Kilburn Engineering | 🔻 EXIT | Q3FY25 Review
Kilburn Engineering has revised its guidance from the Q2FY25 earnings call, impacting both our estimates and my confidence in the management/margin of safety
On 26 December 2024, I published my initial research note on Kilburn Engineering Limited (read here)
At the time, the stock was trading at ₹468. Since then, the share price has declined by 21.4%
⚠️ While this drop may seem like a broader downturn affecting most small and microcap companies, there are specific weaknesses in our original investment thesis that warranted a reassessment
I have exited my investment in KEL. This note outlines the key reasons behind my decision
Q3FY25 Performance
In quarter 3, KEL reported YOY growth in revenues, EBITDA, PAT & EPS growth of 48%, 36%, 48% and 25% respectively
To be fair, this isn’t a like-for-like comparison, as the FY25 numbers include ME Energy’s performance — a subsidiary of KEL acquired in February 2024
Material Changes / New Developments
1️⃣ Status of Recent Acquisitions & Expansions
In Jan 2025, KEL completed the acquisition of Monga Strayfield – a provider of drying solutions based on radio frequency (RF) technology
The MIDC Ambernath unit was handed over in Q3, with an operational ramp-up underway. Full utilization is expected by June 2025
First phase of M.E. Energy's expansion is complete. The second phase is currently in progress
2️⃣ Order Book Position
As of December 2024, KEL's consolidated order book stood at ₹409 crores (₹368 crores standalone + ₹41 crores from M.E. Energy)
The management is targeting a ₹500 crore order book for FY25
⚠️ However, with execution outflows and Q4 order inflows at just ₹35 crores as of 12th Feb, achieving this goal appears challenging (discussed in detail later)
That said, the company continues to highlight it’s active enquiry pipeline exceeding ₹2,000 crores in the earnings callsl
3️⃣ Lowered Revenue Forecast
Until Q2, KEL was guiding a topline of ₹500 crores for FY25
⚠️ However, due to revenue spillover & a large order on hold (expected to clear in Q1FY26), the revised guidance now stands at ₹450–500 crores
⚠️ This downward revisions has impacted FY26 estimates aswell. From a previous guidance of ₹700–750 crores, the revised FY26 revenue numbers are at ₹650–700 crores
Over Promising? Under Delivering? Both?
1️⃣ FY25 revenues
With 9MFY25 revenues at ₹297 crores, KEL needs atleast ₹153 crores in Q4 to reach the lower end of its ₹450–500 crores guidance
A quick check suggests that ₹450 crores is achievable but exceeding it would be a surprise
👉 It highlights the management’s tendency to exaggerate its guidance, which is a red-flag for me
2️⃣ Orderbook
As of December 2024, the order book stood at ₹409 crores
Assuming ₹153 crores of orders get executed in Q4, KEL would need an additional ₹244 crores in order inflows to reach an orderbook of ₹500 crores
With KEL securing only ₹35 crores in new orders until 12th Feb 2025, KEL needs to generate ₹209 crores (244 minus 35) in fresh orders within 47 days (13 Feb to 31 Mar) to meet its target – a very difficult task!
Given recent trends, I estimate an additional ₹49 crores in orders inflows until March 31st
👉 This suggests that KEL is likely to close FY25 with an order book of ₹340 - ₹380 crores
Ofcourse, there’s always the possibility of a large order coming in by March 31st, but as of now, there’s no indication of it happening
3️⃣ FY26 revenues estimates
Historically, KEL takes around 12 months to execute an order. If the company exits FY25 with a ₹340 crore order book (lower range), it’s FY26 revenue (standalone business) will also be around ₹340 crores
While the management is confident of achieving ₹650 crores – I just don’t see it
Even after adding ₹200 crores of projected sales from ME Energy & Monga Strayfield, this totals to only ₹540 crores – a full 17% below the revised ₹650–700 crore guidance
🚨 The recent downgrade, a gap in orderbook & the management’s over-promising nature was a major red flag for me – prompting my exit from KEL
That said, I did learn an important lesson here – pay closer attention to how the order book stacks up rather than blindly trusting guidance numbers
Total Addressable Market
Another oversight on my part was the market size evaluation
On a standalone basis, Kilburn receives ₹1,200–₹1,400 crores of enquiries every year. Based on KEL’s estimates, the total market size for the Indian subcontinent stands at ₹1,500–₹2,000 crores
For Monga Strayfield, the RF dryer market is estimated at ₹300–400 crores
For ME Energy, the overall waste heat recovery boiler market is ~₹2,000 crores, while the cement waste heat recovery boiler segment — where the group plans to enter by FY27 — is projected at ₹5,000 crores
The takeaway? KEL’s addressable market is quite limited, only a few times its current sales — a less-than-ideal scenario for long-term growth
My Viewpoint
Frankly, I’m disappointed with the depth of our initial research
While I don’t expect everything to be neatly laid out (the way I structure my newsletters), we should have paid closer attention to two key aspects — a) order book estimation and b) total addressable market
I’ve taken note of this, and you can expect me to dig deeper into these factors (or challenge them if you’re presenting) in our community discussions
Regarding KEL, my numbers might not be perfectly accurate, but the real concern here is the confidence in management’s optimism & "margin of safety" — and I don’t see any
I encourage you to conduct a second round of research and form your own view on KEL’s long-term prospects
As always, I look forward to hearing from you 📢
Much love,
Shankar
Thank you sir ji
Salute to your great ethics