Kirloskar Oil Engines targets margin recovery as data-centre powergen scales

Investment View and 1QFY27 Takeaways

Motilal Oswal Financial Services retained its Buy rating on Kirloskar Oil Engines (KOEL) after 1QFY27 results showed healthy revenue growth but temporary margin pressure. The broker believes employee-cost absorption as revenue scales, staggered price hikes, market-share gains and investments across growth areas can support a recovery in profitability.

Key monitoring points include segment growth, execution of the HyperNext order and an operating leverage-led recovery in margins. Management expects the additional employee costs to be better absorbed in the coming quarters as revenue rises.

1QFY27 Financial Performance

KOEL reported 1QFY27 revenue of Rs 14,713 million, up 16 per cent year on year and broadly in line with MOFSL's estimate of Rs 15,095 million. Gross margin was about 34.3 per cent, ahead of the broker's 34.0 per cent expectation, with only a 70-basis-point year-on-year decline on a like-to-like comparison.

Employee cost as a proportion of sales increased 120 basis points year on year because of wage increases, ESOP cost and new hiring to build capabilities. Other expenses increased 40 basis points. As a result, EBITDA declined 4 per cent year on year to Rs 1,655 million, 12 per cent below MOFSL's Rs 1,887 million estimate. EBITDA margin fell to 11.2 per cent against the broker's 12.5 per cent expectation. Adjusted PAT declined 9 per cent year on year to Rs 993 million, below the estimate of Rs 1,201 million.

Powergen Growth and HyperNext Execution

Powergen revenue grew 18 per cent year on year in 1QFY27, supported by volumes and pricing across gensets below 750 kVA and higher ranges. KOEL implemented staggered price increases to offset higher raw-material costs, with the full impact expected from 2QFY27 and 3QFY27. The company also gained market share.

MOFSL expects the powergen business to benefit from low-to-mid kVA demand, higher-horsepower product traction, capacity expansion and delivery of the HyperNext data-centre order. OptiPrime continues to gain acceptance in data centres and mission-critical projects. KOEL targets genset delivery for the large HyperNext order by 4QFY27, followed by service revenue over the next five to six years.

Industrial and distribution revenue also supported quarterly growth. Exports were weak because the West Asia crisis affected exports to the Middle East.

Growth Investments and Long-Term Objectives

KOEL is investing in modular OptiPrime power systems for AI data centres, gas-based distributed power, defence, high-horsepower engines and advanced industrial applications. OptiPrime hybrid systems also address microgrids, industrial prime power and utilities.

The company has retained its FY30 revenue objective of Rs 1,66,000 million with a higher double-digit margin.

Estimates and Earnings Outlook

After incorporating the 1QFY27 margin miss, MOFSL reduced its FY27E, FY28E and FY29E adjusted PAT estimates by 7.4 per cent, 3.8 per cent and 1.6 per cent, respectively.

The broker forecasts FY26-FY29 revenue CAGR of 27 per cent, led by powergen, industrial, distribution and export CAGRs of 33 per cent, 27 per cent, 18 per cent and 14 per cent, respectively. It expects a 190-basis-point EBITDA-margin improvement from better mix and operating leverage, with EBITDA and PAT CAGRs of 22 per cent and 37 per cent.

Valuation and Target Price

MOFSL's target price is Rs 2,800. The valuation is based on a sum-of-the-parts approach comprising:

• 35 times two-year forward earnings for the core business;
• 12 times two-year forward earnings for La Gajjar Machineries; and
• 1.3 times expanded two-year forward book value for Arka Fincap.

Key Risks and Monitoring Points

The key thesis risks identified in the report are:

• Slower growth across the operating segments;
• Delayed execution of the HyperNext order;
• Continued disruption to exports, particularly from the West Asia crisis; and
• A weaker-than-expected recovery in margins.