Kirloskar Oil Engines Ltd (KIRLOSENG) Q2 FY23 Earnings Concall Transcript

Kirloskar Oil Engines Ltd (NSE: KIRLOSENG) Q2 FY23 Earnings Concall dated Nov. 14, 2022

Corporate Participants:

Rahul Sahai — Chief Executive Officer, B2B Businesses

Gauri A. Kirloskar — Managing Director

Anurag Bhagania — Chief Financial Officer

Aseem Srivastava — Chief Executive Officer, B2C Businesses

Analysts:

Amit Shah — Antique Stock Broking — Analyst

Ronak Chheda — Awriga Capital — Analyst

Falguni Dutta — Jet Age Securities — Analyst

Asha Rawal — Subhkam Ventures — Analyst

Renjith Sivaram — Mahindra Manulife Mutual Fund — Analyst

Sandeep Tulsiyan — JM Financial — Analyst

Bharat Sheth — Quest Investment Advisors — Analyst

Renu Baid — IIFL Securities — Analyst

Kunal Sheth — B&K Securities — Analyst

Presentation:

Operator

Ladies and gentlemen, good day, and welcome to Kirloskar Oil Engines Limited Q2 FY ’23 Earnings Conference Call, hosted by Antique Stock Broking. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Amit Shah from Antique Stock Broking. Thank you, and over to you, sir.

Amit Shah — Antique Stock Broking — Analyst

Thank you, Shashan. Good afternoon, everyone. On behalf of Antique Stock Broking, we welcome you all to 2Q FY ’23 post result conference call of Kirloskar Oil Engines Limited. I’m glad to have with us today, Ms. Gauri Kirloskar, Managing Director of the Company; and Mr. Anurag Bhagania, CFO of the Company.

I’ll now hand over the call to Ms. Gauri Kirloskar for her opening remarks, and post which we can open the floor for Q&A. Over to you, ma’am.

Gauri A. Kirloskar — Managing Director

Thanks very much, Amit. Good afternoon, everyone. This is Gauri Kirloskar, Managing Director of Kirloskar Oil Engines. Thank you for joining the call today. Present with me on the call are Anurag Bhagania, Chief Financial Officer; Smita Raichurkar, Company Secretary; Rahul Sahai, CEO of our B2B Business; Aseem Srivastava, CEO of our B2C Business; and Amit Gupta, CFO of Arka Fincap.

As you are aware, we have had new colleagues joining us in the senior management team. Since they will be interacting with you for the first time on the call today, I will do a quick round of introduction. Anurag, our CFO is a finance veteran with over 25 years of experience across finance and accounting functions, along with compliance and legal functions. He has been on the team for a couple of months, and I can say that the transition has been smooth.

One more new colleague on the business side is Rahul Sahai. Rahul has joined us as CEO of the B2B Business. Rahul comes with significant domain expertise in our industry. He is an expert in the power generation, industrial and aftermarket space, very well-versed with technology, both current as well as the transition happening in our industry. He is also experienced in channel strategy, supply chain, business turnaround, and technology and analytics deployment.

I will now start with an overall business update and then Anurag will update you about the financial performance. A couple of months ago, we announced our 2X-3Y strategy, which is to double our top line in three years. And I mentioned then that there are strong macroeconomic tailwinds that we clearly see working in our favor. I had also said that a favorable environment will not automatically translate into business results. There is focused work that has to be done strategically for us to be able to reach the aggressive plans that we had set out for ourselves.

I said we will focus on five growth pillars, namely; core growth, channel, technology, operations excellence and people. I strongly believe that if we keep our focus on these pillars and drive our strategies around them, results will follow.

On the macro side, the strong tailwinds continue. The focus from the government on infrastructure development and the upcoming changes in emission norms pose a great opportunity for us. Both of these favorable macro trends fall right into our core competencies. Strong in-house R&D is our strength and we have the ability to develop fit-for-market products in house. Our manufacturing acumen is strong and we have a service network that is unmatched. All of this becomes a competitive advantage for us as the products become more complex.

With the new emission norms, export markets become naturally accessible to us as our products will automatically be at par with global emission norms. However, there is a lot of work to be done for us on the export side, getting the product certified, building the network and brand, and ensuring we have strong service support in place, but I feel that we have the right team who can make it happen for us. This, along with the China plus one strategy that many OEMs are employing, puts a big focus on exports.

On the pump side, as you all know, we have completed the acquisition of LGM and it is now a 100% subsidiary of KOEL. We see this business growing significantly in the coming years, and we are making the right investments in this business for us to move into high-margin manufactured products. This, along with the strategy of deepening and widening the channel, should see this business growing significantly.

For our financial services business, Arka Fincap, the investment as of Q2 now stands at around INR987 crores. Please note this includes the profit on the change of shareholding of approximately INR53 crores. So with our total commitment of INR1,000 crores at the net level, we have about INR66 crores left out of our commitment.

As I said in my earlier interactions, our plans are aggressive. As announced in the 2X-3Y strategy, we are aiming for a top-line CAGR of 26%. The strategy is there, the leadership team is in place and work is ongoing around the five pillars. And step by step, we will make progress towards our ambition.

Now coming to the quarter performance, Q2 has been an encouraging quarter with 22% year-on-year growth in the top line for the quarter and 33% top line growth for the year-to-date performance. So, at the standalone level, we are at about INR998 crores for the quarter and INR1,942 crore for the first half. We have been able to clock a double-digit margin for the quarter as well as the first half. This essentially is a reflection of the steady price rises we had taken as compared to last year same period to pass on the commodity price increases. So at the net profit level, we were at about INR73 crores for the quarter, which is 87% increase year-on-year and about INR137 crores for the first half, clocking a 117% increase year-on-year.

While there are strong macro tailwinds, this performance is also a reflection on our ability to execute. As you are all aware of the constraints around supply chain, we are not insulated from them, but a lot of the efforts put in over the years in building a resilient supply chain translated into these results.

On a consolidated level, the revenue from operations was at INR1,228 crore for the quarter, a 23% growth year-on-year and about INR2,420 crores for the first half, making a 233% increase year-on-year.

Anurag, will dwell upon this in detail in the financial performance update. Over to you, Anurag.

Anurag Bhagania — Chief Financial Officer

Hey, good afternoon, everybody. Thank you. Thank you, Gauri. You know, with all the business updates that we have talked about, I will take some time, go through the financial performance for this quarter.

The positive macro trends, along with all the efforts in the lines of the five pillars of strategic growth that we’ve talked about in the past, I would say this quarter reflects the strong execution capability of our team. This has been absolutely great quarter for us. If you have noticed, this is the second quarter in the span of a calendar year and this is for the first time that we’ve hit the highest quarterly numbers for the second time in one particular calendar year. It is also for the first time that we’ve hit close to INR1,000 crores in overall revenue from operations, delivering almost like 87% growth in terms of net profit.

On the sales side, if you look at the businesses independently, all the businesses have delivered strong year-on-year growth. Power Generation with a 24% growth, keeping the quarterly sales levels at almost INR456 crores. Industrial business unit grew almost 40%, keeping revenues upwards of INR225 crores for the quarter. We saw traction across our Institutional Projects with a Y — year-on-year growth of 54%.

If we look at our half yearly numbers, overall sales growth is close to about 33% and a total revenue of INR1,942 crores. Power Generation, Industrial, IPS witnessed over 40% sales growth. This quarter, however, the Water Management business was almost flat year-on-year, due to unpredictable extended rains across the country, which you all know about.

I would also like to highlight our export performance, which has been absolutely outstanding. For the quarter, the exports grew 88% year-on-year, taking the overall numbers to about INR141 crores for the quarter. And on a half-year basis, the growth is around 78% to a level of INR237 crores. Good growth and demand is visible across Power Generation, Industrial, Agricultural segments in the international markets.

Now, overall, looking at the standalone performance for the quarter, net sales INR998 crores for Q2, 22% increase year-on-year, 6% quarter-on-quarter. EBITDA at INR115 crores for the quarter, 73% increase year-on-year, 12% quarter-on-quarter. This reflects what Gauri also talked about our price, increased efforts and passing on all the raw material inflation. So if we look at where we are coming from the last year, I would say, 70% to 80% of the price rises have already been passed on to the customers.

EBITDA margins at 11.4% for the quarter versus 10.9% and 8.1% in the prior year, we are focused on our efforts to maintain double-digit profit margins and the levels of profitability that we aspire to get to. Net profits at INR73 crores for the quarter, 87% increase year-on-year and 12% quarter-on-quarter.

We are maintaining a good cash position as well. The net cash and cash equivalents at INR193 crores, despite the fact that we have invested more than INR100 crores for LGM and INR50 crores in the financial services business, well within our INR1,000 crores commitment and also invested in the working capital during the quarter.

We are 21 days of net working capital cycle. We expect to maintain — we expect to maintain the same levels for at least the next couple of quarters, I would say, owing to the multiple operating challenges that we see, challenges which are in a sense also opportunities for us. There is technology development that is happening on — likes of CPCB IV, new products development and at the same time, we are seeing significant uptick in the demand. For all of that, you will need working capital to support.

Let us now have a look at our segment performance. The electric pump business grew only by about 5%. Other segments, which include farm mechanization and tractors, spare parts and oil business, declined by about 4%. In the engine segment, more than 25% growth year-on-year basis. Increase in GST from 12% to 18% did impact demand for electric pump segment, along with the wins that we earlier talked about.

As you know, during this quarter, we acquired the remaining 24% stake in the LGM subsidiary, which was already 76% earlier, so making it 100% wholly-owned subsidiary. You may also refer to the holding structure that we’ve laid out in the presentation for the investors and analyst community available on our investor website. The financial services business, this segment registered INR83 crores in revenue with the asset under management as of September at INR2,829 crores.

Summing it up, the consolidated performance, revenues at INR1,213 crores for the quarter versus INR990 crores in the prior year, 23% increase year-on-year and 3% quarter-on-quarter; and net profit of INR82.5 crores versus INR41.7 crores same quarter last year, 98% increase year-on-year and a 1% increase quarter-on-quarter.

I would say, to sum it up, I would like to link our performance back to the 2X-3Y vision that we’ve spoken about earlier. This quarter’s performance with a 23% growth on the top line and a strong healthy EBITDA margin reiterates our aspiration to the 2X-3Y vision.

With this, I would like to hand it back to the operator so that we can take the questions.

Questions and Answers:

Operator

Thank you very much. We will now begin the question-and-answer session. [Operator Instructions] The first question is from the line of Ronak Chheda from Awriga Capital. Please go ahead.

Ronak Chheda — Awriga Capital — Analyst

Hi. Thanks for the opportunity, and congratulation on excellent numbers. My questions is…

Operator

Mr. Chedda, sorry to interrupt.

Gauri A. Kirloskar — Managing Director

Ronak, we can’t hear you. Can you please speak clearly?

Ronak Chheda — Awriga Capital — Analyst

Sure. You can hear me now?

Gauri A. Kirloskar — Managing Director

Yes, much better. Thank you.

Ronak Chheda — Awriga Capital — Analyst

Yeah. Congratulations on the numbers. My question was on the CPCB norms. So how difficult it would be for the smaller companies to transition to the new norms? And would this in a medium to long term differentiate the large companies with the smaller ones in the sector?

Rahul Sahai — Chief Executive Officer, B2B Businesses

Hi, Ronak. This is Rahul Sahai. I am the CEO for the B2B Businesses. So power gen, industrial, aftermarket are the key areas I work on. So if you were to ask — so your question was essentially CPCB 4+, which kicks in from first July, factory out and essentially after December end, there is no liquidation of CPCB II inventory that can happen, right? That was the question. And you asked around, whether it is — how easy or difficult is it for smaller companies to prepare or ensure their readiness for the compliance.

So at this point, Ronak, I’m not sure if I can necessarily answer for the others. But what I can — what I can certainly say is, for Kirloskar Oil Engines, CPCB 4+ is something that is very clearly on our radar, and we are geared pretty well for it. We’ve always relied on an in-house R&D, and that’s actually the good news for us because we have focused on internal development and intimately know the products extremely well. So when it comes to emission compliances, we have managed them efficiently in the past and will continue to do so even for CPCB 4+.

Ronak Chheda — Awriga Capital — Analyst

Okay. So, my question was more from the tech gives us — companies like us and edge over the smaller players.

Rahul Sahai — Chief Executive Officer, B2B Businesses

Yeah. So, what I would say is that, see, clearly, organizations like Kirloskar Oil Engines, where the R&D is in-house and we’re not reliant on other engineering vendors or support. I think there is a clear competitive advantage and which is why this augurs really well for us.

Ronak Chheda — Awriga Capital — Analyst

Okay. And my second question is on the pre-buying, which usually happens with transitions come in place for industry. What is your sense on the pre-buy demand or will it come? And is the supply chain equipped well, the kind of demand which pre-buy can happen?

Rahul Sahai — Chief Executive Officer, B2B Businesses

Yeah. So, we are clearly expecting a pre-buy to take place. Given the cost of after treatment, the asset cost is — the prices to the end customers is going to go up. So a pre-buy is evident. And we will — so we are expecting a quarters worth of pre-buy or three months to four months worth of pre-buy to take place. And over the next few months, there might be some demand normalization that is just happening. But we are — I mean, at this point, we are calibrating [Technical Issues].

Ronak Chheda — Awriga Capital — Analyst

So, our current capacity would be enough to cater to this demand. That is what you are indicating, sir?

Rahul Sahai — Chief Executive Officer, B2B Businesses

That is actually correct. Because what we’ve seen is that, at a fairly granular level, that we’ve looked at it, things seem to be on track and our current supplier capacities are good enough to help us sail through the pre-buy season.

Ronak Chheda — Awriga Capital — Analyst

Okay. Thank you so much for answering my questions. Thank you.

Operator

Thank you. The next question is from the line of Falguni Dutta from Jet Age Securities. Please go ahead.

Gauri A. Kirloskar — Managing Director

Hello?

Operator

Yes, ma’am. Please go ahead.

Falguni Dutta — Jet Age Securities — Analyst

Good afternoon, sir. Sir, I have two questions. One is on what was the volume growth in Engines Y-o-Y? Hello?

Anurag Bhagania — Chief Financial Officer

When you talk about volume growth, you should remember that there is a lot of sub-segment level information that we are talking about, right? And you have to measure it really at each product category level. So, right now, at a very superficial level, at an organizational level, if you really ask me 6% to 7% is really the volume growth that we are seeing at this moment, there is a significant amount of inflation that is also driving it in terms of the overall sales growth. But 7% would be the right to say in terms of the current mix that we have.

Falguni Dutta — Jet Age Securities — Analyst

And sir, what would be the absolute number of engines sold during the quarter?

Anurag Bhagania — Chief Financial Officer

Sorry, we don’t go to that level of detail, and I would like to restrict my response from that one. If you prefer to still have this information, we can probably discuss offline. But absolutely not…

Falguni Dutta — Jet Age Securities — Analyst

Or sir, if you can give us the capacity utilization?

Anurag Bhagania — Chief Financial Officer

Unfortunately, these are not numbers that we disclosed in public domain. I don’t like to refrain from sharing that on a wide call. But very empirically speaking, you look at the financial performance, where we were in the last quarter versus where we are today, there is obvious relationship that you can establish. Clearly, there is improvement on the capacity utilization. We have not built any further capacities, so that definitely is a trend that we are seeing.

Falguni Dutta — Jet Age Securities — Analyst

Okay, sir. Thank you. That’s all from my side.

Operator

Thank you. The next question is from the line of Asha Rawal from Subhkam Ventures. Please go ahead.

Asha Rawal — Subhkam Ventures — Analyst

Hello. Hello?

Gauri A. Kirloskar — Managing Director

Hi, go ahead.

Asha Rawal — Subhkam Ventures — Analyst

Yeah. Good evening. Thanks for the — taking my questions. Ma’am, again my question on this CPCB. Typically, what is the strategy for this, I mean, diesel engines, what you’re looking for this? And going forward, the strategy after looking the CPCB norms and other pollution kind of things?

Rahul Sahai — Chief Executive Officer, B2B Businesses

Yeah. Hi. So this is Rahul.

Asha Rawal — Subhkam Ventures — Analyst

Yeah.

Rahul Sahai — Chief Executive Officer, B2B Businesses

What I would say is that, at a very high level, each of these norms are essentially an opportunity for companies that have prepared well to ring fence our business. So, strategically, this bodes well for us. Having said that, beyond that, from a strategy standpoint, I may not be able to comment at this stage.

Asha Rawal — Subhkam Ventures — Analyst

Okay. Okay, okay. And then, my second question on the farm mechanization side. So can you able to tell me the — hello?

Operator

Yes, ma’am. The audio is very low.

Asha Rawal — Subhkam Ventures — Analyst

Yeah. Second question on this farm mechanization side, can you able to tell me the — what is the EBITDA margin for the current quarter for this?

Aseem Srivastava — Chief Executive Officer, B2C Businesses

Yeah. So, thank you so much for that question. I’m Aseem Srivastava, CEO of B2C Businesses. So see, farm mechanization is a new baby that we have for last few years. And we’re working on various initiatives to increase sales, like what Gauri said about deepening and widening. We are also going into the export market. Right now, we will not be able to tell you much about the EBITDA margin on this.

Asha Rawal — Subhkam Ventures — Analyst

Okay. So can we see — I mean, at — I mean, right now you’re not able to tell me, I mean, the margins. So can we expect like in the near term — like any timeframe can you give us? I mean, at what timeframe we can see like sustainable margin from this segment or any timeline, if you’re able to provide…

Aseem Srivastava — Chief Executive Officer, B2C Businesses

So I think, next year, you will see improvement in this, on the margin side.

Asha Rawal — Subhkam Ventures — Analyst

Okay. And then the second thing is like, as you mentioned, like the unseasonal rains and all these impacted farm mechanization and kind of things, like a tractor and another sales, and pumps also, right? So what is the demand right now as we can see rabi crop is already [Indecipherable]? So anything like…

Aseem Srivastava — Chief Executive Officer, B2C Businesses

Yeah. So this year, it was a little unusual, because the rain was rampant and very heavy in some pockets. Also, it has got extended till October. So across the…

Asha Rawal — Subhkam Ventures — Analyst

Yeah, right.

Aseem Srivastava — Chief Executive Officer, B2C Businesses

Both in farm mechanization and WMS or water management or the pump side, we have less demand. But we are seeing that demand picking up in November, and we are confident that going forward in next few months, normal demand will come back.

Asha Rawal — Subhkam Ventures — Analyst

Okay. Okay. Thank you, sir.

Aseem Srivastava — Chief Executive Officer, B2C Businesses

Sure.

Operator

Thank you. The next question is from the line of Renjith Sivaram from Mahindra Manulife Mutual Fund. Please go ahead.

Renjith Sivaram — Mahindra Manulife Mutual Fund — Analyst

Yeah. Hi, team, and congrats on good set of numbers and great performance. So just one. When I look at your export, as you have shown in the PPT, it has shown a growth from INR75 crore to INR141 crore. So out of this, how much is due to the rupee-dollar depreciation? Because that would have played a major part in terms of the value growth.

And also, if you can throw some more light on the last analyst meet you were explaining certain geographies where you’re targeting. So, which all are the new geographies or new touch points which we were able to add? And how that will enable us in that 2X-3Y strategy because that’s largely going to be driven by exports?

Anurag Bhagania — Chief Financial Officer

Hey, Renjith. Hi. Renjith, you can straightaway correlate it to the currency fluctuations, I think, in the range of 10% to 12%, depending upon different geographies is what is the currency impact on the overall export numbers. And I would also like to invite Rahul here. Maybe he can talk a little bit about where we are growing in the geographies that we are looking at.

Rahul Sahai — Chief Executive Officer, B2B Businesses

Right. Thanks, Anurag. So Renjith, if you look at our export business, we are focused pretty heavily on Middle East. There is a lot of interest from North America and in Northern Africa and South Africa as well. So those are our — are the key markets for us and we are fairly focused on that, even — I mean, as we move along. Strategically speaking, I won’t be able to comment on this call, but I can assure that there are thought processes at play and we are figuring our growth strategy for international markets as well.

Renjith Sivaram — Mahindra Manulife Mutual Fund — Analyst

Okay. So you said that we supply these engines and there are OEMs in these geographies who fit these alternators and sell it as a genset or we have some arrangement with a third party where we fit the whole canopy and everything and sell it as a power genset. So how does this work? Because in India, it’s OEM way. So in these geographies, how does that transaction happen? Because for Cummins, they sell the whole genset as an export for LHP. So if that strategy we follow or we follow the OEM strategy? Just to get some idea, how do — how are you going to create these touchpoints for future growth?

Gauri A. Kirloskar — Managing Director

So Ronak[Phonetic], that’s a great question and it’s actually very relevant to the strategy that we decide, and it changes country by country. So, for example, if you look at our South Africa market, we supply engine for a very particular application in the mining space, and that’s where we are the market leaders. In the Middle East, we are focused [Technical Issues] at the moment, firefighting pump sets, we supply engines for firefighting pump sets. So on both of these areas, we work — in South Africa, we work straight with the customer through a distributor. In the Middle East, we work with OEMs. In the U.S., which is — where we’re selling engines for gensets and for engines, it’s a different strategy.

So it depends on which market we’re in, what is the potential that we see in the market, whether it’s in the power gen space or whether it’s in the industrial space, there will be a difference in how we approach the market. So there is no sort of blanket strategy that would apply to every market.

Renjith Sivaram — Mahindra Manulife Mutual Fund — Analyst

And we sell them as KOEL brand only. There is no white labeling in any of these?

Anurag Bhagania — Chief Financial Officer

As KOEL brand.

Renjith Sivaram — Mahindra Manulife Mutual Fund — Analyst

Okay, okay. Sure. Yeah, thanks.

Operator

Thank you. The next question is from the line of Sandeep Tulsiyan from JM Financial. Please go ahead.

Sandeep Tulsiyan — JM Financial — Analyst

Yeah. Hi. Good evening. My first question is pertaining to this 2X-3Y strategy that you put up. And just wanted to understand how do you foresee the revenue mix changing over the next three years from where it is currently?

Rahul Sahai — Chief Executive Officer, B2B Businesses

So if you look at — I’ll talk about three things. The first thing is CPCB 4+, where there is a lot of content addition happening apart from the gensets, right? There’s the entire after treatment system that’s coming in, and that’s a big chunk of the power gen business that we do today. Number two is, all the growth opportunities on the international side. So we continue to stay focused and we are evaluating all models of growth and how do we establish a larger footprint globally.

And number three, if you look at our aftermarket business, we are roughly — the way we see our — where we are versus the entitlements, there is significant opportunity for growth on the aftermarket side, which will drive the profitability. So if you were to ask me what are the top three levers, those would be the top three areas that I talk about.

Gauri A. Kirloskar — Managing Director

And Aseem?

Rahul Sahai — Chief Executive Officer, B2B Businesses

Aseem?

Aseem Srivastava — Chief Executive Officer, B2C Businesses

Yeah. Thanks, Rahul. So on the B2C side also, currently our export for pumps is almost negligible from KOEL side and that is one focus area. The same market that Gauri mentioned for engines is also available for pumps. Similarly, what we have found on farm mechanization, the export market in Africa is available, where we’ve already supplied some and that will be our main driver. In domestic, currently with deepening and widening, we are confident that we’ll be able to increase our market share. So these are the two levers that we will use in B2C to go to our vision of 2X-3Y. Thank you.

Sandeep Tulsiyan — JM Financial — Analyst

Got it. Second question is pertaining to the agri segment, both electric pumps and others, the farm mechanization what we report separately for consolidated entity. We’ve seen the margins, which were in negative zone for two, three quarters and they had kind of flipped over to positive territory in the last quarter, but this quarter again we’ve seen a loss. So exactly what is the concern here? If you could explain why have you gone back into losses? How do we see the margins improving going forward in these segments?

Anurag Bhagania — Chief Financial Officer

Hey, Sandeep. This is such a small segment. I think it should really be seen as we are incubating our business, right? I think, we should realize the fact that as we are growing [Speech Overlap].

Aseem Srivastava — Chief Executive Officer, B2C Businesses

So this is Aseem here, again. So if you see, on the farm mechanization side, that is our new business. So they’re definitely — what you’re saying is correct. If you come to the pump business, pump business, we have made good margins in last quarter also and this quarter also. And this quarter, despite — so less demand and where many companies are struggling, we have made money. And I believe this will continue on the pump side for next two quarter also.

Sandeep Tulsiyan — JM Financial — Analyst

No, for the consol[Phonetic] entity, as far as the numbers that I have, the pumps has a negative INR3 crore margin or INR3 crore EBIT. So that is where the question was actually focused on.

Aseem Srivastava — Chief Executive Officer, B2C Businesses

So, on the consol side, if you see LGM is also included. LGM is a different story. There we have lot of fixed costs and we are now working on deepening and widening. And this quarter and next quarter, we’ll back to where we were in Q1.

Sandeep Tulsiyan — JM Financial — Analyst

Okay. So by next quarter, your margins should go back to Q1 levels is what you’re saying in LGM?

Aseem Srivastava — Chief Executive Officer, B2C Businesses

Yeah.

Sandeep Tulsiyan — JM Financial — Analyst

Got it. Next question was pertaining to the margins that we have done in engine segment. I appreciate there is some operating leverage benefit also we would have seen. But is there any particular mix benefit or another sudden demand jump that we are seeing is causing some shortages of gensets, because of semiconductor issues is giving some favorable benefits to manufacturers which you think can get rolled back in coming quarters? Or do you think this 10%-plus margin is more or less a sustainable margin going forward in engines?

Rahul Sahai — Chief Executive Officer, B2B Businesses

This is Rahul. So I would say, this is fairly sustainable. And I spoke a little bit about our focus on aftermarket as well. So I think we will continue to see some improvements as well.

Sandeep Tulsiyan — JM Financial — Analyst

Understood. And lastly, on the new businesses that we have spoken about in a lot of previous calls, in pipes, cables, motors and there was a waste management business that plan to get into any update in terms of revenue ramp up that we have done in the past quarter, how do we foresee these businesses becoming a part of the total revenue? Do they start reporting any material number by FY ’24, if you could give some color on that as well? Thank you.

Rahul Sahai — Chief Executive Officer, B2B Businesses

Yeah. So on many of these businesses, right, they are still in incubation stage. For example, if I look at electric motors, that is something where we are actively developing the product portfolio and trying to expand our presence, but I would still call it an incubation product. When it comes to products like organic waste composters, that is more a part of our ESG strategy rather than actively growing big numbers there. So that is what I would say to that.

Sandeep Tulsiyan — JM Financial — Analyst

And for the pipes and cables part?

Rahul Sahai — Chief Executive Officer, B2B Businesses

Aseem?

Aseem Srivastava — Chief Executive Officer, B2C Businesses

Yeah. So pipes and cables also actually is a new business that we are into. And what we have done now is, we have actually — we are using our existing channel of LGM and also WMS to sell pipes and cables. We are confident this business is more of a backward integration for us. Going forward, each of our pump will go with our pipes and cable. By next year, this business will be stable, far stable than what it is today.

Sandeep Tulsiyan — JM Financial — Analyst

Okay. Sir, but — sir, if we were to look at, say, two years down the line or three years down the line for motors as well as for these pipes and cables, by when can it move out of this incubation stage and actually start delivering some external sales?

Rahul Sahai — Chief Executive Officer, B2B Businesses

Yeah. So from that — see, from electric motors, what we are trying to look at right now is just building a portfolio. So, couple of years down the line, we would expect it to become material.

Sandeep Tulsiyan — JM Financial — Analyst

All right. Okay. Thank you so much for taking these questions.

Operator

Thank you. The next question is from the line of Bharat Sheth from Quest Investment Advisors. Please go ahead.

Bharat Sheth — Quest Investment Advisors — Analyst

Hi, Gauri. Thanks for the opportunity and congratulation. On — see, this CPCB norms 4+…

Operator

Sorry to interrupt you, Mr. Sheth, the audio is very low from your line. Please increase the volume.

Bharat Sheth — Quest Investment Advisors — Analyst

One sec. Now am I audible?

Operator

Yes, sir.

Bharat Sheth — Quest Investment Advisors — Analyst

Yeah. On the CPCB norm closed IV, we said that we have a large opportunity in export market and where we have to work lot on the strategy as well as the product and distribution. And how far — big is the opportunity, particularly in the developed market like USA that which we referred during the Analyst Day? And what are we really doing there, I mean, to grow this business in this U.S. market?

Gauri A. Kirloskar — Managing Director

Sure. So just coming back to what you said about the norms, see, that’s something that has changed for us. And I just want to articulate that emission norms have happened in the past in India, but the emission norms that happened were never on par with the advanced countries across the world which had more advanced emission norms. What — so — and as a company that had primarily domestic sales, we never invested in a product to develop a product for global markets, if we could not sell it in India.

So what has changed today is, with CPCB4 coming up or even BS V coming up two years from today, our product which is made for the Indian market actually becomes something that we can sell in all international market, because it’s on par with the most stringent diesel norms across the world. So that’s why I’m saying that today we are at a position or a time where we have this unique opportunity in front of us. And in line with that, we will start and we have already started looking at these advanced emission norm markets, whether it is Europe or the U.S., and in building our sales and service strategy there.

Bharat Sheth — Quest Investment Advisors — Analyst

So, what stage are we? I mean, of course, which will start — I mean, product will be launched somewhere in the July ’23. So where do we in scale of say 10, where do we stay — stand today?

Rahul Sahai — Chief Executive Officer, B2B Businesses

I don’t think I’d be able to comment on a scale of 10. What I can say is that our plan is on track.

Bharat Sheth — Quest Investment Advisors — Analyst

Fair. On — Mr. Sahai, you talk about growing aftermarket and I believe we have a huge ambition of faster space than the rest of the business. So can you give little more color, what are we doing there for aftermarket growth?

Rahul Sahai — Chief Executive Officer, B2B Businesses

Yeah. So if you were to look at historically, our first-fit business has been growing roughly, give or take, if you look at the asset base, growing at about 10%. And if you look at the aftermarket revenues, they’ve been, I mean, lagging behind. So the growth rate has been much slower. So what we are clearly looking at is how do we enhance our service solutions business, how do we create more customer lock-ins and really engage with our customers beyond the warranty period, and thereby enhancing our aftermarket business as well. So there is a much larger focus on the aftermarket. And given where we are, I’m pretty confident that going forward we will be able to grow this substantially.

Bharat Sheth — Quest Investment Advisors — Analyst

Fair. And last question, Gauri, on these things, we were talking of creating a partnership for technology tie-up for 1,500-plus kind of kVA business. So where do we are, I mean, and how do we want to grow — enter in that market?

Gauri A. Kirloskar — Managing Director

So, thanks for the question. So as I detailed in my strategy for addressing the high-horsepower space, which is a space which is growing, we will follow, buy, build or borrow strategy, whether we do it in-house, whether we talk to people outside and go into a collaboration, these are the kinds of things that we’re looking at. At this stage, it is far too premature and preliminary for me to comment on which relationships are being built with whom, but we will certainly keep you updated when there is something definite to tell you.

Bharat Sheth — Quest Investment Advisors — Analyst

Thank you, and all the best.

Operator

Thank you.

Gauri A. Kirloskar — Managing Director

Thank you very much.

Operator

The next question is from the line of Renu Baid from IIFL Securities. Please go ahead.

Renu Baid — IIFL Securities — Analyst

Yeah. Hi. Good evening, team. I have two, three questions. First on CPCB IV. While you have discussed quite a bit in terms of some of the implications and focus on after treatment, etc., can you share in your view what could — since there is a significant cost implication to the consumer, in your view, what could be the impact in terms of consolidation of the nodes in the given segments in which they will be launched? And what is KOEL’s preparedness to introduce alternative fuel products here?

Rahul Sahai — Chief Executive Officer, B2B Businesses

So at this point, what I would say is, and it varies by node, but roughly if you were to look at the numbers, the addition of after treatment raises the cost by roughly from 25 odd-percent[Phonetic] to 40- odd-percent. So that’s the range that I would talk about. And what is the other question that you had asked?

Renu Baid — IIFL Securities — Analyst

So given that there is significant cost implication, in your view, which nodes or which particular segment or range — HP range you think, there could be consolidation of the end market? The ratings of the gensets.

Rahul Sahai — Chief Executive Officer, B2B Businesses

You mean consolidation in terms of ratings consolidated?

Renu Baid — IIFL Securities — Analyst

Yeah, as in certain ratings which you think it may not become viable anymore, customer may switch to higher size gensets because of the cost implications or there would be probably probable merger of ratings of the gensets, based on the application.

Rahul Sahai — Chief Executive Officer, B2B Businesses

See, at the moment, we don’t really see that. Now, there might be specific engine models where there are minor changes. So they — it is quite possible that like-to-like engine platforms may not be there. So there might be some changes that happened there. But beyond that, we’re not expecting major changes in the ratings. See, because from a customer standpoint, the power requirements remain consistent. So we don’t see too much of a change there.

Renu Baid — IIFL Securities — Analyst

Got it. And also related to this, you think because of this kind of cost implications, some of the alternate fuel products, which earlier who are not very attractive to the end customer, now because not just the capital cost, but the operating costs were also increased for consumers. So the market for some of the alternate fuel products will open up? And if so, what is KOEL’s preparedness to introduce such products in the market?

Rahul Sahai — Chief Executive Officer, B2B Businesses

Right. So if I look at alternate fuels, right — so let me just segregate one point that we are an internal combustion company for the large part. And if it means alternate fuels, then alternate fuels also require a way to extract the energy of it. So if you have been kind of tracking our product launches, you would have noticed that we’ll be launching a whole bunch of gas gensets, we have — we’ve commissioned an ethanol-based genset recently. So we have a wide variety of fuels that we are working with.

In fact, we launched the dual fuel kit where we are creating retrofit options for customers, where you can look at anywhere between, say, 30% to 50% substitution of gas and run existing DG sets. So if you were to see what kind of fuels and alternate technologies we are dealing with, as Kirloskar Oil Engines, we actually have been, I mean, a large gamut of it. We do believe that internal combustion is here to stay.

Gauri A. Kirloskar — Managing Director

And I think the only one point I would add to that is, it’s not only cost, but also fuel availability that will determine which way the customer goes. So I think, keep that in mind as well.

Renu Baid — IIFL Securities — Analyst

Okay. And if you look at the LHP segment of the market, there has been a concern that, that segment would be extremely susceptible and will eventually pickup battery or some of the alternate options and probably will move away from diesel-based back up. And coal has a significant exposure to 125 KvA and below segment of the market. So how should we look at the possible implications on this segment and potential disruption in the market?

Rahul Sahai — Chief Executive Officer, B2B Businesses

So what I can say is that, we aren’t seeing too much of that today. In fact, a large chunk of our growth is coming from 15 KvA to 30 KvA. So there is a lot of growth in those markets. So strategically over a longer term, we are constantly evaluating this, but we are not seeing battery or energy storage devices replacing the smaller gensets. We’re not seeing that.

Renu Baid — IIFL Securities — Analyst

Sure. And one last question related to CPCB IV. Since you did mention that aftermarket is a great opportunity, what kind of investments we are targeting to and so that we get a better pull through from electronic engine platform under CPCB IV? And also the after treatment requirements for — I’m sorry, the distribution related to revenue stream from the maintenance of the SCR, etc., would be significant. So any investments or capex that is planned to maximize this opportunity?

Rahul Sahai — Chief Executive Officer, B2B Businesses

Yeah. See, I can’t give out the specific details here, but what I can say is that clearly there is an opportunity for service getting more “proprietary”, with the electronic fuel injection systems and the after treatment systems coming into play. And we are looking at infrastructure necessary to service these products, which — whether included those repair systems or whether it requires us to look at electronic fuel injection calibration stands at the channel partner. So those are all things that we are looking at, but I won’t be in a position to give out further details at this point.

Renu Baid — IIFL Securities — Analyst

Okay. And one last question. Broadly apart from the diesel genset and CPCB IV latest market, can you share how has been the business outlook being for the construction equipment space, especially after the implementation of CPCB BS IV[Phonetic]? Has the volume uptick now back in the market and the broad outlook of the Company for the industrial segment as well? Thank you.

Rahul Sahai — Chief Executive Officer, B2B Businesses

So, on the industrial side, we’ve actually seen a fairly strong uptick from our OEMs. Especially if you look at after the implementation of BH score, a lot of our 110 HP products have seen a lot of demand growth. So we continue to see a lot of traction for the — on the industrial side of the business, and we are hoping to — for that to continue. So that’s the expectation.

Renu Baid — IIFL Securities — Analyst

Okay. All right. Thank you, and all the best. Thank you.

Rahul Sahai — Chief Executive Officer, B2B Businesses

Thank you so much.

Operator

Thank you. The next question is from the line of Kunal from B&K Securities. Please go ahead.

Kunal Sheth — B&K Securities — Analyst

Yeah. Hi. Good evening, and thank you for the opportunity. So my question is pertaining to CPCB IV. Sir, could you give us some sense of what kind of cost increase would you entail once — in the product because of the new CPCB IV?

Rahul Sahai — Chief Executive Officer, B2B Businesses

Yeah. Hi, this is Rahul. So what we are looking at and this varies by node, but we’re looking at roughly about a 25% to 40% cost increase.

Kunal Sheth — B&K Securities — Analyst

Okay. 25% to 40% cost increase. Okay. And sir, my second question is for clarification. So, sir, CPCB IV, your — dealers will be allowed to sell till what time, October, November, December? Or — so basically, the manufacturing cannot be done post July is what I understand, right?

Rahul Sahai — Chief Executive Officer, B2B Businesses

Yeah. So 1st July, shipments from the manufacturing unit kind of stops, so CPCB IV compliant engines and gensets need to be shipped from 1st July. And until December, we are allowed to have inventory in the channel. So essentially, post-December is where CPCB 4+ compliant gensets can be shipped out from the channel.

Kunal Sheth — B&K Securities — Analyst

Okay, great. Sure. Thank you so much.

Operator

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for closing comments.

Gauri A. Kirloskar — Managing Director

Thank you very much for your interest in joining the call, and look forward to seeing you next time. Thank you.

Operator

[Operator Closing Remarks]

Anurag Bhagania — Chief Financial Officer

Thank you.

Operator

Thank you.