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Industry export trends remain solid

Balkrishna Industries’ (BIL) key export markets reported strong demand trends with Aug’21 industry exports up 33% YoY. The latest data (Aug’21) indicates continued momentum in OTR segment (up 33% YoY) even as agri (Ag) demand growth remained sturdy at ~33% YoY. Data continues to support the robust demand momentum driven by both Ag and OTR segments: FY22-YTD industry exports are up ~69% YoY on USD basis.

Regionally, growth in Aug’21 was led by RoW (up 42% YoY) followed by EU (31%) and US (26%). Recent decline (~23% since Q1FY22) in international rubber prices (refer: Chart 7) augurs well for margin improvement in H2FY22, and continued industry export acceleration (YTD: up ~69% YoY) also lends strength to our revenue growth assumption (above consensus) of ~31% YoY for FY22E (~22% volume). Maintain ADD.

* Overall export growth continues as OTR rebounds: On end-product basis, growth sustained in Ag tyres (up ~33% YoY) and contributed ~67% of total exports (up 6bps YoY). On the OTR side, momentum was steady at 33% growth YoY, which signals gradual growth 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 renewed infra push leads to pick-up in investments.

* EU supports growth spurt as US moderates: On regional basis, the EU delivered strong growth (in both Ag and OTR segments) at ~31% YoY and the US followed at ~26% YoY. The two regions together represent ~72% (down 185bps) of Aug’21 exports. On the flip side, RoW’s growth momentum heightened to ~42% YoY (contribution up 185bps) as economies open up on receding covid impact.

Growth in RoW exports – driven by Canada (up 117% YoY), Brazil (101%) and Japan (112%) – reflects a more broad-based improvement across regions and segments (OTR/Agri). In the EU, Portugal (up 74%), Netherlands (66%) and Austria (131%) drove growth even as the large economies of France, Spain and Italy witnessed modest growth (up ~25% cumulative). On sub-segment basis, OTR growth was driven by the EU (up ~37% YoY) followed by RoW (32%) However, on the Ag side, EU and RoW witnessed growth of ~29% and 52%, respectively.

* Maintain ADD: As BIL reaches high (~85-90%) utilisations in FY23E (assuming ~19% revenue CAGR over FY21-FY24E), we expect RoCEs to improve to ~28%, and FCF generation to surpass Rs36bn (cumulatively over FY23E-FY24E). The export incentive scheme (RoDTEP) could also provide additional boost to profitability. We introduce FY24E estimates and rollover to Sep’23E and maintain our target multiple at 26x Sep’23E EPS based on strong growth visibility and top-quartile return metrics. Reiterate ADD with a target price of Rs2,837 (earlier: Rs2,572).

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