List of Questions in the Analysts meet on 29th April 2005

Markets

Q: Do you anticipate that the demand from gas engines will be significant?
We do expect demand to be higher as gas is available at economical price is various parts of the country. The demand for higher capacity (over 1 MW) gas fuel gensets is already up, and we have added Gas Turbine to our product offerings.
We expect that demand for lower (below 1 MW) gas fuel gensets will also increase in coming years. Thus, company’s manufactured engines in Medium Engine range are being developed to run on gas.

Q: What is the market share in MEBG sector? How do you see addressable market share?
Authenticated information on market sizes is not available in our industry from independent sources. Thus, market share estimates are based on internal company information. Based on such information, in key segments, out share in India is around 50% and the nearest competition is about 20%+ behind us.

Q: Spare Parts business turnover is going up. Do you have a higher profitability in spares business and what kind of growth you for see in spares business ?
Our efforts are always to increase sales of spares and consumables. As population of our engines is large, we have opportunity to increase sales. At the same time we have to compete with sellers of Replacement Parts for our engines.
The profitability of spares business is relatively higher.

Q: As regards Auto component market, can you throw light on the kind of growth you for see in the domestic and export market? Any growth in OEM?
We expect the growth in Indian market will be in-line with the manufacture of the engines by automobile manufacturers. We already have ‘preferred supplier’ status with leading players and a large number of automobile engine manufacturers are our OEM customers already. Three of them have stepped up buying from us.

Q: What are key threats ?
Besides the usual threats, we have to keep out performing the competition. Additionally, we can identify the following concerns and threats.
Delays in public spending as announced in the budget can impact company’s growth in sales.
We notice signs of competitive pressure from foreign manufacturers in the range up to 20 hp engines. The company is addressing the threat by developing new cost effective products precisely targeted at meeting customers needs, and also to attend to cost increase in Iron and Steel that could not be fully passed on to the market.
Rising prices of Steel, Iron and non-ferrous metals impact company’s material costs significantly. While efforts are made to convince the customers to accept the corresponding rise in prices, it is rarely possible to recover full impact of the cost rise in the prices due to competitive pressures. To protect the margins to the extent possible, balance has to be stuck between rising material costs, savings in costs by the company by various initiatives and the price increase.

Power Generation

Q: What is the impact of DG Set industry in next 3 to 5 years due to investment in power sector?
As a manufacturing industry, we welcome investments in power sector. However, over recent years our business has diversified. The users need better quality power and uninterrupted power to de-risk their businesses. Moreover, investments in service sectors like telecom, banking, entertainment, internet, etc. do require on site power to ensure uninterrupted services. This has resulted in demand for more sophisticated generating sets. We estimate that such national demand will continue as it has happened in countries having no power deficit.
Talking specifically of our business, we have also started exporting gensets and orders from overseas buyers are increasing.

Q: What is percentage of genset use for base load and standby use ?
To use genset for base load or for standby is a decision user takes based on the need and the cost of power from gensets as compared to cost from grid. Presently, the cost of generating power from fuels like diesel and furnace oil is generally higher than the cost of power from grid. The reason is, high costs of fuel. Thus, some users may be running the genset in base load mode because power from grid is not available.
The situation changes with change in prices of fuel and grid power.

Q: If gas supply improves in next 3 to 5 years what will be the impact on your business ? How much is cost of gas fuel genset Vs. diesel fuel genset ?
We do expect demand for gas fuelled gensets to be higher as gas is available at economical price is various parts of the country. The demand for higher capacity (over 1 MW) gas fuel gensets is already up, and we have added to our product offerings Gas Turbine in the range 2.5 to 25 MW and have plans to add gas engines in range of 1 to 3 MW too.
We expect that demand for lower (below 1 MW) gas fuel gensets will also increase in coming years. Thus, Medium Engine range is being developed to run on gas.
Many contracts for supply of gas are on 'take or pay' basis. In a situation like that the users prefer to use gas for power generation, or any such productive purpose. Then, in some parts of the country like North East and Gujarath, the price of the gas is lower near the well heads. These customers also find use of gas attractive.
As the price of gas varies from region to region and also based on nature of contract with gas supplier, it is difficult to make a generalised statement on cost of generating power from gas versus power from diesel and heavy fuel. But, power from gas is usually lower in cost.

Q: LEBG – How big is the market in size? Is it growing? How big is your order board ? Any plan of introducing any new model ?
We presently sell only 1.6 to 2.5 MW gensets operating on heavy fuel and from 1.6 to 5 MW diesel fuel gensets. In this class of gensets, our share is over 50%. The market is growing.
In FY06, we are also introducing 4.0 and 4.5 MW sets using heavy fuel. We are planning to introduce gas turbines for power generation in the range of 2.5 MW to 25 MW single unit capacity.

Q: What is cost per megawatt for diesel fuel genset and gas fuel genset ?
Cost depends on MW bracket (range) and scope of supply (Civil, switch yard, fuel yard, electrical equipment and auxiliaries are decided on case to case basis with customers.)
In our range (1.6 MW to 5 MW - base load generation application) the approx. cost would be Rs. 21 to 25 Mn. per MW for Heavy Fuel gensets and Rs. 16 to 20 Mn. for diesel gensets.

Tractors

Q: Any tractor OEM signed up for supply of engines ? Could you share the name of the tractor engine OEM using your engines ?
We have started supplies to tractor manufacturer other than Punjab Tractors. The tractor with our engine will be soon launched in the market. Then, the name will be known.

Profitability

Q: There is an increase in the share of high value products in MEBG. How are the margins in these products as compared to others ?
The margins are comparable to other products.

Q: What is the strategy to offset increase in Raw materials ?
In the short term, efforts are made to convince the customers to accept the corresponding rise in prices, it is rarely possible to recover full impact of the cost rise in the prices due to competitive pressures. To protect the margins to the extent possible, balance has to be stuck between rising material costs, savings in costs by the company by various initiatives and the price increase.
In medium term, we are designing our products to be less material intensive.

Q: In the 4th quarter, PBIT on “others businesses” is lower. Could you explain ?
4th quarter, FY05 (year ending March 31, 2005) PBIT of "others businesses" is Rs. 0.41 Crores. In the corresponding quarter in the previous year (FY04) PBIT of "others businesses" is Rs. 13.96 Crores.
Decrease in PBIT is mainly on account of recognition and accrual of Lease Rentals from KFIL accounted in quarter ending March 31, 2004 pertaining to previous years. i.e., FY02, FY03 and FY04 amounting to Rs. 12.40 crores. Since this was a one-time income, there is no corresponding figure against the same in the quarter ending March 31, 2005.

Exports

Q: What is the kind of growth you expect from overseas OEM customers for engine?
Targeting OEM and Institutional buyers is our strategy. Thought this takes time to bring results, such buyers stay with you long term. On the relationships we have built in recent years, we expect robust growth from these customers.

Q: As you have developed 20 OEMs abroad, can you specify the countries and the size of business?
The OEMs are in several countries including China, USA, Europe, and Mid east. The size of business is difficult to spell out at this stage.

Q: What is your strength that attracts overseas OEMs ?
Specifications and quality comparable to their present suppliers is a must to make even an entry. Then, it is advantage of lower price. We also strive to service the customers better and faster.

Q: What is the normal cycle time required from sample approval till the delivery of the equipment ?
The time varies dramatically from OEM to OEM. They go by their well set procedures to introduce new suppliers for critical items like engines and auto components. We have experienced times of 6 months to 2 years.

Q: What is the profit margin in export as compared to that in domestic market?
The margin is comparable.

Growth

Q: What is the percentage of overall growth in the engine in the current fiscal year?
We expect the trend of recent years to continue.

Investment

We see that 45% of Net Worth is in investment and out of that 34% is in KFIL. What is the percentage of share holding in KFIL ? When will preference shares be redeemed ?
The investment portfolio is 67% of Net Worth, and out of the portfolio 34% is invested in KFIL and 39% is in Mutual Funds.
Our share holding in KFIL is 37% of equity and 100% of Preference Shares. KFIL’s performance is improving and we do expect returns to start in near future.
The redemption of Preference Shares starts from 2008 and will be completed by 2013.

Cash related