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Solid delivery yet again; fresh capex on the anvil…

Balkrishna Industries (BIL) reported robust Q3FY21 results. Standalone revenue was at | 1,505 crore (up 30% YoY), amid ~26% rise in volumes to 59,810 MT. EBITDA for the quarter at | 476 crore was higher by 40% YoY with margins at 31.7% (down 233 bps QoQ). Consequent standalone PAT was at | 322 crore (up 46% YoY), aided in part by higher other income – which included forex gains amounting to | 15 crore. BIL declared a third interim dividend of | 5/share (record date: February 16, 2021).

Strong volume performance continues; outlook encouraging

Off-highway tyre (OHT) exports from India have grown sharply post Covid, with 8MFY21 aggregate at ~US$700 million (up 6.3% YoY; up 18.5% YoY in May-November i.e. excluding lockdown impacted April). BIL, being the undisputed market leader, posted revenue growth of ~17% in 9MFY21 – with chief end user applications agri, OTR forming 64%, 33% of 9MFY21 sales, respectively. Near to medium term demand picture remains promising (BIL expects to end FY21E with 2.15-2.20 lakh MT volumes vs. 9MFY21 volumes of ~1.60 lakh MT), with longer term positivity derived from continued market share ambition (aims to reach ~10% globally from ~5-6% presently) due to brand building activities and new product introduction. Margins are seen being squeezed in coming months amid a steep rise in prices of key inputs (natural rubber, crude derivatives). However, carbon black backward integration and other cost actions are seen buffering some of the impact. We build 13%, 16% volume, sales CAGR, respectively, in FY21E-23E & 32.5% margins by FY23E.

Renewed capex spend to support growth, backward integration

BIL is just about to conclude a large capex cycle (~| 2,000 crore in FY19- 21E) and has announced a fresh capex programme amounting to another | 1,900 crore in the next 18-24 months. It comprises– (i) brownfield tyre expansion for | 800 crore by H2FY23E (adds 50,000 MT per annum capacity to take total capacity to 3.35 lakh MT pa; ~four-year payback period), (ii) carbon black expansion for | 650 crore by H1FY23E (takes capacity to 2 lakh MT pa from present 1.15 lakh MT pa; includes 30,000 MT pa for advanced carbon material; ~five to six year payback period) and (iii) modernisation capex of | 450 crore by H1FY23E; ~five-year payback period. Expanded capacities (to be funded via internal accruals and some debt if needed) are set to ease supply concerns amid strong future demand outlook. We expect it to be neutral to marginally accretive for return ratios in long term, although capex cycle elongation postpones free cash (FCF) generation expectations.

Valuation & Outlook

Against several tyre peers, BIL has over the years developed anticommodity behaviour (high operating margins & return ratios). We believe BIL deserves to command premium valuations as a result and upgrade the stock from HOLD to BUY with a revised target price of | 2,100 i.e. 27 P/E (i.e. ~1.5x PEG) on FY23E EPS of | 78 (previous target price | 1,770).

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