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Robust growth prospects, retain positivity…

About the stock: Balkrishna Industries (BIL) is the leader in the niche tyre segment used in heavy machinery for mining and agriculture purposes.

* Exports form lion’s share of its sales at ~80% of its revenues

* Channel mix: replacement account for ~70% while OEM share is pegged at ~26%. Agriculture accounts for ~64% of volumes with OTR share at ~32%

* It has consistently operated with high (>20%) margins & return ratios

Q2FY22 Results: BIL reported mixed Q2FY22 results.

* Standalone net sales for the quarter were at | 2,050 crore, up 13.1% QoQ

* EBITDA margins in Q2FY22 came in at 25.4%, lower by 290 bps QoQ

* PAT was at | 377 crore, up 14% QoQ, boosted by higher other income

What should investors do? BIL’s share price is up ~5x over the past five years, (~| 500 levels in November 2016), thereby vastly outperforming Nifty Auto index.

* We retain BUY on BIL amid robust demand prospects, healthy financials

Target Price and Valuation: We value BIL at revised target price of | 2,900 i.e. 32x P/E on FY23-24E average EPS of | 90.6 (earlier target price | 2,825).

Key triggers for future price performance:

* Ambition to double global market share to ~10% vs. ~5.5-6% currently

* Robust demand across user segments (agri, OTR) to propel volume growth

* Aggressive brownfield expansion and backward integration in place

* Net debt free b/s, double-digit return ratios & strong cash generation

* Sales, PAT growth seen at a CAGR of 21.9%, 17.1% over FY21-24E

Alternate Stock Idea: In our auto ancillary coverage we like JK Tyre.

* Walking the talk on b/s deleveraging, sweating of assets & capital efficiency

* BUY with a target price of | 185

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