US capex halted amidst rising uncertainties
Balkrishna Industries’ (BIL) overall numbers for Q1FY20 were below consensus expectations, as sales declined 14% YoY (consensus estimate 0-5% decline ) while EBITDA margin at 24.3% also came below expectations. The sales miss was primarily driven by volume decline of 9.8% YoY to 51,304MTwhile the margin miss was primarily due to higher incremental A&P spends (160bps). However, BIL has retained its FY20 volume guidance of 3-5% (residual growth 8-11%). Company has decided to put its US$100mn US capex plan in abeyance as business uncertainties have risen. We continue to like BIL’s focus on product, brand and market share; however, growth outlook is moderate and may remain a headwind for the stock. Nevertheless, we are sanguine on free cashflow and margins, and believe these are likely to improve. Maintain BUY. Conference call on Tuesday, Aug 13, 1600 hours IST. Tel: +91 22 6280 1144
* Key highlights of the quarter: Topline decline of 13.8% YoY was led by volume decline (of 9.8%) while ASPs also declined 4.7% (hindered by weaker mix and unfavourable forex realisation). EBITDA margin contracted ~477bps to 24.3% primarily due to 210bps decline in gross margin at 52.8%. BIL has continued to invest incrementally in A&P (160bps) to grow its brand visibility across key regions (e.g. Europe, Australia), thus leading to elevated other expenses. Management has retained its volume growth guidance (8-11% residual growth) for FY20. BIL has put its US$100mn US capital investment plan in abeyance amidst the business uncertainties, and this could allay investor concerns on capital allocation
* Margins likely bottomed as volumes, product mix and costs to turn favourable: BIL’s sales rebound expected in H2FY20 is likely to be driven by better mix as share of OTR segments keep rising (both via new products and strong category growth). The current margins at 24-24.5% are likely to be the near-term bottom as cost structure advantages accrue in H2FY20 via both cost reductions externally (in crude derivatives) as well as internally (via the new carbon black plant). This, along with better operating leverage, is likely to cumulatively aid margin improvement of 150- 200bps. We believe ASP pressures are not likely to persist deep into FY20 as both forex and product mix realisations may improve.
* Maintain BUY: We lower our estimates factoring-in volume growth on the lower end of the guidance (3%) and prune margins accordingly. Despite building-in the earnings cut (~6%/11% in FY20E/FY21E respectively), we expect BIL to generate FCF of Rs 6bn/8.7bn (4.0%/5.8 FCF yield) in the two respective years. BIL remains one of the most attractive investment propositions. We maintain our valuation multiple at 17x FY21E EPS and arrive at a target price of Rs934/share (earlier: Rs1,041/share). Maintain BUY
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