Balkrishna Industries Ltd : Lowering estimates due to geopolitical tensions; maintaining a Buy - Anand Rathi Shares and Stock Brokers
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Lowering estimates due to geopolitical tensions; maintaining a Buy
Despite recent geo-political and macro-economic tensions, we are still positive about Balkrishna Industries. Given the headwinds, Q2 volumes were reasonable. The ASP rose sharply on the product mix for the US and currency fluctuations. Capacity expansion plans have been revised and added capacity would be available by H1 FY24. We maintain a Buy, at a lower TP of Rs2,326 (30x FY25e).
Exports to Europe facing continuous headwinds. Q2 volumes grew 8% y/y to 78,872 tons (q/q down 5%), while revenues grew 32% y/y, 2% q/q, to Rs27bn, on better realisations despite weak macros. The ASP was up 8% q/q to Rs342,871 on 1) greater share of the US, 2) larger-diameter tyre sales and 3) dollar fluctuations. Given the tepid outlook in Europe and the US, instead of a greenfield expansion management decided to add capacity at the old Waluj plant; ~55,000 tons would be available by H1 FY24. Carbon black capacities would come by Dec’22; advanced carbon black capacity, by Q4 FY23. Management expects the ongoing geo-political tension in Europe to continue, and curtail demand sentiment. With a bitter winter expected, financial stress in the economy would continue; hence we lower our estimates. Accordingly, we expect 19% revenue growth in FY23 and 7% in FY24.
Profitability pressured. The Q2 EBITDA margin contracted 77bps to 16.4%. Management expects the full impact of lower raw material and freight costs to come by Q4. We expect margins to rise gradually in the near term as the added capacity is ramped up and operating leverage kicks in. Hence, we expect margins of 16.4% in FY23 and 20.4% in FY24.
Introducing FY25e. We expect FY25 revenues to grow 8% y/y, margins to expand to 21.4% and earnings to grow 15% y/y to Rs17.4bn.
Valuations. We expect an 11% revenue CAGR over FY22-25, and 7% earnings growth, leading to EPS of Rs90. We retain our Buy rating, at a lower TP of Rs.2,326 (30x FY25e).
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