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BIL continues to outperform industry exports

Balkrishna Industries (BIL) has reported strong demand trends in its key overseas markets with overall Q2FY23 exports revenue being up 25% YoY (in US$ terms) against industry exports being up 5% YoY. The data indicates growth momentum in OTR segment exports (up 10% YoY) and steady agri demand (up ~3% YoY) despite adverse market conditions in target geographies and supply-chain issues. Data continues to support robust demand momentum driven by both agri and OTR segments (H1FY23 industry exports in US$ are up ~16% YoY), on a strong base of H1FY22. Regionally, growth in Q2FY23 was led by the US market (up 55% YoY) followed by RoW at 12% YoY. We believe the benefit of new contracts of containers at lower rates and lag effect of lower RM costs could aid BIL EBITDA margin to revert towards 24-25% levels Q4FY23 onwards, over and above delivering ~5% volume growth in FY23. Better cost arbitrage, rising focus on improving OTR market share and scaling up of large diameter tyres are driving our revenue growth assumption of ~16% CAGR over FY22-FY24E (~9% volume CAGR). Maintain BUY with DCF-based TP of Rs2,479, implying 25xFY24E EPS.

* Overall industry export growth continues as OTR demand remains strong: On end-product basis, industry growth sustained in agri tyres (H1FY23 up ~13% YoY) and accounted for ~66% of total exports (down 170bps YoY). On OTR side, momentum remains strong with H1FY23 growth at 22% YoY, signalling rising infrastructure spending along with improving mining activities for precious metals used in electronics and batteries aided by low inventory levels. We believe the outlook for global agri tyre exports remains strong as peers witness strong order inflows from replacement market with inventory destocking exercise by dealers resulting in lower dispatches (link).

* BIL’s share of India OHT tyre exports breaches 60% mark in Q2FY23 as US drives growth spike in agri and OTR: As per commerce ministry data, BIL has been consistently outperforming industry exports on a YoY basis (refer Table 4) and has finally breached 60% market share mark in Q2FY23 from average 50% share over the past three years. On regional basis, BIL reported 17% growth YoY against industry decline of 17% YoY in the EU in Q2, while for the US, BIL grew 60% YoY, higher than industry growth of 55% YoY.

* Near-term capacity pressure presents an opportunity to enter; maintain BUY: BIL, with its cost arbitrage advantage vs peers, is still able to price its products at a discount of ~15-20% to global peers amidst inflationary power/fuel and manpower costs. This enables BIL to make lower price hikes and maintain profitability, resulting in continued improvement in market share (currently ~7% and targeting ~10% in next 3 years). With a mean RoE of ~23% and FCF of Rs20bn in FY23E-FY24E combined, BIL is providing a great opportunity to get added in portfolio currently, we believe.
 

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