Kirloskar Oil Engines Q2 FY26: Robust Growth Momentum Continues with 27% Profit Surge

The September quarter results underscore Kirloskar Oil Engines' ability to capitalise on improving industrial demand whilst managing cost pressures effectively. Net sales climbed 29.50% year-on-year to ₹1,948.38 crores, marking the highest quarterly revenue in at least seven quarters. On a sequential basis, revenue growth remained healthy at 10.46%, indicating sustained momentum across the company's product portfolio. The performance reflects robust demand for power generation equipment and industrial engines, driven by infrastructure development and manufacturing sector expansion.

What stands out is the company's ability to translate top-line growth into bottom-line expansion. Consolidated net profit of ₹162.46 crores represents a 14.51% sequential improvement over Q1 FY26's ₹141.88 crores, demonstrating operating leverage benefits. For the first half of FY26, the company has already posted consolidated profits of ₹304.34 crores, up 50.78% from ₹290.84 crores in H1 FY25, positioning it well to surpass the full-year FY25 profit of ₹475 crores.

Financial Performance: Revenue Acceleration Meets Margin Discipline

Kirloskar Oil Engines' revenue trajectory has been impressive, with net sales reaching ₹1,948.38 crores in Q2 FY26, up from ₹1,504.59 crores in the corresponding quarter last year. This 29.50% year-on-year growth significantly outpaces the company's five-year sales compound annual growth rate of 18.88%, suggesting an acceleration in demand. Sequentially, revenue expanded 10.46% from Q1 FY26's ₹1,763.80 crores, marking the third consecutive quarter of sequential growth.

Operating margins, whilst remaining healthy at 19.59%, contracted marginally by 18 basis points year-on-year from 19.77% in Q2 FY25. This slight compression came despite absolute operating profit (excluding other income) surging 28.30% to ₹381.75 crores. The margin dip reflects higher employee costs, which rose 10.57% year-on-year to ₹151.07 crores, and increased interest burden. Interest expenses climbed to ₹135.98 crores in Q2 FY26 from ₹117.64 crores in the year-ago quarter, a 15.59% increase driven by higher debt levels deployed for capacity expansion and working capital requirements.

On a more positive note, the company's profit after tax margin improved sequentially to 8.17% from 7.61% in Q1 FY26, though it remains below the 8.30% achieved in Q2 FY25. The gross profit margin expanded to 13.26% from 13.24% year-on-year, indicating better realisation and product mix optimisation. Tax incidence remained stable at 26.40%, in line with the company's historical effective tax rate of around 27%.

Operational Challenges: The Leverage Conundrum

Whilst Kirloskar Oil Engines demonstrates strong growth credentials, its capital structure presents a nuanced picture. The company's return on equity stands at 14.23% on average over the past five years, with the latest reading at 14.47%. Whilst this represents steady improvement from historical levels and reflects profitable operations, it lags behind industry leaders such as Cummins India (22.90%) and Elgi Equipments (20.46%). The ROE, though positive, indicates room for improvement in capital efficiency and profitability relative to shareholders' equity deployed.

More concerning is the company's leverage profile. Net debt to equity averaged 1.24 times over the past five years, indicating relatively high financial leverage. Long-term debt surged to ₹3,760.98 crores as of March 2025 from ₹1,970.26 crores a year earlier, nearly doubling in a single year. This aggressive debt accumulation has been deployed towards capacity expansion, working capital financing, and potentially acquisitions, but it also exposes the company to interest rate risk and reduces financial flexibility.

The balance sheet also reveals working capital intensity. Current assets stood at ₹4,390.70 crores as of March 2025, whilst current liabilities were ₹3,449.24 crores, indicating healthy liquidity. However, trade payables increased to ₹708.31 crores from ₹794.27 crores, and the debtors turnover ratio for H1 FY26 fell to 8.48 times, the lowest on record, suggesting slower collection cycles. This working capital build-up has contributed to negative operating cash flows of ₹738 crores in FY25, a trend that continued from FY24's ₹468 crores outflow.

Industry Context: Riding the Infrastructure Wave

Kirloskar Oil Engines operates in a favourable industry environment characterised by robust infrastructure spending, manufacturing sector growth, and increasing power generation requirements. The Indian government's focus on capital expenditure, particularly in roads, railways, and urban infrastructure, has created strong demand for diesel engines, compressors, and pumps. The company's diversified product portfolio spanning power generation, industrial engines, and fluid handling equipment positions it well to capture this multi-year growth opportunity.

The sector has witnessed healthy growth, with the compressors, pumps and diesel engines industry delivering a one-year return of 48.87%. Kirloskar Oil Engines has outperformed this benchmark with a 68.74% return over the same period, demonstrating superior execution and market share gains. The company's position as the second largest player in the sector, with a market capitalisation of ₹18,150 crores, provides scale advantages whilst leaving room for further consolidation and growth.

Industry Leadership: How Kirloskar Oil Engines Compares to Peers

The peer comparison reveals Kirloskar Oil Engines trading at a moderate valuation relative to its fundamentals. At a P/E ratio of 39.27 times, the stock trades below the peer average of approximately 43 times, despite delivering superior revenue growth. However, this discount appears justified given the company's lower ROE of 14.23% versus the peer average of around 21%. Most peers operate with negative net debt (i.e., net cash positions), whereas Kirloskar Oil Engines carries a debt-to-equity ratio of 1.24, the highest in the peer group.

The price-to-book ratio of 5.68 times is significantly lower than premium peers like Cummins India (15.34x) and Ingersoll-Rand (17.43x), but comparable to Kirloskar Brothers (5.91x). This valuation gap reflects concerns around capital efficiency and leverage, which weigh on the multiple investors are willing to pay. The dividend yield of 0.49% is amongst the lowest in the peer group, with the company retaining over 80% of profits for reinvestment and debt servicing.

Valuation Analysis: Attractive Entry Point with Caveats

Kirloskar Oil Engines' valuation presents a mixed picture. The stock's current P/E ratio of 39.27 times represents a premium to its historical average, reflecting the market's recognition of improved growth momentum. However, compared to the industry P/E of 48 times, the stock trades at a 18% discount, suggesting room for multiple expansion if the company continues to deliver on its growth trajectory whilst addressing leverage concerns.

The EV/EBITDA multiple of 18.29 times factors in the company's substantial debt burden, providing a more comprehensive valuation perspective. The EV/Sales ratio of 3.37 times indicates the market values each rupee of revenue at ₹3.37, a premium that reflects strong market positioning but also expectations of continued margin improvement. The company's book value per share stands at ₹212.55, implying the stock trades at 6.20 times book value at the current price of ₹1,318.90.

The valuation grade has improved to "Attractive" from "Very Attractive" in February 2025, indicating the stock has re-rated but still offers reasonable value. Based on the company's improving fundamentals and sector tailwinds, a fair value estimate of ₹1,450-1,500 appears reasonable, implying 10-14% upside from current levels. This target assumes the company maintains its current growth trajectory, gradually improves ROE towards 16-17%, and begins deleveraging from FY27 onwards.

Shareholding: Institutional Confidence Building

The shareholding pattern reveals growing institutional conviction in Kirloskar Oil Engines' growth story. Mutual fund holdings have increased consistently from 21.08% in December 2024 to 26.10% in December 2025, a gain of 502 basis points over four quarters. This sustained accumulation by domestic institutional investors signals confidence in the company's long-term prospects despite near-term leverage concerns. The number of mutual funds holding the stock stands at 29, indicating broad-based institutional participation.

Foreign institutional investor holdings have stabilised at 8.45% after declining from 10.99% in December 2024, suggesting FIIs have completed their position adjustments. The marginal 11 basis points sequential increase in Q3 FY26 indicates renewed interest. Promoter holding remains steady at 41.08% with zero pledging, reflecting strong promoter commitment and financial stability. The Kirloskar family's continued majority control provides governance comfort and strategic continuity.

Stock Performance: Stellar Returns Across Timeframes

Kirloskar Oil Engines has delivered exceptional returns across all timeframes, significantly outperforming the Sensex. The stock's one-year return of 68.74% compares favourably to the Sensex's 10.41%, generating alpha of 58.33 percentage points. Over three years, the stock has delivered a staggering 318.96% return, turning a ₹100 investment into ₹419, whilst the Sensex returned just 38.81% over the same period. This represents an annualised return of approximately 61% over three years, a testament to the company's operational transformation.

The stock's momentum has accelerated in recent months, with a three-month return of 39.54% and six-month return of 44.74%. The stock trades above all key moving averages—5-day (₹1,215.23), 20-day (₹1,151.83), 50-day (₹1,178.72), 100-day (₹1,081.64), and 200-day (₹975.46)—indicating strong technical support across timeframes. The technical trend has been classified as "Bullish" since early February 2026, with multiple indicators including MACD, Bollinger Bands, and On-Balance Volume signalling positive momentum.

However, the stock's beta of 1.36 indicates higher volatility than the broader market, with annualised volatility of 43.86% versus the Sensex's 11.52%. This high-risk, high-return profile suits investors with higher risk tolerance and longer investment horizons. The risk-adjusted return of 1.57 over one year compares favourably to the Sensex's 0.90, suggesting the excess returns more than compensate for the additional volatility.

Investment Thesis: Growth Story with Leverage Asterisk

Kirloskar Oil Engines presents a compelling growth story supported by strong industry tailwinds, improving operational metrics, and attractive relative valuation. The company's quality grade of "Good" reflects consistent long-term financial performance, with sales growing at 18.88% CAGR over five years and EBIT expanding at an impressive 42.41% CAGR. The financial trend has turned "Positive" as of December 2025, driven by robust half-year profit growth of 50.78% and highest-ever cash balances of ₹1,008.03 crores.

The investment case rests on three pillars: sector tailwinds from infrastructure spending, operational leverage from capacity expansion, and potential margin improvement as scale benefits materialise. The company's diversified product portfolio reduces concentration risk, whilst the Kirloskar brand provides pricing power and customer loyalty. The technical trend turning "Bullish" in early February 2026 adds momentum support to the fundamental story.

Key Strengths & Risk Factors

Outlook: What to Watch

The forward outlook for Kirloskar Oil Engines hinges on its ability to convert top-line growth into sustainable free cash flow whilst gradually reducing leverage. The company's H1 FY26 performance suggests it is on track to exceed FY25's full-year profit of ₹475 crores, potentially achieving ₹550-600 crores for the full year. The key will be demonstrating that the debt-funded expansion translates into higher returns on capital employed and eventual deleveraging.

Investors should monitor quarterly working capital trends, particularly debtors turnover and inventory management. Improvement in these metrics would signal enhanced operational efficiency and cash generation capability. The company's ability to maintain operating margins above 19% whilst scaling revenue will be critical to the investment thesis. Any signs of margin pressure or further debt accumulation without corresponding profit growth would warrant a reassessment of the BUY recommendation.