Published on 13/01/2021 11:59:17 AM | Source: ICICI Direct

Buy Balkrishna Industries Ltd For Target Rs.1,700 - ICICI Direct

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Robust performance, firm growth prospects lie ahead

Balkrishna Industries (BIL) reported stellar Q2FY21 results. Standalone revenue was at | 1,579 crore (up 47% YoY), amid ~36% rise in volumes to 61,224 MT. Margins rose 903 bps YoY to a near five-year high of 34% amid 494 bps gross margin expansion and savings in employee costs and other expenses. Consequent PAT came in at | 340 crore (up 16.7% YoY). BIL declared second interim dividend of | 4/share (record date: November 14).


Healthy demand, market share gains keep outlook constructive

BIL is the market leader in the niche export-oriented off-highway tyre (OHT) segment. As of H1FY21, agri, OTR demand formed 64%, 33%, respectively, of end user applications, while in term of geographies Europe (51%), India (23%), North America (14%) constituted its major markets. Replacement demand formed 71% of overall pie. Demand prospects for its products remain healthy, particularly on the Europe agri side, where it has gained market share in aftermarket amid overall positivity for the industry. The company continues to introduce new SKUs (average of ~100 every year) and engage in brand building (via ad spends) in order to gain incremental market share. Successful backward integration (own carbon black plant of 1.4 lakh MT per annum capacity) is expected to mitigate some of the upcoming pressure in input costs and thereby protect margins, keeping it around the guided 28-30% band. We build 6.7% volume CAGR in FY20-23E and estimate margins staying around the ~32% mark by that time.


Q2FY21 earnings conference call – key takeaways

BIL said (1) agri demand remains strong across geographies with OTR demand stable; BIL expected to post marginal YoY volume growth in FY21E amid resurgence of Covid in Europe, (2) achievable capacity has been reduced to 2.8 lakh MT per annum (down ~6-7%) amid some technological redundancies and product mix changes but this is not seen impacting FY22E & FY23E growth prospects. BIL is evaluating brownfield additions, (3) 28- 30% remains sustainable long term margin range, with ASPs over next few quarters seen at ~| 245-252/kg, (4) BIL has gained some market share in Europe aftermarket and in India (now at 5-6%) and has leadership position in Australia agri sector, (5) ad spends are seen remaining at | 100 crore per annum level, (6) third party sales of carbon black amount to ~20% of capacity, ~2% of sales revenues and (7) capex guidance for FY21E, FY22E is at ~| 700 crore, ~| 200 crore, respectively (ex-possible brownfield).


Valuation & Outlook

For BIL, sales, PAT are seen growing at 11%, 12% CAGR, respectively, in FY20-23E. BIL continues to broadly deliver on stated growth and margin guidance. BIL’s net debt free B/S, double-digit return ratios and strong cash generation provides us margin of safety. As a result, we continue to hold a positive view on the stock and retain our BUY rating with a revised target price of | 1,700; valuing it at 25x FY23E EPS of | 68.


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