Kirloskar Oil Engines Stock Up 10% ( sep 19) | MOFSL Sets Target Of Rs 2,800

Kirloskar Oil Engines reported 16% year on year revenue growth in the first quarter of FY27, with growth led by its powergen, industrial and distribution segments. However, the result came below Motilal Oswal's estimate because the company's EBITDA margin missed expectations.

Exports were weaker during the quarter because of the impact of the West Asia crisis on shipments to the Middle East. At the same time, Kirloskar Oil Engines managed its gross margin through staggered price increases across product ranges.

Motilal Oswal has retained its Buy rating on the stock and raised its target price to Rs 2,800 from Rs 2,750. The brokerage has also reduced its earnings estimates for FY27, FY28 and FY29 after factoring in the first quarter margin performance.

Kirloskar Oil Engines Q1 FY27 performance

Kirloskar Oil Engines recorded healthy revenue growth in the June quarter, with power generation, industrial activity and distribution contributing to the increase. The 16% year on year growth shows that demand across these businesses remained firm despite weakness in exports.

The main issue in the quarter was profitability at the operating level. EBITDA margin came below Motilal Oswal's estimate, leading the brokerage to cut its earnings estimates for the coming financial years. The brokerage expects some of the pressure from higher employee costs to ease as revenue grows.

Particulars	Q1 FY27 update
Revenue growth	16% year on year
Main growth segments	Powergen, industrial and distribution
Export performance	Weak, mainly due to West Asia impact
EBITDA margin	Below Motilal Oswal estimate
Revised target price	Rs 2,800
Earlier target price	Rs 2,750
Core business valuation	35 times two year forward earnings

Employee costs put pressure on margins

Employee expenses increased during the quarter because of salary increments, employee stock option costs and new hiring. Motilal Oswal expects these costs to be absorbed better in the coming quarters as the company's revenue base grows.

Kirloskar Oil Engines also managed its gross margin through staggered price increases across its product ranges. The brokerage expects the benefit of these price increases to show up more clearly in future quarters.

This creates an important distinction between revenue growth and operating profitability in the first quarter. Revenue grew 16%, but the margin performance was weaker than expected. The brokerage therefore adjusted its financial estimates despite maintaining its target price above the earlier level.

Exports remain a near term concern

Exports were one of the weaker parts of the quarter. Kirloskar Oil Engines faced an impact from the West Asia crisis on exports to the Middle East, which affected the overall performance of the export business.

The company is still investing across its business segments to capture demand in power generation, industrial markets and exports. The pace at which export activity recovers will therefore remain relevant to the company's performance in the coming quarters.

Kirloskar Oil Engines has also gained market share during the quarter, according to the brokerage's assessment. The combination of market share gains and continued investment could support volume growth if demand remains healthy across its major businesses.

The company's earlier HyperNext power generation order is also relevant to the outlook because Motilal Oswal has specifically identified its delivery schedule as an area to monitor.

Motilal Oswal cuts earnings estimates

Motilal Oswal has reduced its estimates for Kirloskar Oil Engines by 7% for FY27, 4% for FY28 and 2% for FY29. The changes reflect the first quarter performance, particularly the lower than expected EBITDA margin.

Despite these estimate cuts, the brokerage has retained its Buy rating and raised its target price from Rs 2,750 to Rs 2,800. The revised target uses a sum of the parts valuation, with the core business valued at 35 times two year forward earnings.

The target price is therefore a brokerage estimate and should not be treated as a confirmed future share price. The source material does not provide the current market price, so no calculation of the implied upside can be made from the supplied information alone.

What could drive the next few quarters

The brokerage has identified three areas to monitor as Kirloskar Oil Engines moves through FY27.

• Growth across the powergen, industrial, distribution and export segments
• Delivery schedule of the HyperNext order
• Benefits from operating leverage as revenue increases

These factors matter because the first quarter showed strong revenue growth but weaker operating margins. Higher revenue can help absorb fixed employee and other operating costs, while the effect of price increases could support gross margins in later quarters.

The timing of HyperNext deliveries will also provide a measure of how quickly the company can convert its order activity into revenue. Export recovery is another factor because weakness in the Middle East affected the quarter.

Market analysis

Kirloskar Oil Engines' first quarter performance points to a mixed operating picture. Revenue growth remained strong at 16%, and the company gained market share, but the EBITDA margin came below the brokerage's estimate. This has led to lower earnings estimates even as the target price was raised.

The broader power generation and industrial demand picture will remain important for the company because these were among the segments that drove revenue growth. Its ability to capture demand through investment across segments will also matter as it works to expand its presence.

Another Motilal Oswal related stock story covered by WeloMoney is SPR Auto Technologies shares, which also involved a brokerage view on an automotive related business.

What investors should watch

Investors will be watching whether Kirloskar Oil Engines can maintain its revenue growth while improving operating margins. The brokerage has already built a recovery in operating leverage into its outlook, but the first quarter margin miss means the next few quarters will provide more evidence on that expectation.

The delivery schedule for the HyperNext order is another factor to monitor. Export performance, especially demand linked to the Middle East, will also remain relevant after the weakness seen in the first quarter.

Management's ability to absorb higher employee costs as revenue scales up will be important for profitability. Price increases across product ranges could also support gross margins in future quarters, based on the brokerage's assessment.

About Kirloskar Oil Engines

Kirloskar Oil Engines is the company covered in the brokerage report. The source highlights its power generation, industrial and distribution businesses, along with its export operations. The company is also investing across these segments to capture demand and has gained market share during the quarter.

The next phase of the story will depend on segment growth, the delivery schedule of the HyperNext order and the extent to which higher revenue helps operating costs get absorbed. These factors are central to the brokerage's expectation of margin recovery.

Frequently asked questions

What happened to Kirloskar Oil Engines in Q1 FY27?

Kirloskar Oil Engines recorded 16% year on year revenue growth in Q1 FY27, led by powergen, industrial and distribution segments. However, EBITDA margin was below Motilal Oswal's estimate, while exports were affected by weaker shipments to the Middle East.

What is Motilal Oswal's target price for Kirloskar Oil Engines?

Motilal Oswal has set a Rs 2,800 target price for Kirloskar Oil Engines, up from its earlier target of Rs 2,750. The brokerage has retained its Buy rating and values the core business at 35 times two year forward earnings.

Why did Kirloskar Oil Engines' margins miss expectations?

Kirloskar Oil Engines' EBITDA margin came below Motilal Oswal's estimate in Q1 FY27. Employee costs increased because of salary increments, employee stock option costs and new hiring, while the brokerage expects these costs to be absorbed better as revenue grows.

What happened to Kirloskar Oil Engines exports?

Kirloskar Oil Engines' exports were weak in Q1 FY27 because of the impact of the West Asia crisis on exports to the Middle East. The export business is therefore one of the areas to watch in the coming quarters.

What are the main factors to watch for Kirloskar Oil Engines?

The main factors identified by Motilal Oswal are growth across segments, the delivery schedule of the HyperNext order and operating leverage benefits for margin recovery.