The main focus areas of today's IC engine design are energy efficiency and higher thermal efficiency. As there is a high amount of heat loss in atmosphere due to which the efficiency is lower for the standard engine. There is one possible solution to reduce such problem i.e., converting the conventional CI engine in to the LHR engine. For the current work the performance and emission characteristics are evaluated for the twin cylinder ceramic coated water cooled CI engine using blends of diesel and neem bio diesel. For the present work the bio-diesel was prepared in laboratory from non-edible vegetable oil (neem oil) by transesterification process with methanol, where potassium hydroxide (KOH) was used as a catalyst. Combustion chamber inner wall, Piston top surface (crown) and valve faces were coated with the Magnesium Zirconate (MgZrO3). An experimental investigation of performance of a ceramic coated (LHR) engine was carried out with neem biodiesel and its blends, the results were compared to the performance results of a base engine. Experimentation was conducted at medium speed with varying load to obtain actual driving condition experienced in most urban areas and measurements like fuel flow; exhaust temperature and smoke test were carried out. The results indicated improved fuel economy and reduction in pollution level for the LHR engine. The fuel properties of biodiesel such as kinematic viscosity, calorific value, flash point, carbon residue and specific gravity were found.