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Buy Balkrishna Industries Ltd For Target Rs.2,825

Healthy performance, consistency merit premium…

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.

Q1FY22 Results: BIL reported healthy Q1FY22 results.

* Standalone net sales at | 1,813 crore were up 3.8% QoQ

* EBITDA margins at 28.3% were lower by 276 bps QoQ

* Consequent PAT at | 331.2 crore declined 11% sequentially.

What should investors do?

BIL’s share price has grown by ~7x over the past five years (from ~| 375 in August 2016), thereby vastly outperforming Nifty Auto index

* We retain BUY rating on the stock given its consistent, healthy financials

Target Price and Valuation: We value BIL at revised target price of | 2,825 i.e. 36x P/E on FY23E EPS (earlier target price | 2,250)

Key triggers for future price performance:

* Ambition to double global market share to ~10% vs. 5% currently

* Robust demand in the agriculture segment to propel volume growth

* Aggressive brownfield expansion and backward integration in place

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

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 | 180

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