Kirloskar Oil Engines Ltd

NSE:KIRLOSENG

Earnings Call Analysis

Revenue Growth Continues; Transition Phase Managed

In a recent quarter, the company saw a 24% year-on-year increase in its revenue reaching INR 204 crores, and a 52% growth in the Arka segment, achieving INR 127 crores. With a strong first-half performance, the company aims to continue its robust growth into the second half of the fiscal year. Despite a period of transition due to emission regulation changes, executives remain confident in their order book and readiness for upcoming product demands. Additionally, a recent 130 basis point improvement in gross margins suggests a vigilant cost and margin management, although specific future margins were not projected. Employee costs have seen an increase to INR 75 crores due to increments and are expected to stabilize at around INR 70 crores moving forward.

Robust Revenue Growth with Transition Challenges in B2B

Under the leadership of Managing Director Gauri Kirloskar, Kirloskar Oil Engines (KOEL) reported a stable quarter with revenues reaching INR 1,059 crores, marking a 5% year-on-year increase and substantial 19% growth for the first half at INR 2,303 crore. Despite a strong order board, the B2B business navigated a transitional phase due to new emission norms, creating complex supply chains and manufacturing scenarios.

Environmental Focus and Innovative Product Expansion

KOEL has emphasized sustainability, launching the comprehensive gas genset range in India and the OptiPrime series, which caters to high-horsepower needs and operates on multiple fuel options. These launches demonstrate KOEL's dedication to providing cleaner, more efficient power solutions and have already begun attracting orders.

B2C Segment Demonstrates Strong Growth and Operational Efficiency

The B2C segment, particularly pumps and small engines, which constitute over 90% of the standalone B2C business, displayed impressive year-on-year growth exceeding 20%, while margins remained on track. La-Gajjar Machineries (LGM), fully acquired by KOEL, showed exceptional export performance with sales of INR 85 crores in H1, accounting for 30% of LGM's sales and significant margin improvement.

Financial Performance Indicators Reflect Mixed Outcomes

The financials for the quarter showed mixed results with EBITDA decreasing 15% year-on-year to INR 99 crores, influenced by a provision for overdue receivables. Conversely, net profit dipped by 19% to INR 59 crores. However, on the positive side, the international business grew by 45% compared to the previous quarter and 12% year-on-year.

Segment Revenue Breakdown and Consolidated Financials

Analyzing the revenue split, the B2B segment grew by 3% with INR 904 crores, driven by industrial and distribution sectors, despite a decline in the PowerGen sector. B2C revenues increased by 19% to INR 143 crores, highlighting solid performance across business lines. At a consolidated level, KOEL's revenue stood at INR 1,305 crores for Q2 FY '24, a 6% increase from the previous year. Despite challenges, these figures affirm KOEL's resilience and strategic prowess in navigating market transitions.

Earnings Call Transcript 2024-Q2

[Operator]

Ladies and gentlemen, good day, and welcome to the Q2 FY '24 Earnings Conference Call of Kirloskar Oil Engines Limited, hosted by Antique Stockbroking. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Dhirendra Tiwari from Antique Stockbroking. Thank you, and over to you, sir.

[Dhirendra Tiwari, analyst]

Thank you very much. Good evening, ladies and gentlemen. On behalf of Antique Stockbroking, I welcome you to 2Q FY '24 post results conference call of Kirloskar Oil Engines Limited. I'm glad to have with us today Ms. Gauri Kirloskar, Managing Director of KOEL, along with the senior management team of the company.

Firstly, we will have introductory remarks on the results by Gauri Kirloskar, following which we will open the floor for Q&A. Over to you, Ms. Gauri.

[Gauri Kirloskar, executive]

Thank you very much. Good evening to all of you. This is Gauri Kirloskar, Managing Director of Kirloskar Oil Engines. Thank you all for joining the call today. I have with me Rahul Sahai, our B2B CEO; Aseem Srivastava, our B2C CEO; Smita Raichurkar, Company Secretary; and Amit Gupta, CFO of Arka. We also have on the call today Mr. Ankur Gupta. He is the CFO for our B2B business.

I'll start with the business update. KOEL has had a stable quarter. The revenue for the quarter reached INR 1,047 crore, indicating a 5% year-on-year growth. It's worth noting that the first quarter figures saw a spike due to prebuying in anticipation of emission norm changes. So this quarter's numbers show sequential decline against that backdrop. However, when considering performance for the first half, the revenue amounted to INR 2,303 crore, marking a substantial 19% year-on-year growth.

For the B2B business, this was a quarter of transition for us after the CPCB 4+ norms kicked in. We have a strong order board that encompasses different emission norms. On the power generation side, we continue to work through the complexity of managing multiple product lines catering to multiple emission norms. While this gives rise to supply chain and operations challenges, we are managing these challenges by closely watching our supply chain and optimizing our production capabilities to meet delivery time lines and our customer commitments.

On the industrial side, we continue to see strong demand from our OEMs. We have the upcoming BS V emissions change in the construction segment, and we are working closely with our OEMs to enable their success.

On the international side, we have appointed an exclusive GOEM in the GCC region this quarter. We also further strengthened our presence in the firefighting segment by acquiring new customers. We believe these initiatives will help us tap into new opportunities and will lay the foundation of our growth plans on the international side.

Sustainability and environment are a key focus area for us. We have several new product launches this quarter. We expanded our gas genset range and now have the most comprehensive gas genset range in the country. We also unveiled completely new products, such as our OptiPrime and OptiPrime hybrid range of gensets. The OptiPrime range of gensets combined innovation with product efficiency. As a result, customers get a lower product footprint, more power and maximum savings.

This patented technology marks our entry into the high-horsepower range above 1,500 kVA and up to 3,000 kVA. These products are designed to cater to diverse power requirements across various sectors, ensuring businesses and communities have access to reliable, cleaner and better power.

Our fuel agnostic platforms are engineered to operate efficiently on multiple fuel options, including diesel, natural gas, biogas and hydrogen blends, providing unmatched flexibility to consumers. The orders for OptiPrime Series have started coming in, and the early signs are encouraging.

On the B2C side, our focus on stabilizing the business with RACE, that is reach agility, cost and engagement, is working well. Pumps and the small engines business, which is more than 90% of KOEL's stand-alone B2C have shown more than 20% year-on-year growth in the quarter. Our margins here has been on track.

It has been 1 year now since we took full control of La-Gajjar Machineries. We have handled the transition well, and our new plant construction is as per schedule. Our margins in LGM have improved since when we completed the full acquisition. Our export focus in LGM has shown good results with sales of INR 85 crores in H1, which is about 30% of LGM sales. The margin in the LGM export business has also improved significantly.

I will now briefly update on the financial performance on a quarter and half year basis. These are the stand-alone numbers. Revenue from operations is at INR 1,059 crores for Q2 FY '24 versus INR 1,010 crores for Q2 FY '23, a 5% increase year-on-year. H1 revenue is at INR 2,324 crore, an 18% increase year-on-year. EBITDA is INR 99 crores for Q2 FY '24 versus INR 115 crores for Q2 FY '23, down by 15% year-on-year. For H1, EBITDA is at INR 253 crore, a 16% increase year-on-year.

As mentioned in the notes to the results, this quarter, we have made a provision for overdue receivables of INR 10.5 crore for a customer to whom sale was made in the previous year. If you remove that effect, EBITDA is at INR 109 crore with a margin of 10.3% for the quarter. Similarly, for H1, excluding the provision made, EBITDA is at INR 271 crore, reflecting margin of 11.7%.

Net profit is at INR 59 crores for Q2 FY '24 versus INR 73 crores for Q2 FY '23, 19% decrease year-on-year. For the H1, the net profit is at INR 162 crore, an 18% increase year-on-year. Net cash and cash equivalents at the end of the quarter Q2 FY '24 was INR 112 crore versus INR 300 crore at the end of the previous quarter. This quarter, we had CapEx that was spent on CPCB 4+, et cetera, and investment in inventory due to the core existing CPCB 2 and CPCB 4 products.

I will now give an update on working capital. This quarter started with challenges on the supply front due to the continuation of CPCB 2 for another 1 year, while CPCB 4+ was also introduced since the beginning of this quarter. As a result, this quarter has seen demand for both product lines, which has resulted in a complex supply chain and manufacturing situation.

To meet demand and customer requirements and delivery time lines, we have made investments in stocking material that has resulted in higher inventories, which we expect to normalize over the next year as we go through this period of transition.

Now I will take you through the business-wise stand-alone revenue breakup for the quarter. The B2B segment with a top line of INR 904 crore registered a 3% growth year-on-year. Of the total B2B revenue, PowerGen revenue is INR 360 crores, down by 8% year-on-year. Industrial is INR 235 crores, up by 5% year-on-year. Distribution and aftermarket is INR 184 crores, up by 23% year-on-year, and international business is INR 125 crores. Our international business marked a growth of 45% versus the previous quarter and 12% year-on-year.

KOEL B2C segment with a top line of INR 143 crores was up 19% year-on-year. Within B2C, the KOEL water management solutions business recorded revenue of INR 116 crores, up by 21%. And Farm Mechanization recorded revenue of INR 27 crores, up by 12% year-on-year.

In LGM, revenue is flat at INR 132 crores. However, EBITDA margin improved from almost nil in the previous year to good single digits due to better cost management, better product mix and higher exports. The net working capital has also improved in LGM.

Now when we look at the consolidated performance for the quarter and the first half. Revenue from operations is at INR 1,305 crores for Q2 FY '24 versus INR 1,228 crores for Q2 FY '23, 6% increase year-on-year. And for the half year, revenue stood from the -- revenue from the operations is at INR 2,848 crores, 18% year-on-year. Net profit is at INR 78 crores for Q2 FY '24 versus INR 83 crores for Q2 FY '23, 6% decrease year-on-year. H1 net profit was at INR 204 crores. That is a 24% increase year-on-year.

At Arka, the loan book for the quarter is at INR 4,128 crores. The revenue for the quarter is at INR 127 crores, registering a 52% growth year-on-year, and segment profit is at INR 25 crores.

In summary, with a strong half year performance, we are very much on track for our goal of 2X-3Y, advancing satisfactorily on the 5 growth pillars. We have registered a 25.5% CAGR in the last 2 years on a base revenue at the half year of FY '22 of INR 1,473 crores.

With that update, we will now take questions from the audience. Over to you, moderator.

[Operator]

[Operator Instructions] We'll take the first question from the line of Ashish Shah from JM Financial.

[Ashish Shah, analyst]

So the first question is that, obviously, this quarter is a difficult quarter to judge because of the prebuying in the previous quarter. But based on the order book and inquiry levels, would you expect this, let's say, the first half kind of growth momentum to sustain in the second half as well? Or you think that's something which is still evolving and one cannot be sure of that?

[Rahul Sahai, executive]

This is Rahul. So as of now, we have a pretty strong order book. And from a platform and product standpoint, we are absolutely ready. So we would expect the strong performance to continue in the second half.

[Ashish Shah, analyst]

Right. So you -- in the first quarter, you did say that except for the fact of prebuying, you still had a healthy [ plus ] 20% kind of a growth. So is that something that you saw? Because the -- for the quarter as such, you had seen a decline in the PowerGen segment.

[Rahul Sahai, executive]

Yes. So I think -- so what Gauri mentioned earlier, this was a quarter of transition for us. What actually happened is that there was a lot of changes and adaptations we had to make because of the last-minute notification that came out from the government regarding the emission time lines. So for example, the CPCB 4+, there was a soft postponement of that until June next year. So I wouldn't worry necessarily too much about the order board or our execution. This quarter was more of a transition for us.

[Ashish Shah, analyst]

Sure. A little bit on the gross margin or the raw material cost. So this quarter, we have seen -- at least from a sequential perspective, we've seen a fair amount of reduction in the raw material cost. So is this an outcome of the price increases or the raw material prices going down? And is this level of raw material cost, is this can be expected in the quarters to come?

[Rahul Sahai, executive]

Yes. So this is Rahul. So we are keeping a close eye on our margins, along with the material cost. So we are taking full measures to ensure that our margins maintain. So while there is a 130 basis point improvement in this quarter, I would say we're keeping a close eye on it. I can't comment on how the margin fluctuations happen in future.

[Ashish Shah, analyst]

Sure. And just one last thing from my side, please. On the exports front, so are we seeing any improved traction? Because if I look at the Y-o-Y growth, it's a little subdued. First quarter was also about 2.5%. This quarter is flattish. So you think this year, we are going to see some sizable growth in exports? Or maybe there is not so much certainty in the markets to be thinking of...

[Rahul Sahai, executive]

So if you look at the results, we've actually grown substantially in this quarter versus last year in exports. But what is more important is that we've appointed an exclusive channel partner in the GCC countries, and this is happening for the first time. So there is a thought process regarding go-to-market with respect to international markets, and we are committed to executing that.

[Operator]

[Operator Instructions] We'll take the next question from the line of Amit Shah from Antique Stockbroking.

[Amit Shah, analyst]

Am I audible?

[Operator]

Yes, yes.

[Amit Shah, analyst]

My first question is, will it be possible to share the mix between the CPCB 4-compliant product sales? And how much is the sales of CPCB 2-compliant product in this particular quarter?

[Rahul Sahai, executive]

This is Rahul. So I may not be in a position to give out specific numbers. But what I can tell you is that we are seeing demand from specific regions in India for CPCB 4+ owing to the local regulations. For example, if you look at NCR, there is a lot more traction that we are seeing from that area versus some of the other areas. We continue to sell our CPCB 2 products at a significant scale.

[Amit Shah, analyst]

In percentage terms -- broad percentage, would it be possible to share as to what proportion of our PowerGen sales have been from CPCB 4-compliant product portfolio? Any -- so just to get a color on how the traction is moving in this particular segment.

[Rahul Sahai, executive]

I don't think I can share the numbers, but what I can tell you is that this is the first quarter of CPCB 4+, and we have all the products ready. So there are too many companies who have all the products ready and certified. So we are seeing traction, and that traction will continue sequentially every quarter as we move into June of next year.

[Amit Shah, analyst]

Certainly, on the 2H outlook, right? So second quarter, we had seen a subdued performance given that the first quarter was -- had witnessed a very strong prebuying, right? So -- but going -- moving ahead, how do you see the traction in terms of sales? Do we believe that sales -- from second half onwards, sales should revert back to the normal growth trajectory of 10%, 15% that we were witnessing earlier? Or do you believe that the overhang of the first quarter prebuying should continue in 3Q and fourth quarter onwards? We might see the normalcy getting back in action?

[Rahul Sahai, executive]

Right. So I just wanted to make it clear that this quarter was a transition for us. It's not because we see an impact on the demand. The transition is more from our -- getting our manufacturing lines ready, along with our supply chain ready, to ensure that we are able to cater to both CPCB 4+ as well as CPCB 2 products. So it's not an indicator of the demand. Now going forward, we would -- because we've gone through the entire transition in this quarter, we would expect that normalcy to come back.

[Amit Shah, analyst]

Okay. One more thing I wanted to understand. In this particular quarter, our employee cost has jumped up significantly, right? So we have seen INR 75 crores, INR 76 crores kind of an employee cost in this particular quarter. And if you can just share, what is the reason for that? And what would be the quarterly run rate going ahead given that it's a very sharp jump on Y-o-Y basis as well as on a Q-o-Q basis?

[Rahul Sahai, executive]

Sure. So we actually had increments kicking in, in this quarter. But as we move ahead and the revenue normalizing, we don't expect too much of an impact this quarter because there was a transition, we had increments as well as owing to the transition, we had a lower volume leverage. As a result, our conversion costs increased in this quarter, which is why you're seeing the impact. Otherwise, we expect that to normalize from the quarters going forward.

[Amit Shah, analyst]

Okay. So this INR 75 crores is the quarterly run rate we should assume going ahead? Or do we believe that, that INR 65 crores, INR 66 crores is the right quarterly run rate on the employee cost?

[Rahul Sahai, executive]

I would say the run rate would be somewhere about INR 70 crore.

[Amit Shah, analyst]

Okay. And sir, if you can share some details on the CapEx. As to the nature of the CapEx, although you -- in the initial opening remarks, you have highlighted that this CapEx is related to CPCB 4-related product portfolio. But what exactly is the nature of CapEx, if you can just highlight? Because it's a very large number, right, INR 160 crores odd. So if can you just highlight as to what is this regarding and whether we have added incremental capacity lines for the manufacturing of CPCB 4 or what is the nature of this CapEx?

[Rahul Sahai, executive]

So all the CapEx is moving into technology and engineering. If you look at, we are in the midst of emission norm changes CapEx going into CPCB 4+ as well as see BS V on the off-highway side as well as what you will see is there are new product launches happening. So the MD spoke about the OptiPrime Series that was launched. So there is focus on hybridization and sustainability as well as there are new fuel types that we are working on. So there is -- we have the largest range of natural gas gensets now. So there is CapEx going into all of these areas.

[Amit Shah, analyst]

And sir, lastly, on the export, we mentioned that we have appointed a global OEM for the GCC region. So how do we see this playing out? What is the kind of trajectory we can expect on the export sales going ahead? We have been highlighting on our 2X-3Y strategy that export will be almost like 25%, 30% of our revenue over the next 3 years. So if you can just highlight as to this particular arrangement, how significantly it can change the trajectory of export numbers for the next couple of years. Yes, that would be the last question from my side.

[Rahul Sahai, executive]

Sure. So if you look at our product portfolio, we have a very significant portfolio on the power generation side. Now when we looked at international markets, one of the first few steps was how do we ensure our product portfolio on Power Generation is available in some of these key markets.

For example, Middle East is a key market for us. So what we did was we looked at the product portfolio that we're selling in the GCC countries. We realize a lot of the focus that has historically been has been on industrial and firefighting side. So the reason why we have appointed a genset OEM in that region is to represent the full portfolio of Power Generation that we have. And the GCC countries are a fairly large market for power generation.

So what we expect going forward is deploying a market-based-specific, I would say, strategy where we're looking for able partners who can work with us to win in those markets. For example, GCC is the first step in our channel strategy. We have other markets also in mind, and we're looking for capable partners who fit into our value system. So that's the way we are going about it. So the first step is done.

[Operator]

We'll take the next question from the line of Teena Virmani from Motilal Oswal Financial Services.

[Teena Virmani, analyst]

In continuation with the previous question on the demand side, now that we are in second half of this fiscal, basically, October has gone. So how do you see -- or where do you see the demand coming more from, whether it is coming more from CPCB 2 or CPCB 4+-related products? Because you mentioned that CPCB 4+ had some demand from the NPI regions and all, but there also the implementation time lines have seen a shift. So is the market demand more dominated by CPCB 2 during this quarter itself? Or again, it's going to be a mix of both?

[Rahul Sahai, executive]

So if you look at how the market is behaving, from beginning of this quarter until, say, June, what we're expecting to happen is that initially, the demand for CPCB 2 will be higher as CPCB 4+ ramps up. At some point of time, maybe in the middle, there will be an equal balance. And then CPCB 4+ sales will increase and CPCB 2 demand will go down. So that's what we're expecting. And in line with that expectation, our CPCB 2 sales have been higher than CPCB 4 sales in the last quarter.

[Teena Virmani, analyst]

Okay. And is there any impact on the pricing to pass on any kind of raw material correction to the end users, particularly for CPCB 2?

[Rahul Sahai, executive]

No, I don't think -- so we've not see any, yes, issue of passing on the raw material impact or cost changes to the end consumers.

[Teena Virmani, analyst]

Okay. And my second question is related to a more mature state of market when it will be mostly CPCB 4-led demand maybe, let's say, by June, July onwards. Where would you see the scope of margin improvement for the company and even for the industry per se, particularly for PowerGen segment? I understand there would be price increases. There are already price increases for CPCB 4+-related products. But would gross margins have any further so improvement then beyond the current level?

[Rahul Sahai, executive]

So what we are focusing on are 3 main levers for margin enhancement. The first one is getting into white spaces, such as high oil power. So historically, we have not been present in greater than 1,500 kVA segment. And now with the launch of our OptiPrime, we've expanded that range to up to 3,000 kVA, that's number one.

Number two is growing our service and aftermarket business. Because as more electronics come in, it gives us a chance to increase our service penetration and as a result, enhance our margins because then you can get into specific kind of service levels-based contracts.

And third one is looking strategically at our international business and seeing what are the success factors in specific regions and then going to market with those specific factors. So those are the 3 areas that we're working on to increase the margins.

[Teena Virmani, analyst]

Okay. So particularly for PowerGen, will there be any scope of further indigenization of further localization once we reach a mature state of market?

[Rahul Sahai, executive]

So unlike a lot of other organizations, what you will -- what -- in our case, close to about 90% of the supply chain is already localized and indigenized in India.

[Teena Virmani, analyst]

Okay. And remaining 10%, there is a limited scope?

[Rahul Sahai, executive]

Yes. So remaining 10%, I would say that maybe -- I mean, eventually, we may have indigenization plans, but not in the immediate future.

[Operator]

The next question is from the line of Abhijit Sinha from Pi Square Investments.

[Abhijit Sinha, analyst]

Just wanted to understand the opportunity in this HHP segment that we're getting in. Obviously, our portfolio -- product portfolio increases substantially. But what kind of opportunity can we see by entering into the segment?

[Rahul Sahai, executive]

The high-horsepower segment is a fairly large segment with limited number of players. So I would say if you look at the high-horsepower segment, that itself would be close to about INR 2,000 crore annualized opportunity. And with our presence there, we feel confident that we will be able to extract some of that.

[Abhijit Sinha, analyst]

Perfect, sir. And what would be the margin differences between this HHP segment versus the segments that we're already in?

[Rahul Sahai, executive]

I don't think I can comment on specific margin changes, but what I can say is it will be higher than the lower kVA, which is slightly the more commoditized end of the market.

[Abhijit Sinha, analyst]

Fair enough, sir. And amongst the 3 parts you are making regarding the -- one was entry into the HHP segment, one was, you mentioned growing the aftermarket services. So where do we stand now? And like what do we -- what kind of opportunity do we see over there? And same for the international business, if you could just throw some highlights regarding them.

[Rahul Sahai, executive]

Sure. So if you look at currently, a lot of our customers go out of fold after warranty period. Now I can't give out specific numbers on this call. But what we are trying to do is enhance our force-quality engagement with our customers by looking at the overall service value proposition. We're looking at different response times, commitments to our customers and also enhancing our service capabilities. So there's a lot of work that's currently going on. I may not be in a position to give out specific details on this call.

[Abhijit Sinha, analyst]

Not an issue, sir. So strategically, where do we see our exports being as a part of our revenues? So are we looking at about 20%, 30% going forward?

[Rahul Sahai, executive]

Yes. So on the export side, our ambition is to get to about 30% of our revenue.

[Abhijit Sinha, analyst]

And that's primarily the power generation space only, right?

[Rahul Sahai, executive]

No, I would say that's a mix of KOEL B2B and B2C. Power generation would definitely be a large part of it.

[Abhijit Sinha, analyst]

And sir, what's the current breakup between B2B and B2C at the moment? Is it like 80-20?

[Rahul Sahai, executive]

I'll request Ankur, who is the CFO for our B2B business to respond to that.

[Ankur Gupta, executive]

Yes. At a consol level, it's about -- if you talk about is about 75-25% as of now.

[Abhijit Sinha, analyst]

Okay, lovely. And sir, talking about LGM, we mentioned that the margins have substantially improved.

[Ankur Gupta, executive]

Yes, yes, it has.

[Abhijit Sinha, analyst]

So what's the current turnover right now, sir, in LGM?

[Ankur Gupta, executive]

What is the current?

[Abhijit Sinha, analyst]

Turnover in the LGM segment itself? You mentioned right now, it's only 30% of the total annual revenue.

[Ankur Gupta, executive]

Yes. So for the half year, it is around INR 250 crores. And for last quarter, it is INR 132 crores.

[Abhijit Sinha, analyst]

Lovely, sir. And lastly, I just wanted to talk on the OptiPrime segment. So what -- that is going to be purely the HHP segment that we spoke about, right?

[Rahul Sahai, executive]

So if you look at OptiPrime and the OptiPrime hybrid, we've launched these products at -- across the range, but our focus is definitely on high horsepower with that.

[Abhijit Sinha, analyst]

And how would this new gensets series be different from the ones existing?

[Rahul Sahai, executive]

So -- yes, so if you look at the product, we've engineered the product to basically provide a better cost of ownership, increase the flexibility to the customers. And also in terms of the footprint, it's a smaller footprint. So it's a better product for the end-use application.

[Abhijit Sinha, analyst]

Lovely. So eventually, people would start moving towards this because this is a more optimum genset, right?

[Rahul Sahai, executive]

Yes. And hence the name.

[Abhijit Sinha, analyst]

True, sir. And the change in the norm from 2 to 4 -- CCB 2 to 4, does it mean that in CCB 4, we get higher margins also over here in these new...

[Rahul Sahai, executive]

I would say the electronic content increases substantially. So it may not be a direct margin accretion as a result of product sale, but we will have opportunities through our services to increase our margin.

[Abhijit Sinha, analyst]

And all our peers have also dealt it the same as we have by pre-booking it in the last 2 quarters?

[Rahul Sahai, executive]

So all the prebuy has happened for CPCB 2.

[Operator]

We'll take the next question from the line of Prolin Nandu from Goldfish Capital.

[Prolin Nandu, analyst]

A few questions from my side. The first, in fact, because of this delay of norms from year to June, how we see competition reacting. Because we would have typically thought that when the norm change happens, some of the larger players like you would gain market share. Now that, that thing is delayed till about June of 2024, is it fair to assume that some of the smaller players might come back with a vengeance? So I mean I'm just trying to figure out how is the competition or rest of the market reacting to this delay of norms.

[Rahul Sahai, executive]

I think -- so -- and I can just give you my opinion of what I have seen. Each company has their own strategy that is at play. And we are just focused on our main track, which is to support our customers. So we have all our products ready and certified, and we are providing solutions across CPCB 2 and CPCB 4+. But different companies are following different strategies. I may not be able to comment on that specifically. But what we want -- the assurance we would like to give our customers is that we are there to support them.

[Prolin Nandu, analyst]

Sure. So Rahul, let me put it another way. From here to June, do you expect market share gains in overall market? Or do you see some market share losses? Or do you see market share same where it is for us?

[Rahul Sahai, executive]

I would hope for some deals, for sure.

[Prolin Nandu, analyst]

Okay. All right. And second question would be on your industrial segment within B2B, right? So a large part of prebuying, if I'm not wrong, would have affected the power generation side of it, and I'm looking at H1 numbers. So industrial segment has just grown by around 11%, and that's lower than the overall sales of the B2B division. Do you want to call out specifically any reason for this lower growth number?

[Rahul Sahai, executive]

So if you look at the industrial business, from our expectations, the way we looked at the mix, we are pretty much on track. Having said that, there are certain segments within the industrial side where the demand has been lower than what we thought it would be, for example, agri beam, one such segment. But apart from that, we don't see the industrial segment underperforming. It's part of our -- it's going as per plan.

[Prolin Nandu, analyst]

Sure. And sorry, one more question on this whole delay of norms. So from year to June, I mean, as you said that maybe the inventory will normalize, working capital will also normalize. But there -- are there any other costs related to this having 2 products right with us of different norms which can have some kind of drag over the margins? Are there any other costs related to this?

[Rahul Sahai, executive]

No, I wouldn't say that. I mean, because most of the inventory that the working capital increase that you're seeing is largely because of this being a transition quarter. And we -- there are long lead time items that we have had to procure. But all of this will get normalized going forward. So I don't see any other reason.

[Prolin Nandu, analyst]

Sure. And now on your export business, right, I mean, you said that you are getting -- looking at the right partners and taking different market based on the merits and based on the partnership that you find there. So I just wanted to touch up on the developed market side, U.S. and Europe. Are there similar sort of discussions which are going on there? And is this the only route that you would like to take in export market?

And where I'm coming from is that when we met a year or so back in the analyst meet, you mentioned about this whole white labeling thing, and then we had probably taken it off and we were no longer going to pursue that opportunity. So just wanted to understand that, is this the only route of probably looking at the market, finding the right partners, appointing OEM or distributor there? Or are there other routes also in export which you're exploring? And if you can just touch upon which other routes you are exploring and specifically related to opportunity in the developed market, U.S. and Europe, particularly.

[Rahul Sahai, executive]

Sure. So there are multiple modes of entry that we are evaluating by market centers. So we have some market centers in mind. There are large power generation and engine market centers across the world. We are extremely clear about that. There are multiple modes of entry. So what I would say is that the route that we have followed for the GCC countries may not be the only route. But what we will do is, as and when we are closer to maturity in some of those conversations, we will keep coming back and updating on these calls.

[Prolin Nandu, analyst]

Sure. So is white labeling still on the table? Or is that off the table right now?

[Rahul Sahai, executive]

So white labeling may not be an ideal option for us. We will update in this call in case any such arrangement happens. But I would say, definitely, the least preferred option.

[Prolin Nandu, analyst]

All right. Sure. And just one last suggestion, right? I mean if you can give slightly more granular details on your Financial Services, just like most of the NBFCs would be giving, right, in terms of NIMs and NPA numbers and all, that could help to understand where that NBFC is going, right? Because this disclosure -- I mean it's slightly inadequate. So if you can just add those kind of details like any other NBFC, that will help. So that's it from my side.

[Operator]

We'll take the next question from the line of Ashish Shah from JM Financial.

[Ashish Shah, analyst]

Sir, within the PowerGen segment, could you highlight the key sectors which are driving the demand at this point of time where you're seeing the maximum pickup? If you can throw some light on that.

[Rahul Sahai, executive]

So we're seeing a lot of demand uptake happening from infrastructure. There is a lot of interest from data centers as well. And I would say those are the 2 big segments for us. Of course, there is growth that we're seeing from smaller segments as well, but I would say those are the 2 big segments.

[Ashish Shah, analyst]

Right. And data centers would typically need gensets about 1,500 kVA. Am I right in saying that?

[Rahul Sahai, executive]

A lot of times, yes, but we've executed orders right from 500 kVA outputs.

[Ashish Shah, analyst]

So you would say that these are the 2 areas which is driving bulk of the demand at this point of time. Secondly, on the industrial side, you did allude to some emission norm change, which is in new construction segment. So any more color on that in terms of the time line? And how significant is this business as a proportion of, let's say, industrial segment? And what is the preparedness to meet the new equipment which will be needed?

[Rahul Sahai, executive]

So the emission norm that we're talking about is CEV BS V. And what we are hearing through [indiscernible] bodies is that there could be a potential change or delay in the norms. But what we are currently focused on is to ensure that our OEMs winning the market, and we are working very closely with them. There were time lines around total builds that we had commitments on with our OEMs, and we are focused on executing that. So there is a possibility that we may see prebuy kicking in for the CEV BS IV products in the last quarter of this financial year, unless something changes on the -- in the notification. So we are keeping our eyes and ears open to just keep an eye out on that.

[Gauri Kirloskar, executive]

But as of now, the deadline is April of FY '24.

[Ashish Shah, analyst]

Got it. April '24, yes?

[Rahul Sahai, executive]

Yes, yes. As of now, the deadline is April 2024, yes.

[Ashish Shah, analyst]

Yes. And sir, just to get some sense of proportion for this. So how significant part of our segment gets impacted by this particular transition? Just to get some sense of proportion.

[Rahul Sahai, executive]

So what I would say is that if you look at our construction segment, we do roughly around, I would say, INR 400 crores, INR 450-odd crores. And this change will impact the large chunk of it.

[Ashish Shah, analyst]

Got it. So my last question is actually on the lines of what the previous participant asked. If we could share at this point in the call any breakup of the loan book in terms of the segments or the end sectors where the exposure is. And also any numbers on the gross or net NPAs that we could share here?

[Gauri Kirloskar, executive]

Yes. So out of the total loan book, which is INR 4,033 crores, we have about INR 1,300 crores that is going to wholesale lending, about INR 1,200 crores that's going towards real estate lending and urban infra and about INR 1,500 crores to SME and MSME.

Amit, are you on the call? Can you respond to the second half of the question?

[Amit Gupta, executive]

Yes, ma'am I'm there on the call. So just to reconfirm the numbers what Gauri suggested, only one sub bifurcation. INR 1,200 crore is not totally to RE and infra, out of that INR 932 crore only towards the real estate developer, and the balance is towards the warehousing, logistics and other parts of the infrastructure industry. So all put together, INR 4,033 is the total loan book as on 30th September 2023. In terms of the GNPA, we are only at 0.19% of GNPA in the entire loan book. At an NNPA, we are at 0.05%.

[Ashish Shah, analyst]

Right. Just one small additional piece of detail. When we say INR 1,500 is to SME and MSME, which would be the sectors primarily? Or is it too diversified to call out?

[Amit Gupta, executive]

It is diversified in terms of industry with a variety of industry. And in terms of a product also, it is highly diversified into 2 to 3 different segments.

[Ashish Shah, analyst]

Okay. Can you just highlight the segments, please? See, basically, it includes the manufacturer or the traders who are the SME. They own this urban registration certificates. They have their own premises. They have been running the business. The entire money goes out for the business purpose only.

We have been also doing a little bit of digital lending, where we have already got a tied up with 3 or 4 channel partners, and the entire STP process is being set, where they are sourcing cases for us. And basis our credit parameters and case norms, we have been disbursing both cases. This is the one segment where we have been disbursing to the individuals for their personal consumptions, maybe for education purpose, maybe for a consumer durables or any other purpose. And another very small book comprises also of the supply chain, which is like almost in a single-digit number kind of a thing in crores.

[Operator]

Ladies and gentlemen, that was the last question. I would now like to hand the conference over to Mr. Amit Shah from Antique Stockbroking for his closing remarks. Over to you, Mr. Shah.

[Amit Shah, analyst]

Yes. I would like to thank all the participants for joining the call. And I would also like to thank the management for giving us the opportunity to host the call. I would request the management to provide us with the closing remarks, post which we can conclude the call. Over to you, ma'am.

[Gauri Kirloskar, executive]

Yes. Just wanted to say thank you very much for your interest in the company. Thanks.

[Operator]

Thank you, members of the management. Ladies and gentlemen, on behalf of Antique Stockbroking, that concludes this conference. We thank you for joining us, and you may now disconnect your lines. Thank you.