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Growth momentum accelerates

Balkrishna Industries’ (BIL) result was above consensus estimates as revenue growth surprised (up 26%) while EBITDA margins (~32%/flat QoQ) remained resilient even as domestic peers reported 350-600bps contraction. Volume guidance for FY22 at 250-265k MT (growth of 12-18%) is reflective of the growth momentum across segments. Industry export growth remained strong at 16% YoY in FY21 (agri: up 24% YoY driven by strong demand from EU).

Agri demand outlook remains robust on the back of multi-year high crop prices (e.g. Corn, Soyabean). We expect OTR segment to lead growth in FY22 driven by improving global outlook on mining, construction (US infra led). Timely tire capacity expansion (~50k MT) is likely to aid volume growth in FY23. BIL remains a brand led export market oriented play, with improving RoCEs ~27%. Maintain BUY.

* Highlights of the quarter:

Overall topline improved ~26% YoY to Rs17.5bn as volumes grew 17% and ASP improved 7.3% (driven by pricing/mix/FX). Gross margins came in at 58.8% (down only 90bps QoQ) even as commodity pressures continued to rise (up 2-3%). EBITDA margin stood at 31.8% (flat QoQ) even as higher freight costs (due to rise global container costs) ate into operating leverage. BIL posted PAT growth of ~44%YoY/ 16%QoQ, also declared an interim dividend of Rs5/share (FY21 total dividend: Rs17/share / 28% payout ratio).

* Key highlights of earnings call:

Management indicated: a) raw material cost increased ~2-3% in 4Q and further are likely to rise 4-5% in Q1FY22 (BIL has taken 3-4% price hike YTD, further increases are likely); b) company has continued to invest in direct marketing spends to improving customer recall and witnessed ~29% YoY increase in spends (FY21/FY22:Rs1bn/Rs1.25bn respectively); current market share in India stands at 4-5%; c) growth outlook remains strong across both OEM / replacement segments c) in North America, BIL has developed specialised products and increased its distribution network to capture 10% market share in the long term (market size is equivalent to Europe); d) Rs8bn capex in Bhuj plant is expected for undertaking debottlenecking and capacity expansion by 50k MT; it is estimated to be complete by H2FY23; e) new OTR line for large (51”/57”) tyres has been completed at Bhuj; product trials are being conducted and the same should start to contribute to revenues in FY22; and f) EUR/INR rate for 4Q : Rs87.4 (FY22E hedges: Rs89).

* Maintain BUY:

BIL is likely to benefit from growth tailwinds across both agri and OTR segments, we expect sales/EPS CAGR ~21%/26% FY21-FY23E. We upgrade our earnings estimates by 2.2%/7.4% for FY22E/FY23E respectively. We estimate FCF to remain healthy at ~Rs22.8bn (cumulative FY22-23E) even post accounting for Rs19bn of growth capex. Top-quartile RoCE’s (~27%), attractive FCF yield (~3.4%) in FY23E aids our positive stance. We raise our target multiple to 24x (earlier:22x) FY23E EPS due to the improving outlook and arrive at a target price of Rs2,269/share (earlier: Rs1,937). Maintain BUY.

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