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Superlative growth justifies premium valuations…

Balkrishna Industries (BIL) reported robust Q4FY21 numbers. Standalone revenue came in at | 1,746 crore (up 28.6% YoY) tracking 17.3% YoY growth in tonnage to best ever level of 68,002 MT. EBITDA margins at 31.0% were down a mere 63 bps QoQ amid 120 bps lower gross margins amid sequential savings in employee costs and other expenses (as percentage of sales). Consequent PAT in Q4FY21 came in at | 372 crore, up 44.6% YoY, aided partly by higher other income (includes forex gains of | 38 crore). The company declared a final dividend of | 5/share for FY21, with total dividend declared for FY21 including interim dividend standing at | 17/share.

Conducive macroeconomics, double-digit growth on the anvil

In FY21, BIL posted record performance in volumes (up 12.6% YoY to 2.27 lakh MT), net sales (up 20.4% YoY to 5,758 crore), EBITDA (up 42.9% YoY to | 1,786 crore) and PAT (up 22.3% YoY to | 1,155 crore) despite the impact of Covid in key geographies such as India and the US. The market leader in the niche off-highway tyre (OHT) exports enjoyed good traction, particularly in the agri segment. The OTR segment is witnessing an uptick in recent times on the back of higher commodity prices and pickup in infrastructure creation and economic activity.

Management commentary is bullish on demand scenario, with volume guidance for FY22E at 2.50-2.65 lakh MT, YoY growth of ~10-17%. With present capacity of ~2.85 lakh MT per annum, there is enough headroom to service the expected demand. Enhanced production capacity post de-bottlenecking & brownfield expansion at 3.35 lakh MT per annum is set to be completed by H2FY23E. Going forward, Americas are seen as a growth driver (currently form 15% of overall mix). OTR segment is seen outpacing agri segment thereby leading to higher share in product mix from 32% currently to ~45-50%. BIL commands global market share of ~5-6% currently and intends to grow it to ~10% down the line. We build 11.9%, 15.9% volume, revenue CAGR over FY21-23E.

Margin tailwinds in place, operating leverage to rescue…

BIL has undertaken price hikes of ~3-4% thus far in CY21 to pass on rise in commodity costs (~2-3% in Q4FY21). Its carbon black backward integration (present capacity of 1.15 lakh MT per annum) makes it stand apart from peers by providing an inherent cost hedge. This, coupled with higher operating leverage from expanded production base, brownfield nature of capacity expansion and currency depreciation benefits, we expect BIL to post 30%, 31.5% margins in FY22E, FY23E, respectively. The management reiterated long term margin guidance of 28-30%, going forward.

Valuation & Outlook

We expect 16% sales, PAT CAGR for BIL in FY21-23E. BIL continues to deliver on growth parameters without straying from its anti-commodity behaviour characteristics (high profitability, lean B/S and healthy return ratios). We maintain our BUY rating on the stock, valuing it at | 2,250 i.e., 28x on FY23E EPS of | 80.5/share (earlier target price | 2,100).

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