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Industry export growth accelerates

Balkrishna Industries’ (BIL) key export markets have reported strong demand trends (Jul’21 industry exports grew 51% YoY).

The latest industry export data (Jul’21) indicates strong pickup in OTR segment (up 64% YoY) while agri (Ag) demand growth remained sturdy at ~46% YoY. The latest data continues to support the strong demand momentum driven by both Ag and OTR segments: FY21-YTD industry exports are up ~81% YoY on USD basis. On regional basis, growth in Jul’21 was led by the EU (up 59% YoY), followed by the US (44%) and RoW (43%).

The QoQ acceleration in Q1FY22 is defying historical seasonality weakness across both Ag and OTR segments, which reflects the underlying demand pull. Exports acceleration in Jul’21 on MoM basis lends further strength to our revenue growth assumption (above consensus) of ~29% YoY for FY22 (~21% volume). We believe, consensus upgrades are likely if these trends sustain. Maintain ADD.

* Overall export growth continues as OTR rebounds: On an end-product basis, growth sustained in Ag tyres (up ~46% YoY) and contributed ~67% of total exports (down 259bps YoY). On the OTR side, momentum picked up with 64% growth YoY, which signals steady increase in mining and construction offtake. We believe the outlook for global Ag exports remains solid under the rising commodity price environment. OTR demand is also likely to be supported by infrastructure / mining investments across key regions (e.g. US, EU) as investments pick pace.

* EU leads the growth momentum: On regional basis, the EU delivered strong growth (in both Ag and OTR segments) at ~59% YoY while the US followed at ~44% YoY. The two regions together represent ~75% (up 149bps) of Jul’21 exports. On the flip side, RoW’s growth momentum moderated to ~43% YoY (contribution down 149bps) 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, Germany (up 36%), Italy (88%) and Ireland (93%) drove growth as the smaller economies of Portugal and Norway witnessed slump YoY. On a subsegment basis, OTR growth was driven by the EU (up ~89% YoY) followed by the US (74%) and RoW (37%). However, on the Ag side, EU and RoW witnessed rapid growth at ~51% and 48%, respectively.

* Maintain ADD: As BIL reaches high utilisations in FY23E (assuming ~23% revenue CAGR over FY20-FY23E), we expect RoCEs to improve to >27%, and FCF generation to surpass Rs25bn (cumulatively over FY22-23E). The export incentive scheme (RoDTEP) also could provide additional boost to profitability. We maintain our target multiple at 26x FY23E EPS based on strong growth visibility and topquartile return metrics. Maintain ADD with an unchanged target price of Rs2,572.

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