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Blowout quarter; growth momentum to continue

Balkrishna Industries’ (BIL) reported a standout quarter breezing past consensus estimates as it clocked historic high volumes (~61k MT) and EBITDA margins (34%). Management indicated 2H growth outlook (we estimate ~6%) remains firm led by strong rebound in agri segment and continued market share gains. Management also provided an early disclosure (we appreciate) on possible brownfield capex (in FY22) as it signals higher visibility of growth sustenance, a potential demand (too strong) problem. We have advanced our growth capex assumption of Rs6bn from FY23 to FY22, yet BIL could clock ~Rs28bn of cumulative FCF over FY22/23. We model in volume CAGR FY20-23 of ~10% (driven by new OTR SKU’s), as BIL approaches peak utilisation in FY23, we expect topquartile industry RoICs/RoCEs at ~30%/~25%, respectively. We maintain BUY.

* Highlights of the quarter: Overall topline improved 40% YoY to Rs15.5bn as volumes grew ~36%, while ASP rose 3.4% (driven by mix). EBITDA margin came in at 34%, even as headwinds of forex hit on revenues (~Rs270mn) and reduced MEIS benefits. The benefits of backward integration, mix and lower commodity prices led to gross margin expansion of 284bps to ~61%. BIL posted a stellar PBT growth of ~77% YoY. BIL also declared interim dividend of Rs4/share (1H:Rs7/Share).

* Key highlights from earnings call: Management indicated: a) Geography-wise contribution: US: 14%, Europe: 51%, India: 23% and RoW: 13%; Segment wise split: Agri: 64%, OTR: 33%; End use split: OEM: 25%, Replacement: 71%; b) BIL has scaled down achievable capacity by ~6% to 280k MT on the back of low market demand of certain smaller product sizes, thus machinery throughput is reduced as other SKU’s are manufactured ; capex spend for FY21 at Rs7bn (Rs3.5bn spent) while maintenance capex is ~Rs2bn; c) production for Q2 stood at 61,223MT; 3rd party carbon black sales stood at 2-3% of sales (~20% of total production); d) BIL witnessed growth in market share in EU and strong demand from Asia and Australia (market leader in agri); e) India sales stood at 23%, company is witnessing rapid market share gains in domestic market; and f) BIL has not reduced any brand spends and would remain largely unchanged at ~Rs1bn.

* Maintain BUY: BIL has come out of the recent slowdown with market share gains and superior margins. Management continues to remain conservative in their longterm margin guidance (28-30%). However, important fact for investors to remember is that over the past decade (as margins expanded from ~18% to 34%) similar management margin guidance’s have been below the actuals. This is reflective of the superior business, capital allocation decisions taken by BIL; this is unlikely to change in future. We value the stock on an unchanged multiple of 22x Sep’22E EPS of Rs79 to arrive at a target price of Rs1,735/share (earlier: Rs1,671). Maintain BUY

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