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Industry export momentum remains strong

Balkrishna Industries’ (BIL) key export markets have reported robust demand (May’21 industry exports grew 72% YoY respectively). The latest industry export data (May’21) indicates strong pickup in OTR segment (up 85% YoY) while agri (Ag) demand growth remained healthy at ~67% YoY. The latest data continues to support the strong demand momentum driven by both Ag and OTR: FY21-YTD industry exports have grown ~149% YoY. On regional basis, growth in May’21 was led by the US (up 121%), followed by RoW (92%) and EU (51%). The pace of export growth in Q1 currently remains ahead of consensus expectations. As BIL reaches high utilisations in FY23E (assuming ~23% revenue CAGR over FY20-FY23E), we expect the RoCEs to improve (>27%), justifying its valuation premium vis-à-vis peers. Key risk: meaningful change in demand outlook. Downgrade to ADD.

Overall export growth continues as OTR rebounds:

Agri and OTR segments together grew at healthy rates of ~67%/85% YoY respectively in May’21. On an endproduct basis, growth sustained in Ag tyres (up ~67% YoY) and contributed ~69% of total exports (down 209bps YoY). On the OTR side, momentum picked up with 85% growth YoY in May’21, which signals steady increase in mining, and construction offtake. We believe the outlook for global Ag exports remains strong under the rising commodity price environment. OTR demand is also likely to be supported by infrastructure/mining investments in FY22/23 as investments pick pace.

US region supports growth spurt:

On a regional basis, the US delivered strong growth (in both Ag and OTR segments) at ~121% YoY while RoW followed at ~92% YoY. The two regions together represent ~48% (up 725bps) of May’21 exports. On the flip side, the EU region’s growth momentum moderated down in May’21 at ~52% (contribution down 725bps) impacted by high base and potential covid resurgence. Growth in RoW exports – driven by Australia (up ~1.2x), Brazil (~13x) and South Africa (2.6x) – reflects a more broad-based improvement across regions and segments (OTR/Agri). In the EU, Romania (up 2x), Ireland (1.4x) and the Netherlands (1.1x) drove growth even as the large economies of France, Spain and Germany witnessed modest growth (~33% cumulative). On a sub-segment basis, OTR growth was driven by the US (up ~157% YoY) followed by RoW (77%) and the EU (58%). However, on the Ag side, EU and RoW witnessed rapid growth at ~50% and 98%, respectively.

Downgrade to ADD:

We expect healthy FCF generation of ~Rs24bn over FY22E/FY23E. Considering the current export growth momentum, we raise our earnings estimates by 2%/2.6% for FY22E/FY23E respectively. We also raise our target multiple to 25x (earlier: 24x) based on strong growth and top-quartile return metrics. Post a >40% rally YTD-CY21, the stock valuation factors-in many of the positives and potentially limits near-term upsides. Downgrade to ADD (from Buy) with a revised target price of Rs2,425 (earlier: Rs2,269).

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