The Pune-based engineering conglomerate, with a market capitalisation of ₹15,468.12 crores, has demonstrated remarkable resilience in navigating the challenging industrial landscape. The company's strong performance comes on the back of robust demand across its product portfolio, improved operational efficiency, and sustained momentum in its core segments. However, the company continues to grapple with elevated debt levels, with a net debt-to-equity ratio of 1.40, which remains a key concern for long-term investors.
| Quarter | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 | Jun'24 | Mar'24 |
|---|---|---|---|---|---|---|---|
| Net Sales (₹ Cr) | 1,948.38 | 1,763.80 | 1,749.32 | 1,453.70 | 1,504.59 | 1,631.87 | 1,660.02 |
| QoQ Growth (%) | +10.46% | +0.83% | +20.34% | -3.38% | -7.80% | -1.70% | — |
| YoY Growth (%) | +29.50% | +8.08% | +5.38% | — | — | — | — |
| Operating Profit (₹ Cr) | 381.75 | 326.67 | 312.44 | 254.75 | 297.52 | 324.64 | 303.03 |
| Operating Margin (%) | 19.59% | 18.52% | 17.86% | 17.52% | 19.77% | 19.89% | 18.25% |
| Net Profit (₹ Cr) | 162.46 | 141.88 | 131.04 | 71.30 | 127.51 | 159.30 | 148.55 |
| PAT Margin (%) | 8.17% | 7.61% | 7.21% | 4.67% | 8.30% | 9.56% | 8.84% |
Financial Performance: Sustained Growth Across Metrics
Kirloskar Oil Engines' Q2 FY26 performance showcased impressive momentum across key financial parameters. Net sales of ₹1,948.38 crores marked a sequential improvement of 10.46% from Q1 FY26's ₹1,763.80 crores and a substantial 29.50% year-on-year growth from ₹1,504.59 crores in Q2 FY25. This represents the highest quarterly revenue in the company's history, reflecting robust demand across its product portfolio including diesel engines, generating sets, and industrial compressors.
Operating profit (PBDIT excluding other income) expanded to ₹381.75 crores, up 16.87% quarter-on-quarter and 28.31% year-on-year. More importantly, the operating margin improved to 19.59% in Q2 FY26 from 18.52% in Q1 FY26, indicating effective cost management and operational leverage. This margin expansion of 107 basis points sequentially is particularly noteworthy given the challenging raw material cost environment in the industrial sector.
The company's profit before tax surged to ₹216.30 crores in Q2 FY26, representing an 18.64% sequential growth and a 30.02% year-on-year expansion. The consolidated net profit of ₹162.46 crores translated to an earnings per share of ₹11.18 for the quarter, marking the highest quarterly EPS on record. The PAT margin improved to 8.17% from 7.61% in the previous quarter, demonstrating strong bottom-line leverage as the company scales operations.
Interest Cost Burden: A Persistent Challenge
Despite the strong operational performance, interest costs remain a significant drag on profitability. In Q2 FY26, interest expenses stood at ₹135.98 crores, accounting for 62.86% of operating profit. While the company's operating profit to interest coverage ratio improved to 2.81 times (the highest in recent quarters), the absolute interest burden remains elevated due to substantial debt levels accumulated through capacity expansion and working capital requirements.
Balance Sheet Dynamics: Growth Funded by Debt
Kirloskar Oil Engines' balance sheet reveals a company in aggressive expansion mode, with significant capital deployed towards capacity enhancement and working capital. As of March 2025, the company's total debt stood at ₹3,760.98 crores, nearly doubling from ₹1,970.26 crores in March 2024. This rapid debt accumulation has pushed the debt-to-equity ratio to 1.22, whilst net debt-to-equity stands at 1.40, significantly higher than industry peers.
The company's shareholder funds grew to ₹3,086.50 crores in FY25 from ₹2,676.21 crores in FY24, driven by retained earnings. However, this 15.33% growth in equity has been vastly outpaced by the 90.88% surge in long-term debt, indicating a strategic decision to leverage the balance sheet for growth. Fixed assets increased to ₹1,083.24 crores from ₹710.58 crores, reflecting ongoing capital expenditure programmes.
Current assets expanded to ₹4,390.70 crores from ₹3,716.04 crores, with a significant portion locked in working capital. The company's cash flow from operations turned negative at ₹738 crores in FY25, primarily due to working capital expansion of ₹1,327 crores. This was funded through financing activities that generated ₹1,509 crores, predominantly through debt issuance. The closing cash position of ₹741 crores provides some liquidity cushion, though the elevated debt levels remain a concern.
Leverage Concern: With a debt-to-EBITDA ratio of 3.81 and net debt-to-equity of 1.40, Kirloskar Oil Engines carries substantially higher leverage than sector peers. The company's average EBIT-to-interest coverage of 3.28 times provides limited headroom for any operational setbacks. Deleveraging should be a priority once the current capital expansion cycle completes.
Profitability Metrics: Moderate Returns on Capital
Kirloskar Oil Engines' return ratios, whilst improving, remain moderate compared to industry leaders. The company's latest return on equity (ROE) stands at 14.98%, up from the five-year average of 13.04%. Higher ROE indicates improving capital efficiency and profitability, which is a positive development for shareholders. The company's ability to generate better returns on equity capital demonstrates effective utilisation of shareholder funds despite the challenging operating environment.
Return on capital employed (ROCE) improved to 14.19% from the five-year average of 14.09%, reflecting better operational efficiency. However, these returns remain modest when compared to sector leaders like Cummins India (22.90% ROE) and Ingersoll-Rand (30.07% ROE). The company's high leverage amplifies ROE relative to ROCE, suggesting that financial engineering through debt contributes meaningfully to shareholder returns.
The company's sales-to-capital-employed ratio of 0.98 indicates that it requires approximately ₹1.02 of capital to generate ₹1 of revenue, which is reasonable for a capital-intensive manufacturing business. Over the long term, as new capacity comes on stream and utilisation rates improve, these return ratios should trend higher, provided the company can maintain pricing power and operational efficiency.
| Company | P/E (TTM) | P/BV | ROE (%) | Debt/Equity | Div Yield (%) |
|---|---|---|---|---|---|
| Kirloskar Oil Engines | 30.70 | 4.45 | 13.04 | 1.40 | 0.69 |
| Cummins India | 53.05 | 15.48 | 22.90 | -0.42 | 1.17 |
| Elgi Equipments | 42.35 | 8.24 | 18.85 | -0.18 | 0.45 |
| Kirloskar Brothers | 34.23 | 6.14 | 17.12 | -0.18 | 0.41 |
| KSB | 51.66 | 8.65 | 16.17 | -0.20 | 0.52 |
| Ingersoll-Rand | 44.54 | 19.34 | 30.07 | -0.42 | 2.14 |
Peer Comparison: Valuation Discount Reflects Leverage Concerns
Kirloskar Oil Engines trades at a significant valuation discount to its peer group, with a P/E ratio of 30.70 times compared to the peer average of approximately 45 times. The company's price-to-book value of 4.45 times is substantially lower than premium peers like Cummins India (15.48 times) and Ingersoll-Rand (19.34 times), reflecting market concerns about the company's elevated leverage and moderate return ratios.
The valuation discount is primarily attributable to the company's ROE of 13.04%, which lags the peer average of approximately 21%. Higher ROE is a critical driver of valuation multiples, and Kirloskar Oil Engines' moderate returns on equity justify a lower price-to-book ratio. Additionally, the company's debt-to-equity ratio of 1.40 stands in stark contrast to most peers who maintain net cash positions (negative debt-to-equity ratios), further explaining the valuation gap.
Despite the discount, Kirloskar Oil Engines offers attractive growth prospects. The company's five-year sales CAGR of 17.40% and EBIT CAGR of 50.07% significantly outpace most peers, suggesting strong operational momentum. As the company's new capacity ramps up and leverage moderates through cash generation, the valuation gap could narrow. The current dividend yield of 0.69% is modest but reflects a conservative payout ratio of 19.29%, allowing the company to retain capital for debt reduction and growth investments.
Valuation Analysis: Attractive Entry Point Despite Leverage
At the current market price of ₹1,064.60, Kirloskar Oil Engines trades at an enterprise value-to-EBITDA multiple of 15.15 times and EV-to-EBIT of 17.31 times. These multiples appear reasonable given the company's strong growth trajectory and improving margins. The EV-to-capital-employed ratio of 2.44 times suggests the market is valuing the company's deployed capital at a moderate premium, reflecting confidence in future returns improvement.
The stock's valuation grade has been classified as "Attractive" since December 2024, having oscillated between "Fair" and "Very Attractive" over the past year. The current P/E of 30.70 times represents a 36% discount to the industry average of 48 times, providing a meaningful valuation cushion. This discount is partially justified by the company's higher leverage and lower ROE, but appears excessive given the robust growth momentum and margin expansion trajectory.
From a historical perspective, the stock has delivered exceptional long-term returns, with a five-year return of 963.01% significantly outpacing the Sensex's 94.83% gain. However, recent performance has been subdued, with the stock down 6.65% over the past year whilst the Sensex gained 7.37%. This underperformance of 14.02% has created an attractive entry opportunity for long-term investors willing to look past the near-term leverage concerns.
| Quarter | Sep'25 | Jun'25 | Mar'25 | Dec'24 | Sep'24 |
|---|---|---|---|---|---|
| Promoter (%) | 41.12 | 41.13 | 41.15 | 41.16 | 41.17 |
| Change (QoQ) | -0.01% | -0.02% | -0.01% | -0.01% | — |
| FII (%) | 8.34 | 8.48 | 9.14 | 10.99 | 10.79 |
| Change (QoQ) | -0.14% | -0.66% | -1.85% | +0.20% | — |
| Mutual Fund (%) | 25.53 | 24.75 | 23.43 | 21.08 | 21.02 |
| Change (QoQ) | +0.78% | +1.32% | +2.35% | +0.06% | — |
| Insurance (%) | 1.38 | 1.29 | 1.41 | 1.23 | 1.37 |
| Other DII (%) | 1.08 | 1.16 | 1.74 | 2.72 | 2.54 |
Shareholding Pattern: Mutual Fund Accumulation Signals Confidence
The shareholding pattern of Kirloskar Oil Engines reveals interesting institutional dynamics. Promoter holding has remained remarkably stable at 41.12% in Q2 FY26, with minimal sequential changes over the past year. This stable promoter base, with zero pledging of shares, provides confidence in the management's long-term commitment to the business. The Kirloskar family, through various entities and trusts, maintains control whilst allowing for meaningful institutional participation.
The most notable trend has been the consistent increase in mutual fund holdings, which expanded to 25.53% in Q2 FY26 from 21.02% in Q3 FY25. This represents an addition of 4.51 percentage points over four quarters, indicating strong institutional confidence in the company's growth trajectory. The sequential increase of 0.78% in Q2 FY26 suggests continued accumulation by domestic institutional investors, with 28 mutual funds holding positions in the company.
Conversely, foreign institutional investor (FII) holdings have declined from 10.79% in Q3 FY25 to 8.34% in Q2 FY26, a reduction of 2.45 percentage points. This selling by FIIs, totalling 138 foreign institutions, may reflect concerns about leverage or profit-booking after the stock's strong multi-year run. The divergence between domestic and foreign institutional behaviour is noteworthy, with domestic investors appearing more constructive on the company's prospects despite the leverage concerns.
| Period | Stock Return | Sensex Return | Alpha |
|---|---|---|---|
| 1 Week | +4.90% | +1.21% | +3.69% |
| 1 Month | +19.50% | +2.39% | +17.11% |
| 3 Months | +18.88% | +5.28% | +13.60% |
| 6 Months | +52.09% | +2.48% | +49.61% |
| YTD | +3.86% | +8.10% | -4.24% |
| 1 Year | -6.65% | +7.37% | -14.02% |
| 2 Years | +93.30% | +29.44% | +63.86% |
| 3 Years | +270.23% | +36.70% | +233.53% |
Stock Performance: Near-Term Momentum After Year-Long Consolidation
Kirloskar Oil Engines has demonstrated remarkable near-term momentum, with the stock surging 19.50% over the past month and 52.09% over six months. This recent strength follows a prolonged consolidation period, with the stock down 6.65% over the past year whilst the broader Sensex gained 7.37%. The underperformance of 14.02% relative to the benchmark over one year created an attractive entry point that appears to have attracted renewed investor interest.
The stock's technical profile has turned constructive, with the current trend classified as "Mildly Bullish" since November 3, 2025. The stock trades above all key moving averages, including the 200-day MA of ₹838.62, signalling strong technical momentum. The recent breakout from a consolidation range near ₹940-₹950 levels has been accompanied by robust volumes, suggesting genuine buying interest rather than short-covering.
From a longer-term perspective, Kirloskar Oil Engines has been a phenomenal wealth creator, delivering returns of 963.01% over five years and 270.23% over three years. This significantly outpaces the Sensex returns of 94.83% and 36.70% over the same periods, generating alpha of 868.18% and 233.53% respectively. However, investors should note the stock's high beta of 1.35, indicating volatility approximately 35% higher than the market, with annualised volatility of 41.12%.
"Kirloskar Oil Engines stands at an inflection point – robust operational momentum and attractive valuation offset by elevated leverage, creating a compelling risk-reward for patient investors willing to bet on deleveraging and margin expansion."
Investment Thesis: Quality Growth at Reasonable Price Despite Leverage
The investment case for Kirloskar Oil Engines rests on several compelling pillars. First, the company operates in structurally growing end-markets including power generation, industrial automation, and infrastructure development. As India's manufacturing sector expands and infrastructure investments accelerate, demand for diesel engines, compressors, and pumps should remain robust. The company's market position as the second-largest player in its sector provides competitive advantages in distribution, service networks, and brand recognition.
Second, the company has demonstrated exceptional growth momentum, with five-year EBIT CAGR of 50.07% and sales CAGR of 17.40%. This growth has been accompanied by steady margin expansion, with operating margins improving from 8.7% in FY20 to 18.6% in FY25. The company's ability to scale operations whilst expanding margins suggests strong operating leverage and pricing power, which should continue as new capacity comes on stream.
Third, the current valuation appears attractive relative to growth prospects and peer multiples. Trading at 30.70 times earnings with an EV/EBITDA of 15.15 times, the stock offers a meaningful discount to sector peers despite comparable growth rates. As the company deleverages through cash generation and ROE improves towards peer levels, the valuation discount should narrow, providing potential for multiple expansion alongside earnings growth.
KEY STRENGTHS
- Record quarterly revenue of ₹1,948.38 crores with 29.50% YoY growth
- Operating margin expansion to 19.59%, up 107 bps QoQ
- Exceptional long-term growth: 50.07% EBIT CAGR over 5 years
- Strong institutional confidence with MF holdings rising to 25.53%
- Zero promoter pledging with stable 41.12% holding
- Attractive valuation at 30.70x P/E vs industry average of 48x
- Market leadership position in growing industrial segments
KEY CONCERNS
- Elevated debt-to-equity of 1.40 vs net cash positions for peers
- High interest burden of ₹135.98 crores consuming 62.86% of operating profit
- Negative operating cash flow of ₹738 crores in FY25 due to working capital
- Moderate ROE of 13.04% lagging peer average of ~21%
- FII holdings declining from 10.79% to 8.34% over four quarters
- High stock volatility (41.12%) with beta of 1.35
- One-year underperformance of 14.02% vs Sensex
Outlook: Monitoring Points for Continued Performance
The trajectory for Kirloskar Oil Engines over the next 12-18 months will be determined by several critical factors. The company's ability to generate positive operating cash flows and reduce leverage should be the primary focus for investors. With debt-to-EBITDA at 3.81 times, any meaningful deleveraging would provide significant comfort on financial sustainability and could trigger valuation re-rating.
Margin sustainability represents another key monitoring point. The operating margin of 19.59% in Q2 FY26 marks a significant improvement, but investors should watch whether this can be sustained in the face of potential raw material cost pressures or competitive intensity. Sustained margins above 19% would validate the company's pricing power and operational efficiency improvements.
Finally, the company's order book and capacity utilisation will provide insights into demand sustainability. As new capacity commissioned over the past two years ramps up, improved asset turnover should drive better returns on capital employed. Management commentary on order inflows, product mix, and export opportunities will be critical in assessing the durability of the current growth momentum.
POSITIVE CATALYSTS
- Sustained revenue growth above 20% YoY
- Operating margin expansion beyond 20%
- Positive operating cash flow generation
- Debt reduction through internal accruals
- Continued mutual fund accumulation
RED FLAGS TO WATCH
- Further deterioration in operating cash flows
- Additional debt issuance for working capital
- Margin compression below 18%
- Continued FII selling pressure
- Interest coverage falling below 2.5x
The Verdict: Attractive Growth Story with Leverage Caveat
Score: 71/100
For Fresh Investors: Kirloskar Oil Engines presents an attractive entry opportunity for investors with a 2-3 year horizon. The combination of strong operational momentum, improving margins, and reasonable valuation (30.70x P/E) creates a compelling risk-reward despite leverage concerns. Investors should build positions gradually, targeting accumulation on any dips towards ₹1,000-₹1,020 levels. The elevated debt requires monitoring, but the company's cash generation ability and growth trajectory provide confidence in eventual deleveraging.
For Existing Holders: Continue holding with a target of ₹1,250-₹1,300 over the next 12-15 months. The recent breakout above ₹1,000 validates the positive fundamental momentum. Existing investors should use any meaningful corrections as opportunities to average up, whilst maintaining strict vigilance on debt reduction progress and cash flow generation. Consider booking partial profits if the stock rallies beyond ₹1,350 without corresponding debt reduction.
Fair Value Estimate: ₹1,280 (20.23% upside from current levels)
The investment case hinges on the company's ability to convert strong revenue growth into positive cash flows and meaningful debt reduction. With operating margins expanding, institutional confidence building, and attractive valuation multiples, Kirloskar Oil Engines offers a favourable risk-reward for patient investors willing to look past near-term leverage concerns. The key catalysts of margin expansion, capacity utilisation improvement, and deleveraging should drive both earnings growth and multiple expansion over the medium term.
Note- ROCE= (EBIT - Other income)/(Capital Employed - Cash - Current Investments)
⚠️ Investment Disclaimer
This article is for educational and informational purposes only and should not be construed as financial advice. Investors should conduct their own due diligence, consider their risk tolerance and investment objectives, and consult with a qualified financial advisor before making any investment decisions. Past performance is not indicative of future results, and all investments carry risk of loss. The analysis presented is based on publicly available information and may not reflect the most current developments or company-specific factors that could materially impact investment outcomes.
