Kirloskar Oil Engines Limited (KOEL) has been reaffirmed as a BUY by IDBI Capital Markets Securities, following its impressive Q2FY26 financial performance and robust demand outlook. The research house projects a strong growth trajectory, underpinned by a surge in the Power Generation (PG) and Industrial segments and a strategic focus on expanding the High Horsepower (HHP) segment. The stock is currently priced at Rs1,059, with a revised Sum of the Parts (SOTP) target price of Rs1,221, implying a potential upside of approximately 15%. Investors are advised to monitor key technical levels and consider earnings growth momentum and margin expansion prospects in their investment decisions.

Robust Quarterly Performance Highlights

KOEL's Q2FY26 consolidated revenue rose by 29% year-over-year to Rs19.48 billion, a testament to accelerating sales momentum. The Power Generation segment led the charge with 41% growth, reaching a quarterly revenue milestone of Rs6.78 billion, driven by healthy volume growth and increased contribution from the HHP category. The Industrial segment also exhibited a strong 40% year-over-year increase, buoyed by defense and railways demand. International business showed a remarkable 43% growth, largely due to an effective distribution strategy in the Middle East and North Africa region, led by KOEL's Original Equipment Manufacturer (OEM) Myspan.

Strategic Focus on High Horsepower Segment Expansion

KOEL has methodically scaled its HHP offerings over the last three years, moving progressively from lower to higher nodes. This segment is critical as it relies heavily on service excellence rather than solely on cost competitiveness, suggesting rich growth potential. The company secured multiple large orders (1,500 KVA, 2,000 KVA, and 2,500 KVA), predominantly from the real estate sector, signaling strong commercial traction in this high-margin category. Management’s emphasis on expanding the HHP segment underscores a strategic push into more lucrative, less price-sensitive markets.

Encouraging Demand Outlook and Product Pipeline

KOEL management remains optimistic about sustainable demand, particularly in the domestic market across diverse infrastructure verticals such as residential and commercial real estate. Continued broad-based industrial growth is anticipated, extending beyond defense and railways into construction and mining sectors. The rollout of new products in the power generation business is slated for Q3FY26, expected to further enhance competitive positioning. Notably, revenue recognition from the Nuclear Power Corporation of India Limited (NPCIL) order is expected to commence in FY27, promising an additional growth catalyst.

Corporate Structural Changes for Margin Expansion

The company's business-to-consumer (B2C) segment is being transferred via slump sale to its wholly owned subsidiary, La-Gajjar Machineries, starting Q3FY26. The move aims to improve operational efficiencies and margin profiles, potentially generating higher profitability. KOEL management also confirmed the company has successfully regained market share after experiencing volatility in prior periods, reinforcing market positioning and competitive strength.

Updated Financial Estimates

IDBI Capital has revised its FY26 and FY27 financial forecasts to reflect KOEL's improving performance:

Net profit estimates for FY26 and FY27 have been raised by 9% each, to Rs6,109 million and Rs7,376 million respectively, reflecting better margin prospects and growth sustainability.

Key Valuation Metrics and Ratios

KOEL’s price-to-earnings (P/E) ratio is projected to compress from 34.2x in FY25 to 25.2x in FY26 and further to 20.9x in FY27, signaling increasing earnings quality and re-rating potential. The EBITDA margin is expected to peak at 22.4% in FY26 before a slight normalization in FY27. Return on equity (RoE) and return on capital employed (RoCE) remain healthy at 18.3% and above 20%, underscoring operational efficiency and shareholder returns. Meanwhile, the company’s net debt-to-equity ratio is expected to improve significantly from 1.4x in FY25 to 0.4x in FY27, indicating a strengthened balance sheet.

Stock Price Technical Levels and Targets

IDBI Capital research indicates key technical levels for KOEL stock trading around Rs1,059:

• Immediate support is conceived near Rs1,000 - Rs1,020, a crucial zone to watch for defensive entry points.
• Key resistance lies at Rs1,150 - Rs1,200, acting as the near-term breakout zone.
• The revised target price stands at Rs1,221, implying a potential upside of 15% from the current market price.

Investors with a medium to long-term horizon should consider accumulating near support while keeping an eye on volume trends and broader market sentiment.

Investment Strategy for Medium and Long Term Investors

IDBI Capital’s reaffirmation of a BUY call on Kirloskar Oil Engines Ltd. reflects confidence in the company’s robust growth trajectory fueled by strong domestic demand and strategic expansion in high-value segments. The combination of improving financial metrics, margin expansion, and international business gains paves the way for solid earnings growth in FY26 and FY27. With valuations becoming more attractive, the stock presents a compelling opportunity for investors seeking exposure in the capital goods sector amid a favorable domestic capex environment. Prudent investors should track the near-term technical levels for optimal entry and target a price range near Rs1,220 within the next 12 months for capital appreciation.