| Kirloskar Oil Engines Limited | ||||||
| Rated amount enhanced | ||||||
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| 1 crore = 10 million | ||||||
| Refer to Annexure for Details of Instruments & Bank Facilities |
Detailed Rationale CRISIL Ratings has reaffirmed its ‘CRISIL AA/Stable/CRISIL A1+’ ratings on the bank facilities and commercial paper programme of Kirloskar Oil Engines Limited (KOEL).
In fiscal 2022, operating income grew 44% to Rs 1,739 crore during the first six months despite the second wave of Covid-19, and EBITDA rose to Rs 127 crore at 7.3% margin, compared with EBITDA of Rs 97 crore at 8% margin during the corresponding period of the previous fiscal. This was also supported by healthy performance of the subsidiary, La-Gajjar Machineries Private Limited (LGMPL; ‘CRISIL A+/Stable/CRISIL A1’). CRISIL Ratings believes the operating performance will improve in the subsequent quarters, aided by better demand and the company’s established market position. Operating margin is expected to remain healthy at 8-9% in fiscal 2022, while revenue is expected to grow 20-25% on-year to more than pre-pandemic levels.
The ratings factor in equity infusion of Rs 784 crore as of September 2021 in ARKA (ARKA Fincap Ltd and ARKA Financial Holdings Pvt Ltd, together called ARKA), which is KOEL’s wholly owned subsidiary in the non-banking financial company (NBFC) segment. The investment was funded through cash and liquid investments, which stood at Rs 432 crore as on September 30, 2021. The financial risk profile will remain strong even after capital infusion in ARKA, taking total investments to Rs 1,000 crore by fiscal 2023, backed by strong debt protection metrics and negligible term debt obligation. Developments in the NBFC subsidiary and higher-than-expected investment from KOEL will be key monitorables.
The ratings also factor in the company’s strong financial risk profile, established market position in the small and medium-sized diesel engine segment across key end-user industries and wide product portfolio with the electric pump business of LGMPL. These strengths are partially offset by susceptibility to cyclicality in end-user segments, volatility in raw material prices and intense competition in the diesel engine market. |
Analytical Approach For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of KOEL and its subsidiaries, KOEL Americas Corp (wholly owned subsidiary) and LGMPL (76% subsidiary), collectively referred to herein as KOEL, as the entities have common management and operational linkages. For the financial subsidiary, ARKA, CRISIL Ratings has used the capital allocation method. Cash outflow towards investment of Rs 784 crore in ARKA by September 2021 has been considered.
Also, CRISIL Ratings has amortised goodwill (post completion of purchase price allocation) from the acquisition over five years; both profit after tax (PAT) and networth have been adjusted to that extent.
Please refer Annexure - List of entities consolidated, which captures the list of entities considered and their analytical treatment of consolidation. |
Key Rating Drivers & Detailed Description Strengths:
Networth was healthy at Rs 1,886 crore, and gearing was low at 0.09 time, as on March 31, 2021. Interest coverage ratio stood at 32.7 times in fiscal 2021, and will remain healthy over the medium term. The financial risk profile is likely to be sustained over the medium term, despite annual capital expenditure (capex) of about Rs 190 crore (including LGMPL) and additional investment of Rs 216 crore in ARKA, on account of steady cash accrual. Larger-than-expected capex or acquisition, having material impact on the liquidity or capital structure, will be a key monitorable.
The company has strong presence in diverse sectors, such as power generation, agriculture and industrial. Its market position is well established, particularly in the agriculture and industrial sectors; a bulk of the revenue comes from diesel-powered farm pump sets (agriculture) and engines for construction equipment (industrial). Acquisition of controlling stake in LGMPL has provided KOEL a significant footprint in the electric pump market. While the operating performance has been marginally impacted owing to subdued demand in the industrial and power generation segments, LGMPL’s business has provided stability.
Weaknesses:
Because of the nature of products, the company’s prospects remain linked to capex undertaken by end-user industries. Susceptibility to cyclicality in demand should persist, reducing revenue contribution from the impacted segment, as witnessed in the industrial and power generation segments in the past few fiscals.
Raw material cost accounts for 66-67% of operating income. Profitability, therefore, is susceptible to volatility in the prices of raw materials, particularly on account of the intensely competitive small- and medium-range diesel engine segment. The company faces competition from unorganised players in the small diesel engine segment, and from entities such as Cummins India Ltd, Ashok Leyland Ltd and Mahindra & Mahindra Ltd in the medium diesel engine segment. |
Liquidity: Strong Liquidity will remain strong over the next two fiscals supported by healthy cash accrual. Term debt obligation is expected to be minimal at Rs 5.8 crore and Rs 7.1 crore in fiscals 2022 and 2023, respectively; capex of Rs 190 crore in fiscal 2022 and Rs 120 crore in fiscal 2023 will be funded through internal cash accrual. KOEL had liquid surplus of Rs 432 crore as on September 30, 2021. Utilisation of the fund-based limit of Rs 313 crore was nominal. Liquidity should remain adequate, despite capex and additional investment in ARKA. Any larger than expected capex or acquisition could adversely impact KOEL’s liquidity position and will remain the key monitorable. |
Outlook: Stable KOEL will continue to benefit from its established market position and large product portfolio catering to diverse sectors. The financial risk profile will remain strong, supported by robust capital structure and debt protection metrics. |
Rating Sensitivity factors Upward factors:
Downward factors:
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About the Company KOEL, one of the flagship companies of the Kirloskar group, manufactures and services diesel engines (primarily between 2.5-740 horsepower) and diesel generator sets (mainly between 2-1,010 kilovolt ampere). The company also makes diesel, petrol and kerosene pump sets. It has manufacturing units in Pune, Kagal, and Nashik, all in Maharashtra. It caters to the agriculture, power generation and industrial sectors. On August 1, 2017, it acquired 76% stake in LGMPL, and is likely to acquire the remaining stake over the next five years, in line with the share purchase agreement. KOEL has set up an NBFC through ARKA, with equity infusion of Rs 526.5 crore as on March 31, 2020.
For the first six months of fiscal 2022, on a consolidated basis, net profit was Rs 74 crore on operating income of Rs 1,739 crore, against Rs 53 crore and Rs 1,211 crore, respectively, in the corresponding period of the previous fiscal. |
Key Financial Indicators*
*CRISIL Ratings-adjusted consolidated numbers |
Any other information: Not applicable |
| Note on complexity levels of the rated instrument: CRISIL Ratings' complexity levels are assigned to various types of financial instruments. The CRISIL Ratings' complexity levels are available on www.crisil.com/complexity-levels. Users are advised to refer to the CRISIL Ratings' complexity levels for instruments that they consider for investment. Users may also call the Customer Service Helpdesk with queries on specific instruments. |
Annexure - Details of Instrument(s)
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Annexure – List of entities consolidated
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| Annexure - Rating History for last 3 Years | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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| All amounts are in Rs.Cr. | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Annexure - Details of Bank Lenders & Facilities | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
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This Annexure has been updated on 08-Nov-2021 in line with the lender-wise facility details as on 08-Nov-2021 received from the rated entity.
Criteria Details
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