MUMBAI: Blackstone, the world’s biggest private equity fund, has emerged the front runner to buy
Engines Ltd, the listed flagship company of the $3.5-billion Kirloskar Group that is in the middle of an escalating family feud, multiple people familiar with the development said.
Promoters own 59.33% of Kirloskar Oil Engines (KOEL) that has a market cap of Rs 4,947 crore at present. Pulak Prasad’s Nalanda Capital, with 9.61% stake, is the second largest shareholder in the company that makes diesel engines, agricultural pump sets and generating sets.
One of the proposals being suggested is splitting the company by demerging its oil engines business into a new entity, sources said. Blackstone will step in then to buy controlling stake for around Rs 2,600 crore, or about $400 million, and follow it up with an open offer for an additional 26% stake, sources said.
Both companies upon demerger will have mirror shareholding. The cash and investments of around Rs 1,000 crore will be left with the old company, which in effect will become a holding company, sources said.
This structure is similar to what
did with its consumer business before selling it off to Advent Private Equity. But such a move may face backlash from the minority shareholders.
There is also a Chinese strategic investor in the fray whose identity could not be independently verified though Blackstone is believed to be the preferred choice.
Earlier, Cummins Group, one of the world’s largest manufacturers of engines and power generation products, was evaluating buying out KOEL but chose not to pursue it.
Ambit is running a formal sale process. The transaction is expected to get announced in June. Mails sent to Atul Kirloskar, executive chairman of KOEL, did not generate a response till press time. Blackstone declined to comment.
Incorporated in 1946, Kirloskar Oil Engines manufactures and services diesel engines (primarily in the range of 2.5 to 740 horsepower) and diesel generator sets. It is the largest producer of non-automotive diesel powered engines in India. Its large engines are used for nuclear, marine and stationary power plants and power generating units for residential, commercial, marine and defence applications and off-highway equipment. The company is a dominant player in the agriculture pump sets market. It is the largest producer of non-automotive diesel powered engines in India. The company has more than 2,400 employees spread across the country and supplies engines to international markets as well, including the Middle East, Africa and South Asia.
“The next generation of the Kirloskar family is not keen on running the business, plus it is a stodgy manufacturing setup in a sunrise sector,” said an official in the know. “There are several eco-friendly technology options that are coming up, so the growth prospects are also limited,” the person said.
Kirloskar brothers Atul (61) and Sanjay (60) are now also entangled over a bitter legal fight with their mother, 82-year-old Suman Kirloskar, now siding with her younger son. A fight that started over a property dispute has now snowballed into a full blown tussle over the partition of assets held by Chandrakant Shantanu Kirloskar Hindu Unpided Family (HUF) in the Pune civil court.
The Kirloskar group is also a minority shareholder in Toyota Kirloskar Motor Pvt Ltd, which manufactures Toyota cars in India.
The company has manufacturing units in Pune, Kagal and Nashik (all in Maharashtra), and Rajkot (Gujarat) and caters to the agriculture, power generation, industrial and construction machinery sectors. According to its recent corporate filings for fiscal 2017, net revenue of Rs 2875 crore, and a net profit of Rs 173.62 crore. In addition, Kirloskar Oil Engines also has a surplus of about Rs 1,006 crore as on March 31, 2017.
In the domestic market, apart from unorganised players, Kirloskar Oil Engines competes with branded manufacturers such as Cummins India Ltd, Ashok Leyland Ltd and Mahindra & Mahindra Ltd in the medium-range diesel engine segment.
Diesel generator sets manufactured by the company are branded as Kirloskar Oil Engines Green Gensets. Kirloskar Oil Engines Green also offers customised power solutions. In June this year, the company acquired a majority stake in La-Gajjar Machineries (LGM), the maker of Varuna and Raindrop brands of electric pumps, at a valuation of 7.89 times earnings before interest, taxes, depreciation and amortization.
The Kirloskar group also manufactures a wide range of industrial products such as automotive castings, air compressors and air conditioning solutions among others. Kirloskar Brothers Ltd (KBL) is one of the largest manufacturers of industrial pumps in the country. KBL provides fluid management solutions for large infrastructure projects in the areas of water supply, power plants, irrigation, oil & gas and marine & defence. The company manufactures a range of industrial & petrochemical, agriculture & domestic pumps, valves and hydro turbines.
“We expect a 7% earnings CAGR over FY17-20. Considering the greater downward risk in the overall business due to pressure in the low kVA business, we expect the company to be de-rated,” Bhalchandra Shinde, analyst with Anand Rathi, said while giving a “sell” call to the stock. “Though the high-HP business is gaining market share, low-kVA gensets are affected by the transition to green options such as batteries and solar power, especially in the tower business. In agri, Shinde argued, oil-engine pump-sets have been hugely affected by power surplus across India while in industrials, “strong growth may arise from increasing road construction, but will not offset the downside risk in gensets and pump sets,” he said.