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Capex plans unveiled as demand remains firm

Balkrishna Industries’ (BIL) Q3FY21 result was a beat on consensus estimates as both volumes and margins surprised positively. Management has raised volume guidance by 5% to 220k in FY21, believes demand in FY22E is likely to remain strong. Management also shared details of new capex spends (Rs19bn) over FY22/23E: a) brownfield project for 50k MT capacity (Rs8bn), b) automation, modernisation investment for Bhuj (Rs4.5bn), c) carbon black expansion (Rs 6.5bn) for both internal use/external sales. We model-in a capacity utilisation reaching >90% in FY23, hence, enhanced capacity would be timely. However, we trim our FCF estimates to ~Rs20bn for FY22E/FY23E to accommodate the capex needs. As BIL approaches peak utilisation in FY23, we expect it to deliver topquartile industry RoICs/RoCEs at ~31%/~25% respectively. Maintain BUY.

* Highlights of the quarter: Overall topline improved 26% YoY to ~Rs15bn as volumes grew ~30% and ASP remained flat (Impacted by FX MTM). EBITDA margin came in at 31.9% (up 70bps YoY), even as commodity pressures have started to rise. BIL posted PAT growth of 45.7% YoY supported by higher other income (up 324bps) and normalised tax rate (24.1%). BIL also declared an interim dividend of Rs5/share.

* Brownfield expansion picks up; US greenfield project shelved: a) Board has approved setup of a new brownfield expansion project and debottlenecking plant at Bhuj, to keep pace with the rising demand in its key international markets; b) the plant will increase capacity by 50k MT and is estimated to be complete by H2FY23; capex for it is Rs8bn; c) BIL has shelved the US greenfield expansion plant of 20k MT (earlier stated capex was US$100mn); d) in-line with the rising demand for carbon black and focus on local manufacturing (e.g. budget raised customs duty to 7.5%), BIL plans to enhance capacity for both internally and external parties (long term supply agreement driven). Board has approved enhancement of achievable capacity from 115k MT to 200k MT and setting up an additional 20MW captive power plant; capex for the expansion and power plant is estimated as Rs6.5bn and is likely to be complete by H1FY23; e) new OTR line for the large (51”/57”) tyres has been completed at Bhuj, the same should start to contribute to revenues in FY22.

* Maintain BUY: BIL is approaching high utilisation levels driven by growth tailwind from Agri segment, with OTR also likely to rebound in FY22 we expect EPS CAGR ~22% FY20-23E. We upgrade our earnings estimates by 5.5%/2.8%/3.2% in FY21E/22E/FY23E respectively. As a new capex cycle begins in FY22, we moderate our FCF yield estimate to 2.2%/3.4% in FY22E/FY23E. However, cumulative FCF (FY22/23E) would still be ~Rs20bn, RoCE>25% (FY23E). We value the stock on an unchanged multiple of 24x FY23E EPS and arrive at a target price of Rs2,113/share (earlier: Rs2,047). We maintain our BUY rating on the stock.