Kirloskar Brothers Limited Third Quarter 2011-2012 Earnings Call

(January 24, 2012) Moderator: Good afternoon ladies and gentlemen, thank you for standing by and welcome to the Kirloskar Brothers Limited, Third Quarter 2011-2012 Earnings Call. Joining us today in this conference room are the Chairman and Managing Director Mr. Sanjay Kirloskar; Executive Directors, Mr. R K Srivastava and Mr. Jayant Sapre; and Vice President, Finance, Mr. Umesh Shastry. Mr. Umesh Shastry will take us through the results highlight for the period ending December 2011. All participants are requested to refer to the presentation available on the company website www.kbl.co.in . As a gentle reminder during the duration of the presentation all participants are in a listen only mode. There will be an opportunity to ask questions at the end of the presentation. If you wish to ask a question please press * and 1 on your telephone. Please be advised that this conference is being recorded today. I will now hand the conference over to Mr. Umesh Shastry. Over to you, sir. Umesh Shastry: Good afternoon ladies and gentlemen. Before I begin with my presentation I would like to remind you that the overview and discussions that we have today may include certain forward looking statements that must be viewed in conjunction with the risks that we face. Just like last time we had to have our analyst meeting immediately after our board meeting though analyst normally request us to have this on the subsequent day. This is because our directors would be travelling and since we are present here today we thought this would be the appropriate time for us to host this conference so that in case of any questions that you may have then you can throw it open to them and we would be glad to answer them. You would have seen the presentation that we loaded on our website a couple of hours back and I will just quickly run through the slides that we have actually uploaded on the website. At an overall company level just like the overall economic decline persist we also have not grown or rather we have grown in conjunction with the way in which the rest of the economy is growing and as you all are aware the Indian economic scenario is definitely affecting both liquidity and growth currently. Especially in the power sector we found that there is lot of slow decision making in major government policies and a lot of liquidity issues have also been faced by the private power sector companies because of which the sales for the quarter was affected because we withheld sales since the money was not actually forth coming from a lot of private power sector players. We continued with the focus on selective sale basically depending upon the financial position of the customer so that we ensure that the sales that we made were matching with the collections that we did and in no case to be allowed the sales actually to go in excess of the amount of inflow that we actually recovered from our customers during the quarter. The project sector actually has only been able to book product orders in this quarter. So no project orders were actually booked by us in quarter 3. As you all are aware the civil portion of the projects have been declining and we have been ensuring that our sales is more focused on our own products and on electromechanical products and we believe that whatever portion of civil sales is still pending will likely to be completed by the end of the next financial year.

One good news is that the Andhra Pradesh situation has improved as the payments there are being released by the government authorities and now going forward we will ensure that the retention money which is blocked with the government authorities in the state of Andhra Pradesh is quickly received by us based on the movement of the projects so that whatever little we need to do, we do and get the retention amount back from the government authorities. And in the agricultural business which is seasonal in nature has now picked up. It was at a little bit of slow down for about two to three months because of the extended monsoon. But in the last one month or two months we have found that the business has again started picking up. Moving on to the individual sector level highlights, the water sector actually delivered the 90 MLD water to the Bhopal city and the other system which is 180 MLD water system is likely to be completed by June 2012. As far as irrigation sector is concerned like I said the situation in Andhra Pradesh has improved and the payments are being committed and we see hope now in the irrigation sector and in the state going forward. I told you in the beginning about the liquidity situation but barring that we did have successful commissioning of CW pumps for Reliance Energy’s Rosa Thermal Power Station during the quarter. Even at the Essar Salaya Power Plant we successfully commissioned our CW pumps and this was KBL’s first indigenous concrete oriented pump for 660 MW. Also at the DVC Koderma plant we successfully commissioned a water system package which is our first plant water system package. And the full load testing for our first vertical turbine was done at the KACB room Ranni Perunad project. This is the largest horizontal plant which KBL has actually installed. The building and construction sector which is basically a product sector they have submitted about a 120 offers for multi outlet multistage pumps and this would lead to an improvement in our orders for better margin products in fire fighting business moving forward. So from that perspective this is an indicator or a sign of good things to happen in the future. As far as the industry sector is concerned we have received the first ever order for the lowest life cycle at the iCP pumps of sugar industries from Lakshmi Sugar Mills which was in five numbers and also for two numbers of iCP pumps. Century Rayon has accepted the concept of VTP in the LNC version which could again lead to a potentially good margin business moving ahead. And we also conducted workshop on the lowest life cycle pumps and valves because we are trying to educate our customers about the advantages they would have purchasing LLC pumps manufactured by us. Going to the gas, oil and defense sector, we successfully carried out string test for four out of seven packages for ONGC offshore firefighting platform. This was done at the SPP, our international subsidiary UK and three packages string tests were also carried out at USA at Fluid Power. We also received an order for special axial flow pumps for Amphibian Tanks from the Vehicle Research Development Establishment. You will be glad to note that the Coimbatore plant has crossed the break even quantity of 11,000 pumps per month and we definitely see good progress in this plant going ahead. We executed our first order of stainless steel submersible pumps, 14 numbers were delivered. And we also inducted about 20 new dealers and 115 new retailers in this quarter in the distribution network.

Spares business. We conducted a survey and the survey results showed us that more than 75% of our customers based on the services we provide to them on the Dewas range of products were satisfied. We definitely want to see this going up in the future. Moving aside from the sectors and going ahead to our plants. Moving on to the Kirloskarvadi factory FMUL was approved and UL listing was received for the VT Pump series, the joint project with SPP. Regarding the large pumps division at the Kirloskarvadi plant it executed a prestigious order for Fujairah within 12 weeks. We also introduced complete cartridge assembly checks for our CVP and MVP pumps. And an order for Bechtel, USA and hydel turbines for Pench LBC project were also executed during this particular quarter. Regarding the small pump division there was a re-layout conducted at the factory for split case, process pumps and multi-stage pumps and this would lead to a significant capacity rise. Now as and when we would get good orders for the S&M pumps from the market we would definitely be able to execute the orders faster because we have re-laid our lines and ways that the execution time would also get improved and higher productivity would also be envisaged because of that. The Dewas factory won the Regional Productivity Championship award from the IMA and we launched a mobile pump controller at the Shirval plant We had a product group known as the DB pumps which were hitherto manufacture at the Kirloskavadi. We have now decided to shift that production from the Kirloskarvadi plant to the Dewas plant. The Kondhapuri plant which is our valves manufacturing unit completed the proof of design for the 1,200 millimeter butterfly valve which is 2% NiCl content. We also obtained the consent from the Maharashtra State Pollution Control Board till July 2013 and vendor meet was conducted for our suppliers at the Kondhapuri plant during this particular quarter. There are a few snaps of the Ahmedabad plant progress which you will see subsequently. There is a good progress as far as the plant is concerned and by the month of March the production in the plant would begin. You can see certain pictures internal as well as external on the presentation that we have actually loaded on the website. The next slide shows the company level pending orders which is quarter by quarter analysis shown to you. At the end of the third quarter our order board was about 2,635 Crores and if you see the composition of the order board it still has irrigation sector with the highest content of about 52% followed by power with 27% and the water sector with 11%. The only thing was that the order received during this quarter significantly declined as compared to the orders which we received in the earlier two quarters. We received about 352 Crores of orders in Quarter 1, 306 in Quarter 2 and Quarter 3 it was only 210 Crores. We believe this movement is more or less in line with the state of the rest of the economy and the way it is moving. Going to the financial our sales are more or less flat. We had done sales of about 1,221 Crores up to December in the previous year. In the current year they are at 1,259 Crores. The good news is that the product sectors have crossed sales compared to the previous year. And consequent of which the share of the own products in the overall sales mix has improved from 55% in the previous year to 59% in the current year. And

the PBT has also increased from 60 to 67 Crores but of course this PBT includes non-operating income of 35 Crores from Gondwana which we had also told you about during our last con call. The other good news is that compared to the September end quarter we were able to reduce borrowings by 25 Crores during this quarter through monitoring of the net working capital situation. So the drive continues to be on improving the balance sheet by reducing our net working capital and reducing our borrowings over a period of time. You can see the numbers which are given as far as the financials are concerned. On a stand-alone basis as compared to December 10 figures of 1,231 Crores we stand at 1,270 Crores with a PBDIT of 80 Crores and a PBT of 32 Crores in the current year. The cash profit for the current year is at about 46 Crores as compared to last year’s cash profit of 63 Crores. The percentages are also mentioned and these figures I request you to note are excluding the profit on sale of investments so that we can have an Apple-to-Apple comparison with the numbers of December 09-December 10. The next slide shows the consolidated financial picture for the nine months ended on December 11 where again you find that the total income has increased from about 1,797 Crores to 1,896 Crores during the period. The PBDIT is down from 151 Crores to 125 Crores and the cash profit is also down from 90 Crores to 74 Crores during this period. The key financial ratio percentages are given below and again over here naturally like the earlier slide the figures for December 11 exclude the profit on sale of 35 Crores. With that I have come to an end of the presentation that we have loaded on the web. I throw open the floor to any questions that you may have and we will be glad to answer them for you. Thanks a lot. Moderator: Ladies and gentlemen we will now begin the question and answer session. If you have a question please press * and 1 on your telephone and await your turn to ask the question when guided by the facilitator. If your question has been answered before your turn and you wish to withdraw your request you may do so by pressing the # key. We have our first question from Mr. Kamlesh Kotak Kotak from Asian markets. Mr. Kamlesh Kotak, please go ahead. Kamlesh Kotak: Hello, good afternoon sir. Umesh Shastry: Good afternoon. Kamlesh Kotak: Sir, just wanted to understand what is the performance of the subsidiaries, if you could throw some light on that? Umesh Shastry: All the international subsidiary companies have done well during the year as well as during the quarter. In fact as we mentioned to you last time there were two international subsidiaries namely Kirloskar Brothers Europe in Amsterdam and Kirloskar Brothers Thailand which was actually in the red but this year they have turned to the green and they have done pretty well. We see tremendous opportunity for these two companies to do much better going forward. On the domestic front Hematic Motors and Kolhapur Steel Limited have continued to do reasonably well commensurate with the way in which the rest of the economy is growing but Kirloskar Construction, yes, as we told last time, our focus is basically on ensuring that the old orders that we have in hand are executed and completed and we are continuing with that particular activity to

see that all the old jobs are primarily executed as soon as possible and there has been a significant movement compared to September by the end of December as far as the execution of the old project is concerned. Kamlesh Kotak: Sir, any losses has been booked from that company? Umesh Shastry: We have currently not booked any loss during the quarter but preferential share capital of 10 Crores have been subscribed to by KBL during this quarter. Kamlesh Kotak: And what was the revenue for the company? Construction…. Umesh Shastry: Roughly about I think it was …. Kamlesh Kotak: Could you help us sales for each of the major subsidiaries, if possible? Umesh Shastry: See Kirloskar Constructions for the nine months has done a sale of just 30 Crores, Kolhapur Steel Limited has done a sale of 25 Crores, Hematic Motors has done a sale of 151 Crores and as far as the international subsidiaries are concerned SPP pumps unaudited draft results that we have has done a sale of about 477 Crores for the year from January to December because as you know we consolidate the December results. Kirloskar Brothers Europe(BV) has done a sale of about 23 Crores. Kirloskar Brothers Thailand has done a sale of about 20 Crores and Braybar Pumps has done a sale of about 18 Crores but the Braybar Pumps figures is for 11 months. So also Kirloskar brother Thailand is figure is for 11 months. We are awaiting their draft audited numbers for the last month of December which will be available to us in another 15 days’ time. Kamlesh Kotak: So except Kirloskar Construction none of the companies are in the red, I guess now? Umesh Shastry: Absolutely right. Kamlesh Kotak: Okay. Sir, secondly what is the outlook as we does order building pipeline domestically and also in the export markets? Umesh Shastry: You are asking for the order board or the outlook. Kamlesh Kotak: Yeah, order book and order book outlook. I mean we are already seeing degrowth in the order books so how is the incremental intake likely to be panning out over the quarters ahead. R K Srivastava: See as far as the standard pumps are concerned domestic and all except the industrial sector, the rest of the sector is almost stable. It was downward last two months but now it has come back and more or less it is coming on the line what they were last year. It is better than last year but not in line with the expectations. Other orders specifically in the industrial pumps there we have gone towards process pumps. So relative to our booking we are better off but if you see the market it is down compared to the market last year for overall pump industry. But as such we are having lower CF

on stainless steel pump. They have increased appreciation of Almost 30 to 40% market has gone up. So that is in the industry. If we come back to the other sectors like power, Umesh Shastry has already mentioned that we are definitely selective whereas today there is definitely an issue. All expansion programs are really held up and they are not moving forward. So we are only looking forward for government plans and in government the nuclear power is still getting delayed because they are certain issues after the episode of Japan and they are getting reviewed all the cases for security reasons. So they are likely to get delayed. Then in NTPC which is thermal power is the only case that is moving right now. But there are also certain court cases are going on so they are not moving that fast. They are normally doing. So whole industry in power sector as you can say is down with respect to the execution as well as booking and now we come to the irrigation. Irrigation really the government of India has really moved that they want to go on infrastructure and irrigation with very heavy funds and that we are expecting to start moving after this election which is taking place very recently in states because all the political focus has gone towards elections. So the decision is going to be again slow. As far as municipal, corporation and water sector is concerned it is continuing as usual like last year. Jayant Sapre: Distribution sector has picked up in the last two months. From December onwards the demand for domestic as well as agricultural pumps especially the smaller pumps that we manufacture in Dewas and as you must have seen in the presentation the Coimbatore plant has crossed break even numbers and in fact in the month of March, April, May and June we will be doing 22,000 pumps. 11,000 is the break even but we will be doing 20 because that’s the results for the four months of the season then maximum sale of domestic pumps takes care. Kamlesh Kotak: Sir, how much revenue we get from Coimbatore plant? Jayant Sapre: From Coimbatore plant about 20 Crores but it has the capacity of doing single line of about 50 Crores and it has worked only for about 8 months. Kamlesh Kotak: This 20 Crores is for 8 months. Sanjay Kirloskar: Yes. Umesh Shastry: But working at full capacity we would have about 20 Crores at a single shift. Kamlesh Kotak: And how much is the Andhra order part of this total irrigation order book? Sanjay Kirloskar: About 1,400 Crores. Kamlesh Kotak: So the entire irrigation is Andhra only? Sanjay Kirloskar: No, irrigation total. Andhra is 1,100. Kamlesh Kotak: 1,100 and they are no more slow moving?

Sanjay Kirloskar: Out of 1,100 almost 500 Crores is on hold right now by the government themselves and we have been waiting for their movements then only we will start. Kamlesh Kotak: The remaining 600 Crores are now in execution mode. Ramesh Srivastava: Yeah around 500 to 600 under execution. Kamlesh Kotak: Okay. Sir, overall we see that the kind of order book declining and that lower order intake to continue next for how many quarters? Sanjay Kirloskar: We have no answers. Because of these uncertainities it is very difficult to predict but I do see that next six months it is not going to have any improvement up to September. The expectations are there but only after September there may be an improvement. Kamlesh Kotak: Okay and so is the case in export market also? Sanjay Kirloskar: Exports, nothing spectacular is happening. We are looking at some line of credit order but there also the government is going very slow. Many proposals are pending and this is not taking any action. We will move in line with the rest of the industry and what we see increasingly is as we have been saying we are very selective with orders. Now we see one or two customers realizing that may be a mistake was made by not accepting KBL’s proposal. So we hope that by being selective we will gain the right value when we quote next time. Kamlesh Kotak: Okay and sir can you help us with some balance sheet numbers in terms of Debt and the working capital? Umesh Shastry: What is it that exactly you like to know? Kamlesh Kotak: Debtors, debt, and net working capital. Umesh Shastry: The borrowings have reduced by 25 Crores as compared to September but as compared to March last year the borrowings are higher but they have basically gone higher in the first two months. So there they have reduced now and as far as the net current assets are concerned also they have reduced compared to September naturally the consequent of which we have been able to achieve repay our borrowings of about 25 Crores and the debtor numbers have also improved. Debtor numbers in fact as compared to March have come down nearly by about 100 Crores. So there has been a significant change as far as the debtor numbers are concerned. Kamlesh Kotak: And net working capital would be how much, sir. Umesh Shastry: The net working capital currently is around 680 Crores. Kamlesh Kotak: 680 Crores. Umesh Shastry: That’s right.

Kamlesh Kotak: Okay alright. Thank you very much. Moderator: Thank you sir. We have our next question from Keerti Dalvi from Enam MC. Keerthi, please go ahead. Keerthi Dalvi: Good afternoon sir I have few questions from my side.If I am not wrong in the first half Kirloskar construction reported 8½ Crores loss. So, this means for first 9 months the loss is the same? Or is there any increase in loss? Umesh Shastry: The loss is now increased to 11 Crores. Keerthi Dalvi: So, for first nine months the loss is 11crores what we have reported in Kirloskar Construction. Umesh Shastry: That’s right. Keerthi Dalvi: Yeah, and sir on your slide number 4 you had metioned this in building and constrution division that 120 offers are made for these multi stage kind of pumps and you are mentioning that margins will be quite different or rather high than the standard product. Could you just give us the broad range? Jayanat Sapre: You know these are pumps that go for fire fighting and also for high pressure ratings which are there in high rise buildings. So basically our option or proposal involves vertical pumps which no one else in the world has. Basically saving a lot of space for example if the fire fighting system is put in the parking area then the builder can offer two extra parking spots which he has to sell if they are buying our pumps. So it makes good sense for him to install vertical sets rather than horizontal sets. Keerthi Dalvi: So have we done any kind of projects or we have already supplied these pumps? Jayant Sapre: Yeah these have already been supplied in Pune to Paranjpe, the schemes that is coming up at Hinjewadi and increasingly once those pumps have been installed and a large number of builders have been contacted and they find this which is why suddenly 120 offers have come. Keerthi Dalvi: Okay and in terms of value-wise what would be the size, if you could give us the realization where one pump would be how much? Sanjay Kirloskar: That will depend on our independent certification. Jayant Sapre: It is very difficult to give. Keerthi Dalvi: Okay. Sir, the question was coming basically from I mean that means we have lot of scope left in our margins to improve further excluding our project business if I look only your product side, what kind of margin improvement we see in that kind of business. Sanjay Kirloskar: In the last three months we have undergone a complete layout change in the body plan for which the number of pumps that we manufacture will

increase substantially and then we have made a major shift from cast iron to stainless steel. So at least for the next three months I am sure the industry sector should record margins of 10% plus and in the distribution sector also we see a good execution of orders in domestic as well as agriculture since industry is slightly slow but these two will reasonably show a good off take and there will be about 5 to 6% profitability in these areas. Keerthi Dalvi: Okay and sir in terms of the execution cycle for this 2600 Crores which is primarily are project based order book, would that be executed in next say 12 to 18 months. Umesh Shastry: No I already told almost 700 Crores are on hold in irrigation side so almost 1,900 Crores order which is under execution. And we expect at least over the next one year 1,200 Crores can be executed out of 1,900. Umesh Shastry: I just like to add one thing. Out of this total order board there is only about a 100 Crores of civil that is left in the total order board which by the end of next year we will have it will be executed. So after that the quality of the order board also will be significantly different then what you see today because by the end of next year we believe we will be able to complete whatever civil work is remaining. Sanjay Kirloskar: And this order board obviously does not include the small pumps which are more on a monthly basis and that would be close to about 650 Crores for distribution throughout the year. Keerthi Dalvi: Okay, which is not a part of this order book currently? Umesh Shastry: Because we get a monthly forecast and we manufacture accordingly. Keerthi Dalvi: Yeah. And sir these new orders which have come primarily on the product side if you could give which industries these orders we have received and going forward if you can give a bit of traction where we are seeing it further? Sanjay Kirloskar: Basically for cast and steel industry pumps capacity which we have increased. These are all process industries-chemical industries and some of them are pharma industries. More and more orders are coming from these industries. Keerthi Dalvi: And few questions from the consolidated front, if you could give us the consolidated order book as of 31st December. Umesh Shastry: No, we don’t have a consolidated order book available with us currently because international subsidiaries are reporting to our step down subsidiary which is KBI BV which is looking at Amsterdam. And currently the process of audit of all those subsidiaries at Kirloskar Brothers International is taking place. So as of now we do not have the consolidated numbers as such but from the results perspective I already have it with you the year results of the international subsidiary. Keerthi Dalvi: Sir, any consol debt number if you have, absolute figure. Umesh Shastry: Yeah the borrowing number is currently at 450 Crores which is down from 478 Crores as of September which includes 95 Crores term loans which we have

taken for our CAPEX acquisition. Of which 33 Crores is actually repayable on 31st of March. Keerthi Dalvi: And any planned CAPEX for the current year as well as the next year. Umesh Shastry: Yeah, there will be CAPEX. Nothing major is left for the rest of the year and only what has already been ordered will come in. And for the next year actually we are in the process of making our annual operating plans but we don’t expect too much CAPEX because of the re-layout at Kirloskarvadi plant and the improvements that have been done in Dewas. So we don’t expect too much CAPEX. Keerthi Dalvi: And sir if I am not wrong last quarter we had few issues in the power segment. I mean there were couple of clients we were assessing some issues from the execution point of view. Have those issues been resolved? Sanjay Kirloskar: No, these issues have not yet been resolved. What we have done in, I think that is what Mr. Shastry also mentioned in the first instance was that just like we have being selective with orders we are also not delivering to the people who are unable to pay. Keerthi Dalvi: Sure. But in the current power order book of 710 Crores the way you said that almost 500 Crores in irrigation is on hold. So kind of issues we must be facing in the power group. What could be the quantum of that? Sanjay Kirloskar: It is not really something which we have put on hold but there is an FG inventory and there is a WIP inventory which is lying with us. Of which the FG inventory could have been despatched by us had we got the money so also with the WIP inventory both of which put together is about Rs. 20 Crores which could have been immediately converted into a sale but that sale would have resulted into debtors and because of the customer inability to pay we have not despatched that. Keerthi Dalvi: Sure. Umesh Shastry: That will be considered a temporary phenomena because so many things are happening at the government side to improve the situation and we expect in next three months. After March we hope things should be alright. Umesh Shastry: And what we also see with these companies is if we have to pay say Rs. 100 they are paying in stages 25, 25, 25, 25 but we don’t want to go out of the way and get into a problem. Keerthi Dalvi: Okay. Sir, the last question since we are focussing more on high margin product business and probably most of the old projects will get executed by next year including the onhold projects. Do we see at least 10 to 15% growth in our core product business, next year given the current environment? I am talking purely from the product business. Umesh Shastry: Yes. Keerthi Dalvi: That’s something pretty much possible for us, right.

Umesh Shastry: Sure. Keerthi Dalvi: Sure. And margin improvement if you have to take a call probably next year on FY13 given Kirloskar Construction assuming that next year there won’t be any losses. Umesh Shastry: The increased product business and the betterment of the sales mix will definitely lead to a margin improvement going forward but it is very difficult to assign a number to it at this point in time. But yes the scope is of course there for doing that. Keerthi Dalvi: So Kirloskar Construction at least will not have losses in FY13? Umesh Shastry: Yeah we will try to curtail our best because if you remember last year they were running at a loss of 3 to 3½ Crores per month. That has been brought down to about a crore or so per month. We will try our best to reduce that. Keerthi Dalvi: Thank you very much sir and wish you good luck. Umesh Shastry: Thank you. Moderator: Thank you ma’am. We have our next question from Sanjeev Sahoo from BNK Securities. Mr. Sanjeev, please go ahead. Sanjeev Sahoo: Good afternoon sir. Just wanted to know about your debt, how much is the dollar denominated? Umesh Shastry: About 75 Crore of dollar denominated which is in working capital. And the term loan is all dollar denominated but it is fully covered. Sanjeev Sahoo: So, this 75 Crores is not covered, it is unhedged. Umesh Shastry: The 75 Crores and working capital is unhedged because since the 180 days kind of loan for PCFC we are not permitted to take up forward cover on that but the term loan of 95 Crores which is currently in the book which we took the year before last is fully covered till the end of the tenure of the loan. So there will be no hits on account of the term loan that we have taken. Sanjeev Sahoo: And when is this term loan due for repayment? Umesh Shastry: One tranche is to be repaid on 31st of March, 2012. Sanjeev Sahoo: Another one third will be in April 2013. Umesh Shastry: On 31st of March 2013 and then 31st March 2014. Sanjeev Sahoo: Yeah, got it. And sir, the amount of import that you do from China, how much that would be as a percentage of your total imports? Umesh Shastry: The imports per se if you see our material consumption also about 98% of our material is indigenous. Hardly about 2% is imported. It is only when a client

in a project specifically request for motors to be imported from abroad or does the imports go up otherwise, we primarily believe in indigenous consumption only. Sanjeev Sahoo: Thanks sir. Coming to the last question, any time lines for your Ahmedabad plant to be up and running? Jayant Sapre: In fact they have already started the trial. We have decided to do 20,000 pumps next financial year. The production has already started. As we are establishing the machinery, flow of the assembly and so on the last worker will be out by 15th of February and after that the production will start and we are also planning to shift our Shirwal plant which touched about 40-45,000 by next year. After one year that plant would be fully occupied. Sanjeev Sahoo: That is in the first year that is in FY13 before the full ramp up happens, how you target about 20,000 units or the capacity is of 20,000 units? Jayant Sapre: Next financial year. Sanjeev Sahoo: Yeah, how much will that contribute to the top line? Jayant Sapre: 40-50 Crores. Sanjeev Sahoo: Yes sir and when do you see the Coimbatore plant when do you see the plant running at full capacity? Jayant Sapre: March, April, May, June, four months it will run with full capacity because that is the season and we are hoping that the plant will produce at least 50 Crores next year. Sanjeev Sahoo: And that will be utilization of about 50% of all the capacities? Jayant Sapre: No, single shift full capacity. Sanjeev Sahoo: Okay thank you sir. That’s all from my side. All the best, sir. Moderator: Thank you sir. We have our next question from Bharti Gupta from Sushil Finance. Bharti, please go ahead. Bharti Gupta: Good afternoon sir and thank you for taking my question. Sir, first of all I would like to understand in this quarter we have seen a significant improvement in our operating margin which was at 3.82% in the second quarter has improved to 8.3% in the third quarter. If I see the breakup of your cost, our purchase of traded goods has gone up significantly. Can you just explain the reasons for this? And are these benefitting any kind of decline in the input cost pressures? Umesh Shastry: The primary reason for this is the completion of certain projects beyond 50% at the time of which we actually recognized the profitability of that project as per the accounting standards. So in this quarter there are about 5 or 6 projects which have crossed the percentage of completion threshold of 50% and where we have recognized the profitability of those projects. As you know till day the stage of 50% the cost and revenue are equal. It’s only when they cross 50% of the cost that we recognize

the profit on those contracts. In this quarter because of the completion of these 5 or 6 projects we had an improvement in the profitability is concerned and reduction in the raw material percentage. Bharti Gupta: Okay, that’s only because of the POC method. Sanjay Kirloskar: That’s right. Bharti Gupta: Okay. So in all the projects we recognized the revenue only beyond 50% we recognized the profitability. Umesh Shastry: Yes. Only after the project crosses 50% of the cost we recognize the profit. Bharti Gupta: Okay and during this quarter we have recognized 5 to 6 and anything in the offering for the current quarter? Umesh Shastry: Yes in quarter 4 also there will be about 4 projects which will cross the percentage of completion threshold. Bharti Gupta: Okay. My next question is, are you expecting our Ahmedabad plant to commence by March 2012? Will that happen? Jayant Sapre: By 15th of March. Bharti Gupta: By 15th March. Jayant Sapre: We have taken target of producing atleast 20,000 pumps in the year 2012-13. Bharti Gupta: 20,000 pumps. What would be the total capactiy of the plant? Jayant Sapre: If you take all the three shifts in the next 2 to 3 years it will go to 350 Crores. Bharti Gupta: 350 Crores. Jayant Sapre: Yeah at least 3 shifts. Bharti Gupta: Okay. Over the next 3 years your total output should go to about 300 Crores in value terms. Jayant Sapre: That’s right. Bharti Gupta: Right. Okay. During the quarter our pumps division is reported of flat revenue growth but the other’s revenue has gone down by around 11%. Umesh Shastry: Can you repeat the question?

Bharti Gupta: In the segmental revenue break up which you have given in the quarterly results, the other revenue has declined by around 11%. What does other comprise of? Is it only customer sales and services? Umesh Shastry: No, it is the valves and other business that we have. Bharti Gupta: I didn’t get you. Umesh Shastry: It’s involves other income. Bharti Gupta: Other income. Umesh Shastry: Valves and other income. We make pumps and we make valves. Bharti Gupta: Okay so it comprises of valves and other income. Umesh Shastry: That’s right. And last year the interim dividend which we had received from two of our subsidiary companies in quarter 3 which this year we did not receive. Bharti Gupta: Okay and I just happened to miss your revenues and profitability of individual subsidiaries. Could you just repeat it again? Umesh Shastry: Kirloskar Construction had a sale of 30 Crores. Bharti Gupta: This you are talking about 9 months, right? Umesh Shastry: Nine months, that’s right. Kolhapur Steel Limited had a sale of 25 Crores, Hematic Motors had a sale of 151 Crores, among the international subsidiaries SPP pumps for the year ending December that is January to December based on the draft results which are still being audited had a sale of 477 Crores and Kirloskar Brothers Europe had a sale of 23 Crores. Again all these results are subject to audit because audit is in progress currently. Kirloskar Brothers Thailand for 11 months had a sale of 20 Crores, the 12 month figure will be known after the audit and Braybar Pumps also comes for 11 months had a sale of 18 crores. Bharti Gupta: Okay and the operating profit is how much? Umesh Shastry: All of that barring Kirloskar Construction is in green and the total operating profit for both the international and the domestic subsidiaries put together is about 55 Crores. Bharti Gupta: 55 Crores, okay. Can you give us the breakup of project and products revenue, as in terms of percentage, how much does the project constitute and how much it is in the product solution? Umesh Shastry: Roughly two-thirds is the products revenue and one-third would be the projects revenue. Bharti Gupta: And in terms of the order book.

Umesh Shastry: In the order book you can see that irrigation, water, power all three of them are project sector. About 90% of the order book is projects. Bharti Gupta: Okay. Sanjay Kirloskar: I would only like to tell you that whatever you see in the order book the project order book lasts for quite a few months or years while the product sector order book for distribution would be a month so you would see that they get about 40, 45, 35 or whatever crores of orders which are received in the month and has executed in the month. So you don’t see much of an order board over there. Bharti Gupta: What is the kind of repetitive? Sanjay Kirloskar: It is a quick turn over thing. It does not reflect much in the order board but as a sector, distribution is a larger sector. Bharti Gupta: Okay. In the last con call you said that we are planning to take the Coimbatore plant with a production plant of 20,000 pumps and during the last quarter we crossed the 11,000 breakeven things. Are we still holding that 20,000 pumps as target for the Coimbatore plant? Sanjay Kirloskar: March, April, May, and June is the peak season. So that is going to give us an opportunity to test our full capacity. Bharti Gupta: Okay. During the quarter, of the 2010 Crores any major order which you would notify it and any significant order that we have received and it would change the…. Umesh Shastry: No, they have been regular kind of orders. In fact as we mentioned in our company level, the project sector also have booked product orders only. There has been no project order book during the quarter. Bharti Gupta: And last quarter also our Andhra Pradesh order book stood at around 1100 Crores. There has been no incremental order book from the Andhra Pradesh Government and going forward also we are not facing any kind of a major order in flow from the Andhra Pradesh state. Should that hold true? Sanjay Kirloskar: As far as we are concerned we are focussed on execution. Whatever is pending orders are there that is where we are going to collect depending upon the funds available with Andhra but definitely they are saying that they have funds now and whatever money is due they are paying. Bharti Gupta: Okay. Can you just explain us to what is VTP because in slide no.5 you have stated that you could provide us good business potential going forward. Sanjay Kirloskar: Vertical turbine pump. Bharti Gupta: Okay. Umesh Shastry: And LLC stands for lowest life cycle cost.

Bharti Gupta: Okay. What kind of revenue potential or business potential are you observing out of this concept? Sanjay Kirloskar: It is very difficult to tell you what kind of revenue potential is there. Not theoretically but it will be our intention to ensure that all our vertical turbine pumps as well as horizontal split case pumps are replaced by LLC version because in terms of efficiency, in terms of life, wear and tear, it gives huge benefits to the customer. So the pump has been designed with sustainability in mind. It has sustainable high efficiency otherwise pumps lose 1 to 5% points of efficiency every year. So when a customer goes for an LLC pump we have been able to prove that the efficiency does not drop like it does for all other pumps when it stays flat for quite a long time. It is a new generation product. It’s been introduced first in the United Kingdom and it is the first choice of all the private water companies over there now and slowly but surely we are introducing it in India. Bharti Gupta: And any other players who are there in this segment? Sanjay Kirloskar: No one else has the LLC pump in India at the moment. I believe there is one other company in the world who has designed pumps in line with the hydraulic institute or Euro pump standards. We are really one of the first in the world to do it. Bharti Gupta: Okay that’s good to hear. Can you just give us your current dealership network? Sanjay Kirloskar: Dealership network. On small pumps we have over a thousand, 1100; and major distributors roughly about 350. This is for the small, agriculture, domestic and industry. We have about 40 dealer distributors for industry sector as well as building and construction. Bharti Gupta: Okay and one last question is, can you just give us the guidance over the tax rates for the full year because during the consistence on an average basis the tax rate has been quite low at around 23% as against 32% for the last year. So, what has resulted in the drop in the tax rates? Are we getting any kind of tax benefits? On what account has that gone down? Umesh Shastry: The primary reason is because lot of the profit is from the sale of Gondwana which is a long term capital gain which is taxed only at 20%. So that’s why the average rate of tax is lower. Bharti Gupta: That was the 35 Crores other income. Umesh Shastry: That’s why the average rate is lower. Bharti Gupta: Otherwise it would stand close to 33%. Umesh Shastry: Absolutely. Bharti Gupta: So no tax benefit should occur in the next year. Umesh Shastry: That’s right.

Bharti Gupta: Okay. That’s all from my side. Thank you. Moderator: Thank you ma’am. We have our next question from Mr. Sameer Raj from Reliance Mutual Funds. Mr. Sameer, please go ahead. Sameer Raj: Hello, good afternoon sir. Just wanted to get some sense on, what is the contribution of revenues from Andhra in our last quarter results? Umesh Shastry: Practically negligible, may be 15 to 20 Crores. Sameer Raj: How much was the same for nine months in the last full year? Umesh Shastry: See last year the total sales of irrigation sector as such were about in excess of 250 Crores. This year we are down to 160 so that’s the kind of gap in the sales. Sameer Raj: Okay. When you are saying basically that things are improving from Andhra and you still have substantial order book which is there from Andhra so would you expect that if this improvement continues there could be significant jump in our revenues from Andhra at least in the next financial year. Umesh Shastry: Yeah, we expect so. Definitely it will be better next year. Sameer Raj: So what exactly is changed because we get this feedback from many companies that things are actually improving? Do you think it is a sustainable improvement or is it just a sort of whatever had stopped in the system is coming back? Ramesh Srivastava: Because all these irrigation projects are politically linked up and that is where the question mark is. If these things continue to be same then yes there will be continuous improvement. If there is any political development again there is disturbance. Sameer Raj: Okay and sir you also mentioned that there is share of civil in your total order book is only around 100 Crores. So is it correct to assume that whatever field work which should have been done in the last financial year would largely be related to these Andhra orders. R K Srivastava: The other power orders are there like in Farakka it is there, in Bhawli it is there, Jhajjar it is there, NTPC projects are there and then certain small projects were there. Because we had taken a decision that we will go with JV, civil partner. We are not going to do ourselves civil work. So that is how we have taken a policy decision and that’s why whatever revenue portion is there then we will complete this year. Sameer Raj: So last in FY11, what is the share of civil turnover? Umesh Shastry: Sameer, I will probably give you an answer later. I don’t have the break up right now but I believe it would be close to 200 Crores. Sameer Raj: Sir, we have done work on export markets but somehow we have not been so lucky as far as getting orders?

Sanjay Kirloskar: There are some orders in the offing but they have not happened. Sameer Raj: What exactly is going around that? Sanjay Kirloskar: The funding is an issue. So there are some lines of credit that are not happening. But there are quite a few places we have put up our fingers in. Hopefully some of them…. Sameer Raj: You should have lost hope on that. Sanjay Kirloskar: No, not at all. They will come. It is just a question of time. Sameer Raj: Okay. Normally it is bad times as good times at least to keep house in order, reduce cost and make yourself efficient and all. And you also have done good job in terms of building up two plants that too in segment which can throw very good margins. Just wanted to elaborate like all other steps you have taken in this last nine months to reduce the cost and all such stuff like that. Sanjay Kirloskar: For instance in factory we have taken material induction cost initiatives both in Dewas as well as Kirloskarvadi and we have seen good results. One major initiative that we have taken up in Kirloskarvadi has been changing the complete layout of the factory and just to give you an example the split case line that used to produce on an average of about 600 pumps a month can now go up to 2000 pumps a month with the same number of people. Because the mindset of the people from 600 to 2000 pumps will take some time but we are seeing improvements. We have already done 800 and this month it may probably go to 1,200. We are quite confident that we will go and increase. So you can imagine. We have not added any assets. Sameer Raj: Okay sir but its impact is not visible because our revenues are not growing. Once we have the orders we will see full impact of all these things. Sanjay Kirloskar: In the next three months we have a good order book for small and medium pumps and hopeful the results of the layout will start coming up from the month of January-February. So we will have no capital expenditure and with the same number of people. Sameer Raj: Sir, what’s the sense on the ground level that we are getting? Are we already seen the worst or you think in this period…. Sanjay Kirloskar: Next six months also it is going to be sluggish. Sameer Raj: But it may not deteriorate further like we have already seen in terms of last quarter results were really very bad. So we have seen the bottom you think or you think the things can go back to those. Sanjay Kirloskar: We hope so. Sameer Raj: One more thing normal in case of Kirloskar. Fourth quarter is normally a very big quarter where revenues could range from 1.5 to 1.6 to 1.7 times what they were

normal in the third quarter. So the stand will be maintained more or less the same in this quarter. Umesh Shastry: Probably not Sameer because in the last year and the year before last we had in the fourth quarter either a significant POC completion because of which we have been able to recognize the good of the profit or good LOC order where we have exported and got a good revenue and good profit. Unfortunately in Q4 of this year we don’t have a single LOC order or export order to execute and we also don’t have any big ticket POC which is going to get completed because of which we will be able to recognize those significant revenue and profitability. So Q4 will be good, but It will probably not be like Q4 that you normally see for KBL for the last couple of years. Sameer Raj: Okay. Sanjay Kirloskar: You should also remember that we will be controlling sales in the power sector as well as the project sector because we don’t want to make the sales go up and then worrry about collecting the money from the customers. Sameer Raj: Yeah, that’s right. And lastly on Kirloskar Construction front, what steps are we taking to turn this around the company. Can you just elaborate more on that? Sanjay Kirloskar: Actually we are trying to cut cost. Like I said little earlier last year our losses were about three times as much as we have this year. We have reduced the number of people significantly. We closed large number of sites so we are really hoping that we can get a firmer control on this. Sameer Raj: But do you think it will be possible to take these levels from 8-9 Crores loss we have made. Umesh Shastry: Not in the next three months. Sameer Raj: Okay and great sir. Thank you so much and all the best. Sanjay Kirloskar: Thank you. Moderator: Thank you. We have our last question from Mr. Manish Goel from Enam Holdings. Mr. Manish, please go ahead. Manish Goel: Very good afternoon sir. I have a couple of clarifications as well as questions. At Kirloskar Vadi you said because of layout change you are expecting execution to improve and industry pump to reach 10% margin. Sanjay Kirloskar: Yes. What has happened is the industry has made a shift from cast iron pumps which are for general water use and they are now getting more and more cast steel and stainless steel pump which are required for process which are of high value and much better margins. So we are now reoriented our whole production process to deal with the steel pumps. So that is why this complete layout change was necessary and we have also augmented our foundry capacity for cast steel, stainless steel and we have made investment into replicast. So cast steel and stainless steel pumps would be more in numbers and that should give us better margins and a good foothold in the process industry pump market.

Manish Goel: But just to get a sense what is the current level of margins? Sanjay Kirloskar: About 4 to 5% may be. Manish Goel: Coming back to Andhra Pradesh you said that 700 Crores order is on hold but still there is another 500 Crores. I believe 1,300 Crores is the Andhra Pradesh order book or is it 11. Umesh Shastry: No, I think the total is around 1,100 which I told you because total for Andhra …. Manish Goel: Irrigation. Umesh Shastry: Total order for irrigation is 1,359 so rest of the order are mainly for Karnataka, Gujarat and other places. Manish Goel: Sir, just want to get sense on this 700 Crores order which has been pending for a long time. So do we see any change going forward in terms of debt due to some reasons? R K Srivastava: No, change our project because these projects are in stages, 13 stages has been cleared. This was in our old project. It has to get cleared. So other stages will get cleared over a period. Now we are beating for better. When they get fund cleared from the Central Government then only they are clearing now. So it is better that when they get fund and clear it and then restart. Manish Goel: Okay. So basically these are in the midst of the execution means we have done some part of the execution and further spending. R K Srivastava: No there is no execution done in this. Manish Goel: No execution. R K Srivastava: Actually we have done only engineering part and no execution, no procurement done in it. Manish Goel: Okay. Sir, what is the retention money due from Andhra Pradesh? Umesh Shastry: Around 225 Crores. Manish Goel: And apart from this retention money any other pending dues? Umesh Shastry: Nothing, about 16 to 18 Crores which is normal. Manish Goel: The 235 Crores I believe this would be linked to certain project completion schedules and completion of one year time frame, right. R K Srivastava: That is the completion of particular project. This is like completing the erection you get some money, after commissioning you get some money, after

guarantee and testing and handing over you get some money. So they are linked up with water, power and civil work. Manish Goel: There is some confusion because on one side the execution is not happening in Andhra Pradesh and on the other side we are looking to recover the retention money so how do you think it should be possible in the next 12 to 15 months and this 235 Crores can be recovered over what time frame and what are the milestones linked to it. R K Srivastava: No we have not stopped the work. The projects which are on hold that is neither the invested money nor retention money is there. Now the other projects which we are doing is hold project of 1.5 year is already started and step by step we are completing each stage and collecting the money like Pala HHMF. They are almost and commissioning is still now. Erection is over now the pump is going to get commissioned and at every step we are going to collect certain money after equity is over. Manish Goel: May be in the next 12 to 15 months, what kind of money can be recovered from 235 Crores? Umesh Shastry: I think at least 50%. Manish Goel: Okay and there is lot of confusion on the revenues. What I understand is that irrigation was contributing 400 to 500 Crores in FY11. R K Srivastava: It has gone up to 700. Manish Goel: Sorry. R K Srivastava: Irrigation has gone more than 700. Manish Goel: In FY11, I think it was near to 450 or 500 Crores. Umesh Shastry: In FY11 you are right, in FY10 it was more than 700 crores. Manish Goel: And in FY11 it was 400 Crores or more than that. Umesh Shastry: 500 Crores. Manish Goel: 500 Crores. So this year you said in nine months it has come down to 160 Crores. Umesh Shastry: Actually I just said the exact figure is 173 to be precise. Manish Goel: 173 from irrigation. Umesh Shastry: That’s right. Manish Goel: And last year it was 500 Crores. Umesh Shastry: No last year figure Manish it was 415 Crores for the entire year.

Manish Goel: Okay and out of these 80 was substantial, last year. Umesh Shastry: Yeah, most of it I think was Andhra Pradesh only because they weren’t sales to Gujarat or anything last year. It was primarily upto 80% from Andhra Pradesh and rest was from Karnataka. Manish Goel: Okay. The sense we are trying to get is that basically we have come down to a substantially very low level in terms of base effect which going forward will not have significant impact on our overall revenues in FY12 and FY13. Basically the point is that the composition of the revenue has changed dramatically in last two to three years for Kirloskar Brothers. So in irrigation, how much we might complete in this year? Umesh Shastry: May be another 50 Crores at the most depending upon the government giving us the money. Manish Goel: Okay. So basically irrigation will fall down to 200-225 Crores. On other side basically even the power which used to be 400 Crores revenue last year and that again you are saying subdued trends currently. Umesh Shastry: Same problem, money. They may have had around 330 to 350. Sanjay Kirloskar: So all the private players are having cash crunch, right, you are aware of it. Manish Goel: Okay. Sir, to how much would this power fall this year? Umesh Shastry: About 100 Crores lower than last year. It will be around 330 to 350. Manish Goel: Okay. And we are not seeing any significant order flow in the power because order book has been coming down from say 1000 Crores to now almost 700 Crores. Umesh Shastry: Yeah. It was expansion and on hold. They are not going ahead. Manish Goel: Okay. Even water resource is not growing for us, right sir. R K Srivastava: Water resource we were selective and I think they are maintaining almost like last year. Sanjay Kirloskar: Water actually is little ahead of last year and it will continue to remain that way. Manish Goel: So basically then rest of is contributed by industry, building and construction. Umesh Shastry: Yes, it’s all the product sectors. Manish Goel: So these are all product sectors which have been growing. And this has grown by how much in these nine months?

R K Srivastava: Distribution might be the highest in the topline and customer service and support may be highest in the bottom line. The product sector has grown roughly by about 8 to 10% over previous year in the current year. Manish Goel: Product sector has been growing at 8 to 10%, okay. Basically the whole idea to do this exercise is to get a sense what kind of base we are going to carry forward in the project business and product business and what kind of growth we can forecast for the next year. How big would the distribution be this year? Umesh Shastry: 480. Manish Goel: And this was some 400 Crores last year. Umesh Shastry: Yes. Manish Goel: Customer support, roughly? Umesh Shastry: 7 to 8% of the total revenue. R K Srivastava: 120 last year and now we are talking about 140. Manish Goel: From 100 to 140 Crores. And basically product is typically better margins then the first three segments that we spoke about irrigation, power and water. Umesh Shastry: No Manish it depends. Because good project in the power sector can give us a phenomenal margin. It depends basically on the project and the ability to complete and execute the project based on the money that customer will give us for the project. R K Srivastava: They are doing only selective project means that only. Umesh Shastry: If they are getting better projects their margins are better. Manish Goel: Okay. Moving on to the consolidated you did share the break up in terms of revenues from each of the subsidiaries. Basically what I find is our consolidated picture looks much better than the stand alone number and just wanted to get a sense that the improvement in the margins in consolidation is largely due to reduction in losses in the Kirloskar Construction. Umesh Shastry: That is one and the conversion of Kirloskar Brothers Europe and Kirloskar Brothers Thailand Limited which were in the red last year are to green this year. It is a combination of both the factors. Manish Goel: So this 9 crores loss which we incurred in nine months this year was as compared to how much loss was there in the first nine months of last year. Umesh Shastry: It was 24 or 25 Crores last year. It is about 11 Crores this year. Manish Goel: So when you said 55 Crores profit from subsidiaries. Umesh Shastry: This is the net of the loss of Kirloskar Constructions.

Manish Goel: Agreed and this is the net profit. Umesh Shastry: No this is the PBT. Actually it is the operating profit OPDT. Manish Goel: Can we say EBIDTA? Umesh Shastry: No it is actually after depreciation, after interest but before other income. Manish Goel: So basically the subsidiaries have been more or less doing well for us. How is SPP doing in terms of margin and profitability? Umesh Shastry: Quite good. Manish Goel: Okay and how is the order book for SPT? Sanjay Kirloskar: They are quite decent orders. Manish Goel: Basically they are lot of turmoils in Europe. Sanjay Kirloskar: They are not that much affected by the turmoil because they are still our basic product and which we told about LLC. It is getting prominent in fire and water. Sanjay Kirloskar: Basically it is for petroleum and gas. The factor which they are having is not getting that much affected. Manish Goel: Okay thanks I am done sir. Umesh Shastry: Thanks Manish. Moderator: Thank you sir. At this time there are no further questions from the participants. I would like to hand over the conference back to Mr. Umesh Shastry for his concluding remarks. Over to you, sir. Umesh Shastry: Thanks ladies and gentlemen for being part of the earnings call and let’s hope for better things to come in the future. Have a great day ahead and let’s hope for good margins at the year end. Thank you very much. Moderator: Thank you sir. Ladies and gentlemen that concludes KBL’s earnings call for today. Thank you for your participation.