Thank you, Janice. Good afternoon, ladies and gentlemen. On behalf of Axis Capital, I welcome you all for the Kirloskar Oil Engines Limited Q2 and First Half FY '20 Earnings Conference Call. From the company, we have with us today, Mr. T. Vinodkumar, the Chief Financial Officer; and Mr. Sanjeev Nimkar, the Chief Operating Officer of the company.

The call will be initiated with a brief overview by the management, followed by a Q&A session. So over to you Mr. Kumar.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [3]

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Thanks, Abhishek, and good afternoon, ladies and gentlemen. We are pleased to present and discuss the results of the second quarter as well as the first half of FY '19, '20 for Kirloskar Oil Engines Limited.

So if you recall in the last quarter call, I had mentioned that we're already witnessing a slowdown, and this was quite evident in the numbers also. Whereas the situation at ground has probably further deteriorated and -- in Q2, and this can be corroborated in the GDP estimates getting realized to somewhere between 5% and 5.5% and also the index for industrial production dipping quarter-on-quarter.

Given this general slowdown at KOEL, our handover was to address the client to the extent possible by looking at new avenues, new markets, innovative offerings and also doing as much as we can on the austerity measures in order to protect, and wherever possible, improve the margins.

So with that brief, sales for the quarter stood at INR 673 crores and was 11% lower than the previous year figure of INR 754 crores. With this, the H1 -- first half sales stood at INR 1,429 crores as against INR 1,566 crores in the previous year. This translates to a 9% drop.

After witnessing high growth rates in the last 2, 3 years, the industrial business was the most impacted in the first half, with a drop in revenue of close to 17% as compared to the previous year. While now, highway witnessed considerable slowdown in Q2, the tractor segment also witnessed a slowdown, and we see it further deteriorating as the year goes by.

In Power Generation, Telecom orders came to a virtual standstill, and the continuing liquidity crisis resulted in a fair amount of postponement of offtake in the High Horse Power and the Ultra High Horse Power segments. In Large Engines, the dip was primarily on account of government orders getting deferred. But there's orders on hand, we are confident of a much better second half.

Exports witnessed a 24% growth in the first half, and we saw gains in Middle East, East and South Africa. Our first estimate of EPA-approved engines to the U.S.A. have been received by our distributors in the U.S.A. And on this, we now look forward to sales in the U.S.A. steadily opening up.

On margins. Operating EBITDA for the quarter at INR 44 crores was 34% lower than the previous year figure of INR 66 crores. EBITDA for H1 at the first half at INR 117 crores was 21% lower than the previous year figure of INR 147 crores. The drop was largely attributable to the loss in contribution resulting from lower sales. Fixed cost containment helped in avoiding a further slippage.

The profit before tax for the first half stood at INR 119 crores as against INR 137 crores for the previous year. Profit from sale of land and other amounting to INR 16.5 crores, has been included here. So overall, not a great quarter for KOEL.

However, at Large Engines, which is our subsidiary, the situation was significantly better. The revenue for the first half at INR 255 crores witnessed a 20% growth and EBITDA margins too witnessed an improvement of 22%. First half PBT stood at INR 16 crores as compared to INR 10 crores in the previous year. On a consolidated basis, the first half revenue was INR 1,694 crores and was 4% less than the previous year, and profit before tax was INR 130 crores, which also was 4% lower than the previous year.

So with those brief remarks, we'll open it up to questions. Thank you.

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Questions and Answers

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Operator [1]

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(Operator Instructions) We take the first question from the line of Renjith Sivaram from ICICI Securities.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [2]

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Sir, this -- there were some floods in Kolhapur and our carbon factory is there. So was there any impact because of those floods in our production or has that impacted the sales in any way?

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [3]

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First of all, yes, you are right, there was a flood, a known situation. Our operations got impacted for 2 days, actually. But it had 0 impact on our sales side of it because we had enough inventory to take care and those 2 days we balanced it out. But the overall operations were closed down only for 2 days.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [4]

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Okay. And coming back to the PowerGen market, what is the outlook like this year? What's the kind of growth that you're looking at? These other segments, which have done better are now doing bad. So when can we expect this to rebound, if at all? What are the signs you're seeing?

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [5]

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See expecting when to rebound is too tough a question to answer at the moment. But coming to what are our assessments on the particular segments. First, I will go on the product side. On the UHHP, that is the 750 and above. And HHP, we have a reasonably good order booked right now. The only question is the execution of that order, and which we expect Q3 and Q4 to a large extent. Most of these orders are time-bound with the March closure. So we expect they will definitely see a day of light. And all these orders we have, some amount of advance money we took. So we are sure we'll execute that. That's point one.

Point two for railway, thus so we have a good amount of order booked with us which will be executed in the next 3 to 4 months. So that's a very positive story.

Another thing, in Q1, we also observed that specifically on the low horsepower and medium horsepower side, at least 4% to 5% market share we have gained, because of our iGreen offering in the market. Because after 6, 7 months of launching and taking all the -- first to take it to the end customers, we connected more than 5,000 plus inquiries directly by KOEL team, and that has now reflected in gaining market share. However, as Vinod was mentioning, the markets were established but in the downturn market, we have gained the share in LHP, MHP. That momentum may continue going forward.

For the end of the year, we are looking for marginal positive growth over last year in terms of value.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [6]

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Okay. And for the market, it will still be a degrowth. Will we increase?

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [7]

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Market, maybe slightly decline. Overall market, end of the year, we see a slight decline. We have a little positive momentum right now because of our value-added offerings to the market. But overall, market is in decline; maybe single-digit decline.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [8]

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Okay. And what's the outlook for the industrial portion? Will that be...?

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [9]

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The industrial story in H1 was we have at least a good part happening on the tractor engines. But industrial, the mainstream construction equipment, off-highway engines, there was a decline of around 20% plus. The tractor was doing better until almost August. But September, the tractor also lost the energy and now factory is also on the declining side.

So overall, we see, going forward, the Q3 will also be similar, not much difference we see in Q3. Rather, tractor maybe a little worsening. And Q4 will be better for industrial, it will be turned around story in Q4, but it cannot compensate the 3-quarter losses. So we expect 5% up price in Q4 over Q3, and Q3 will be similar to Q2.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [10]

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Okay. But for the full year, it will be still a decline?

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [11]

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Yes, yes. Around 15% minimum decline I can see. But this is -- all of you know, this is a cyclic -- same kind of tractions, maybe a few quarters back, we were telling you we have grown 25 and we have grown 30. And that happened for the last 7, 8, 9 quarters consecutively. And before that, it was 11. So that's the nature of the industry. We are holding on all our customers and our -- the futuristic program, which will be effective next year on BS4. So we are absolutely on track on -- as far as those programs are concerned.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [12]

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Okay. And any pricing action you are seeing in the market? Price hikes?

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [13]

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Which segment?

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [14]

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In the PowerGen.

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [15]

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Current conditions, I don't think any price rise will be possible in the market at all. There is no possibility. But on the commodity side, there is a slight benefit of other things, so we can look at it that way.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [16]

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Okay. And sir, lastly, what's the…

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Operator [17]

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Mr. Sivaram…

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [18]

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Okay, yes. I'll join back.

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Operator [19]

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Next question is from the line of Sandeep Tulsiyan from JM Financial.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [20]

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So my first question is out of the PowerGen segment, 10% decline, how much is the number ex of Telecom orders?

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [21]

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Telecom orders came to a complete 0.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [22]

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No, no, last year, we had almost INR 20 crores.

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [23]

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No, no. You're talking about last year versus this year or you're talking only this quarter?

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [24]

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Basically, last year, 2Q versus this year 2Q, how Telecom numbers have changed.

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [25]

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So you had close to (inaudible) growth of INR 25 to INR 30 crores orders last year. And I think it has gotten -- and this year, it was virtually 0.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [26]

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This is last year, first half or last year 2Q, sir?

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [27]

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Q1, (inaudible) Q2. So the last year, the execution was in Q2.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [28]

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Yes.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [29]

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Q2 itself was INR 25 crores, which is 0 in this.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [30]

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Yes.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [31]

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So almost (inaudible)

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [32]

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(inaudible) some orders, but it's very…

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [33]

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It's very small. This is not even worth talking about.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [34]

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Got it. Got it, sir. So basically, we have still declined in, say, low-single digits.

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [35]

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Yes, yes.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [36]

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Yes.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [37]

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Okay. So just want to understand how does this contrast with the overall industry? You said LHP, MHP, we have gained some share. But overall, if I were to look at the industry, again, ex of Telecom, in your sense, how do those numbers get stacked up in for (inaudible)...

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [38]

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[MHP] declined and the LHP was maybe close to 10%.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [39]

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Okay. In first half, all of them declined. Got it. Sir, secondly, I think tractors, the number that we had shared in 1Q was a 10% growth, but you shared a 7% decline for first half. So what kind of decline have you seen this quarter? Is it so material? And how do you see overall full year numbers panning out for tractors? And I mean has there been any change in the strategy overall? Or this is more or less in line with the industry level decline?

(technical difficulty)

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Operator [40]

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Participants, please stay connected. We've just lost the line for the management. Please stay online while we reconnect them back to the conference. Requesting each participant to please stay online. We are just trying to reconnect the management back to the call.

(technical difficulty)

We have the management back on call. So you may please go ahead with your questions. We have the question from Sandeep.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [41]

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Sure. Sir, my second question was on the tractors growth. We had reported a 10% growth in 1Q while the first half number indicates a 7% decline. So what I was trying to understand is, other than the industry level weakness, is there also a change in the product offerings that we have to (inaudible).

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [42]

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No, no, no. Not at all. That is one single product offerings to (inaudible) and it continues that way. In fact, our percentage -- compared to last year, we have improved our percentage share each for us this year in terms of their own production and how much they are taking from us. That percentage has gone up. But the overall industry is declined. So my understanding is that industry is declined at 15% right now.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [43]

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Okay. Understood. The third question was on the diesel pump-set business. If I look at the numbers ex of power tillers, for the Agri segment, there seems to be a flattish or maybe a small decline in Q2. And you mentioned in the comments that the -- at least the electric pumps business is growing by 50% or so. So how is -- at what rate is your diesel pump-set business declining? And still the transition is happening to electric pumps, so at what level, on an annual basis, do you think this number should settle, going forward?

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [44]

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See, the diesel pump set will decline around 15%.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [45]

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15% to 20%.

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [46]

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15% to 20% at the change (inaudible) level, whereas we'll continue to grow on our Electric Pump [new coil] brand. That 50% momentum will continue until the year-end. But since that base is small, that 50% is not able to compensate the 20%. But at the end of the year, you will see a positive -- if you add up (inaudible) and relative comps, look at that over last year, it will be on positive side.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [47]

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Understood. And lastly, if you could, sir, just share the DV series volume that you give every quarter. Last year, I think we had shared 300 as volume and 550 as...

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [48]

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What do you want? For the quarter?

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [49]

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Yes, sir. For 2Q.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [50]

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The numbers or revenue?

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [51]

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Both, sir, volume as well as revenue.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [52]

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[257], numbers; INR 40 crores.

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Sandeep Tulsiyan, JM Financial Institutional Securities Limited, Research Division - Senior Research Analyst [53]

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INR 30 crores?

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [54]

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INR 40 crores.

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Operator [55]

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(Operator Instructions) Next question is from the line of Renjith Sivaram from ICC Securities.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [56]

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Sir, just wanted to get some color on the CPCB non change, or what are the kind of deadlines now we should work with and what you hear?

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [57]

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So yes. So CPCB current situation, the norms are going once beat level, that means all of you are aware, currently, the unit at (inaudible) CPCB 2, whereas the next norm, which is coming in CPCB 4 plus. So it's a drastic change which is happening here. But those norms will be effective in the market on 1st July, '22.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [58]

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Okay. Effective 1st July, '22?

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [59]

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That's the current. There is no circular out. But this is the internal discussion. So you may not quote me on that, on the continent yet, but for understanding purpose, I'm just saying this date. But once the actual date is there, but it will be around this, 1 quarter, plus or minus.

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [60]

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But then are we ready with all the technicalities for complying with this in terms of...

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [61]

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The good part, the way we work, and fortunately, sometimes, government regulations are also helping us to prepare ourselves better. What happened earlier, BS 3 changed in 2011 and the sealer technology was required to -- under CPCB 2, which happened in 2014, and that helped us immensely. You may be knowing we were the first company to cross the largest range in CPCB 2.

Similar thing is happening right now also. BS4 is happening for the industrial engines down the line, 3 quarters from now. So that means, 1st of April, 2021, BS4 will be fully implemented in our country. And for that, we are fully geared up, we'll be prepared. Sometimes, as I said, that I talked about that.

That same or similar technology, with a little more advancement, will be the basis for CPCB 4 plus. So as we speak, we feel we have fully geared up to handle this [partnership].

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [62]

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Okay. Okay. That was helpful, sir. And there was this nuclear energy order, I think this -- America in Association with (inaudible) got this. So we were also previously a big player in that market. So is there any chances that we will also try to get back into that market? Previously, we had some tie ups with [NTO] and some other company.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [63]

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You are absolutely right that we had a fuel market share earlier. And once our tie-up with the stake was not there, then we were almost out of that market. Now we have a tie-up going with ABB and (inaudible) we have that. But there was some clause in this tender there in Mumbai and these people could work out. It was related to the liability. And our partners were not ready to take those consequential liabilities of nuclear where disasters happen and all those liabilities. There was an issue on that. So we could not participate into this kind of avenue, we were not qualified to work around what you are talking about.

But going forward, we are geared up to handle business. We are tying up something else, as well as we are working out some possibilities on our own as well. But we are watching this space closely. There are quite a few tenders coming up in this space, starting 2020 to 2022. So next 3 years, there is this (inaudible) tenders coming in. And definitely, some of these will be (inaudible).

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Renjith Sivaram, ICICI Securities Limited, Research Division - Assistant VP [64]

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So you are confident that at least for the next tender, we can get qualified?

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [65]

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Not immediate next, but next to next.

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Operator [66]

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(Operator Instructions) We take the next question from the line of Deepesh Agarwal from UTI Securities.

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Deepesh Agarwal, UTI Asset Management Company Limited - Associate VP of Equity Research [67]

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So my first question is what has led to a strong growth in exports? Can you throw some light? Is it some market share gain? Or how is the end market doing in the exports?

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [68]

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Two, three things in export have worked favorably for us. Point number one, we have currently extremely good market share in industrial engine domain, especially the platinum mines in South Africa. So these mines we are near procuring, only the mechanical solutions, but there were some regulations came up and [electronic] government solutions they wanted.

And last 9 months, we have worked very hard to qualify our products with the electronic governments. And to share with you, we have done it successfully. Not only that, some new OEMs have started looking at us now, and we will receive some new orders in South Africa soon.

There, our performance of the new engines that we supplied has been extremely good. So that has helped us. So our order book that -- on that side, whatever we have planned, it is ahead of the curve. That's point number one.

Point number two, as we have mentioned to you in earlier interactions, that KOEL has worked in FM we were offerings for the last 2, 3 years, consistently. And now, last 2 quarters, we have offered these products with 3,000 RPM range, which is the biggest market. And to share with you, 10 of the big OEMs from Middle East of the -- these 10 OEMs control 50% to 60% of the world market in terms of getting their firefighting engines.

So these OEMs have started buying our products, and they are really happy with our offering in terms of value proposition, price and the quality combination. So that is also a very good story to share with.

Third important thing which has happened is in this Q2, we were able to sell more than 10 numbers of our DV 16, 1010 kVA in 3 or 4 countries, and that is a very positive news for us. So that acceptance is also very good.

So plus the positive 3 together, it is a very positive story for us. And we feel all this is good news. None of the influence are from positiveness of the market side of it, but more these initiatives are pushed from our side, that is, offering the right solution, right products and things like that and indirect systems. So it looks to be a sustainable story.

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Deepesh Agarwal, UTI Asset Management Company Limited - Associate VP of Equity Research [69]

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Nice to know that you have gained market share. But in terms of end markets, how is the situation? Because we understand some of the markets you mentioned, Africa, Middle East, there is a meaningful decline in terms of an overall demand for our engines. Are you witnessing the same in terms of end market?

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [70]

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No, the key which I talked about, South Africa, was fundamentally on the industrial engines and not the PowerGen. So the gain of market share is all in industrial engine side. And Middle East, yes, there was a decline in UAE and this market for PowerGen side but given we also -- I spoke specifically on this (inaudible) which is a part of the industrial engines. And same thing to be -- what you've talked about, this has fundamentally gone into Power Generation side.

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Deepesh Agarwal, UTI Asset Management Company Limited - Associate VP of Equity Research [71]

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Okay. Okay. And sir, lastly, on NBFC side, is there further investment expected? And what is the typical profile of the borrowers you are lending to, like ticket size or the kind of their ratings? Can you throw some light on this?

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [72]

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What I've been saying in my earlier -- the earlier con calls also and we are still a business which is run completely independently, separate management. None of us sitting here are involved in the day to day management of the NBFC. But I'll use some top line numbers. The amount which we have -- KOEL has put in so far is INR 525 odd crores of which INR 500 crores were invested in April of this year, but mainly in the first half itself. And the maximum lending has gone to about INR 387 crores. It keeps -- then there will be some prepayments. So there is a drop-down to about INR 187 crores. Currently, it's about INR 275 crores as we speak.

It's not that there is a dearth of employees or people who want to borrow, but we'll be extremely conservative in the way we sell and the way we evaluate. So as we speak, there is interest from -- like I said, from balance of last quarters, which is there. And we have also talked with -- they are also in talks with banks to see how some amount of debt also can be infused so there is the right amount of debt and equity in their structuring. In a brief which we had over a con call some point back, they said that they look at it actually as an opportunity in the current scenario where most people are not willing to -- or banks have certainly not been lending. And there is a fair amount of liquidity trend. As long as we are able to lend sensibly, and I think they feel that there is meat in this business going forward.

What matters is that going forward is [over the peak], there is a fair amount of cycles which we'll have to go by where the credit rating of the (inaudible) on a stand-alone basis also have to start improving. That's when they'll be able to lower their cost of borrowings and then look at it sparingly. So it's still some time away, but -- and this is -- we all know that this is not a quarter-to-quarter game, it's not going to happen that way. We need the attrition and I think KOEL is one of the (inaudible).

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Operator [73]

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(Operator Instructions) Next question is from the line of Manish Goyal from Enam Holdings.

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [74]

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On electric pumps which is sold under the KOEL brand, can you give us some sense on the -- what is the value in Q2 and half 1? And what was it in FY '19?

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [75]

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Yes. Do you want value in Q2?

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [76]

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Q2, yes.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [77]

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For electric pump, Q2 value was INR 18 crores.

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [78]

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And for half 1, sir?

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [79]

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Half 1, Q1 was INR 31 crores. So the...

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [80]

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Okay. INR 49 crores. Yes, INR 49 crores. And what was it last year, sir?

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [81]

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Last year, you're talking about full year?

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [82]

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Yes, last full year.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [83]

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INR 58 crores.

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [84]

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INR 58 crores. Okay. And -- okay. So this gets captured under the entire Agri segment?

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [85]

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Yes, [the profit is in].

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [86]

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The operating profit, okay.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [87]

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Yes, but we're (inaudible).

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [88]

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And how are you positioned, like, you already have Large Engines, which has its own brand and KOEL? So is it that you are servicing different markets? Or how is it being done?

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [89]

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We are servicing same market through different channels. So our channels are (inaudible) to you.

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [90]

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Okay. And sir, in Large Engines, what we see from the financial statement is that the inventory levels have increased a bit. That was one question on Large Engines.

And second, still, the margins are at 5% despite sales growth...

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [91]

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(inaudible) PBT.

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [92]

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PBT. As far as your segment and what you would disclose?

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [93]

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(inaudible) 5%, yes? Not for Large Engines.

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [94]

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You would say…

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [95]

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So [8.5%].

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [96]

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Yes, [8.5%].

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [97]

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Okay. Okay. So maybe you are clubbing even the KOEL sales in there, because electric pump sales for Q2, what -- as per segmentally is INR 143 crores.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [98]

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(foreign language)

You are -- 1 minute. Where are you getting Large Engines sales from? Are you looking at Large Engines or you are trying to interpret some figures from what we have given?

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [99]

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No, that is why I asked you these numbers of electric pump sales in the KOEL because you give segmental numbers, according to which electric pump sales are INR 143 crores in the current quarter. So if you have done only INR 18 crores from Kirloskar or the KOEL brand, so still, we have done roughly INR 125-odd crores from the Large Engines numbers.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [100]

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You are absolutely right on that front.

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [101]

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Because -- and then if I look at the PBIT margin in -- that segmental is showing as 5%. And I don't think so there will be significant depreciation in that. So that is why. So if you're seeing Large Engines margins are 8.5%, which is -- that is what is surprising.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [102]

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You asked me the question and I'll give you the answer. Because right now, I'm trying to figure out what are you trying to...

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [103]

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Well, I'm just looking at your segmental numbers, what you disclose on a consolidated sheet.

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [104]

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And you (inaudible) answered not. Also those sales coming, Large Engines margins are [written] up moving towards positive sales figure going up.

So coming to your other question which was on the inventory side of it, the inventory, we have actually increased around INR 15 crores inventory for the coming season because our assessment is the way the rains will happen this time, the entire country, this quarter, Q3, will be a very good quarter for agricultural concepts, which we sell to (inaudible). And that's where we are prepared for extra number. It's a big month for us for agriculture (inaudible).

And this is a very momentous opportunity. That means in those 3 weeks' or 4 weeks' time, your funds should be available at the outlet. Whatever is available at the outlet gets sold. And after that, we get the next opportunity down the line 6 months. So we are prepared for this and that service inventory has gone up just a month away.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [105]

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Let me tell you, for Q2, you are right. INR 125 crores is the LGM sale and EBITDA percentage actually is 9.5% for Q2. 8.5% is what I was talking about, is for first half. [INR 155 crores] is what we have done in the first half in LGM and 8.5% EBITDA margin. And we expect that to further improve in the second half.

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [106]

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Wonderful. Okay. And the last question on the power tiller. So can you give me the Q2 number comparable for volume number in power tiller, please?

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [107]

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Yes, just 1 minute. Okay. So Q2 what?

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [108]

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Q2 last year.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [109]

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Last year?

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [110]

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Yes, Q2 last year. You said you have already given [1 1 5 3] numbers. I wanted a comparable number.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [111]

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[1 1 5 3]...

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [112]

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[1 1 5 3] is for the current Q2. I want a comparable number, sir.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [113]

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Okay. Let me (inaudible) number, let me... Yes. So [875].

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [114]

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Okay. So again, my question, based on the segmental is that the other segment which includes power tiller and Agri equipment...

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [115]

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So other -- so that includes power tiller, it includes spare, it includes rotary trimmers, it includes power weeders, it includes reapers, back cutters, all types of stuff.

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Manish Goyal, Enam Holdings Pvt. Ltd - Investment Analyst [116]

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Okay. So we are -- basically, the segmental shows a loss number over there despite revenue growing. So I'm just wondering, what is the break-even revenue number or how should we read into it? Because quarterly, we are showing INR 5 crores loss -- PBIT loss in that.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [117]

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So it is going to be a loss of (inaudible). Okay, let me answer it differently. When horsepower, power tiller, which is the mass product we introduced into the market, we didn't realize that it was probably a little overpriced. And we've got it down to what actually the market is looking for. And the seeding of that has started. And is that -- it's not the way we hoped that we'd build up in actual volume numbers -- 15 horsepower and (inaudible) so then we'll be able to bring down that -- or rather, we'll be in a faster trajectory to breakeven. The breakeven number will be still in the region of 6,000, 6,500.

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Operator [118]

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We take the next question from the line of Bhavin Vithlani from SBI Mutual Fund.

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Bhavin Vithlani;SBI Mutual Fund Public;Analyst, [119]

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Happy Diwali.

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Operator [120]

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Excuse me, sir, I'm sorry to interrupt but we are unable to hear you well.

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Bhavin Vithlani;SBI Mutual Fund Public;Analyst, [121]

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Is it better now? Happy Diwali to Sanjeev and Vinod.

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [122]

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Happy Diwali.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [123]

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Thank you.

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Bhavin Vithlani;SBI Mutual Fund Public;Analyst, [124]

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A couple of questions. On the export front, good performance. You mentioned that you started the U.S. offerings. Would you be able to quantify what was the U.S. and the growth ex of the U.S.?

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [125]

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The U.S. has just started about -- in fact, our first -- I'm not talking about (inaudible). I'm not talking about all the little bits which we were doing in the past. And the (inaudible) engines have just reached the U.S.A. Our initial feedback is that they're extremely happy with the consignment which they've got. Orders have started coming in. Base is back already. And going forward, I said that we expect that market to start picking up. This is our first reactions of the distributors' side from what we have sold.

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Bhavin Vithlani;SBI Mutual Fund Public;Analyst, [126]

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Sure. So the strong growth coming...

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [127]

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No, it's not come from the U.S., the strong growth is -- I think you may have missed what Sanjeev has said. Maybe he could repeat.

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Bhavin Vithlani;SBI Mutual Fund Public;Analyst, [128]

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Sure. So he mentioned 3 reasons. The Africa, 2 engines at electric governors and he spoke about the FMUL to the U.S. (inaudible)...

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [129]

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Not the U.S., the UAE.

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Bhavin Vithlani;SBI Mutual Fund Public;Analyst, [130]

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The UAE, okay. Right. So would it be -- like what part of this is the initial and how large can some of these become? So how large your exports can be like from a INR 67 crores current quarter level?

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [131]

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So what we see in Q3 will continue the momentum of growth in export. So that, we are confident. So all -- whatever better or let's say, between the 3 initiatives what I talked about are sustainable on its own irrespective of the market conditions in some of the markets. So I'm [just close] to that, we are to expect something to start in U.S. market also. Our first continent (inaudible) which is one of the distributors. Now second continent is leaving the market through this time. So it is also being -- going there. So we are testing our experience in the U.S. market. So that will also be adding to the revenue growth.

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Bhavin Vithlani;SBI Mutual Fund Public;Analyst, [132]

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Sure. Second question is on the industrial side where you mentioned that the construction markets have softened. Could you give us more color because you're talking about more OEMs and getting larger engines and new applications? So how would these initiatives stack up, given that the construction equipment (inaudible) market is in a bad shape?

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [133]

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See, our attempts is to first recognize existing OEMs and second is to gain some new OEMs. That continues, no doubt about it. But when overall markets shrink, then it impacts a lot. Now to give a perspective to you, compared to 2013 and today, 2000 -- let's say, last year's number 2,000 in FY '19 where we have out of our 600, the 25% of our revenues in industrial has come from the new application introduced only in the last 4 years. So that talks about what is the way we handle this business.

But at the same time, the overall industry or the external environment is in a shrinking side, even new application also tend to shrink. So that's the situation right now. So once the tide turns positive, it will turn at both the existing application as well as the new application. So we are gaining some new customers as well. So some (inaudible) customers (inaudible). In fact, the BS4 is opening up opportunity for us to gain at least 2 more OEMs. So our products are already proven. Our first total [India] what we have given to some of the OEMs, in the first time, the machine has performed as per expectation. In fact, some of our OEMs also got surprised to the perfectness with which we work on that and given the solutions to our audience. And that's how we got some -- 2 more OEMs in that segment. But their volumes will start ticking up down the line 1 year.

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Bhavin Vithlani;SBI Mutual Fund Public;Analyst, [134]

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These are in the backhoe loaders or excavator markets?

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [135]

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Backhoe loaders. Excavator will come under emission norms 2 years down the line. That means March '21, backhoe loaders is coming underway. On March '22, we can look at this quarter -- sorry, March '23 before it starts.

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Operator [136]

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(Operator Instructions) Next question is from the line of [Chander Modi] from [Madison Securities].

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Unidentified Analyst, [137]

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Sir, what is your expected tax rate this year, please?

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [138]

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Pardon me?

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Unidentified Analyst, [139]

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Expected tax rate. I mean are we adopting the move for corporate taxes?

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [140]

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We are. So that's the policy we will take. But in all probability, we will be adopting them.

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Unidentified Analyst, [141]

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Okay. So how do you see the kind of top line growth this financial year (inaudible) compared to the last few months?

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [142]

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Pardon me?

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Unidentified Analyst, [143]

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(inaudible).

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [144]

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You're talking about what is…

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Unidentified Analyst, [145]

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No, overall. Overall.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [146]

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Overall for the year?

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Unidentified Analyst, [147]

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Yes.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [148]

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It will be flattish compared to the previous year. Hopefully, we will end way close to last year numbers.

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Unidentified Analyst, [149]

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Okay. Okay. And does it mean that demand will be slightly (inaudible)?

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [150]

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Yes. So it basically means that H2 is going to be -- we're expecting it to be better than H1. And this is not based on what we expect the market to be. But based on -- largely based on what is (inaudible) [the orders we have running].

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Unidentified Analyst, [151]

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So I understand, sir. But the market is better, maybe because we see some more improvement also.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [152]

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Yes.

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Operator [153]

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Ladies and gentlemen, that is the last question for today. I would now like to hand the conference over to the management for their closing comments.

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T. Vinodkumar, Kirloskar Oil Engines Limited - CFO & Chief HR Officer [154]

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Nothing more to add.

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Sanjeev Nimkar, Kirloskar Oil Engines Limited - COO [155]

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I think that's it from our side.

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Operator [156]

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Thank you very much. On behalf of Axis Capital Limited, we conclude today's conference. Thank you all for joining. You may disconnect your lines now. Thank you.