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Annual report analysis: Managing pressures well

Balkrishna Industries’ (BIL) FY22 annual report highlights: a) Outlook for low teen volume growth for FY23 post executing 27% growth in FY22 due to geo-political risk and inflation scenario in target markets; b) higher-than-normal capex to persist with carbon black capacity expansion, captive power capacity expansion and plant modernisation projects to get executed in FY23 for ~Rs11bn, following Rs15bn of capex in FY22; c) lower ad/marketing spends at ~4% of sales in order to manage margin amidst elevated raw material and freight costs; d) cash conversion worsened from ~96% to 68% due to adverse working capital. Rise in working capital cycle from 64 days in FY21 to 85 days in FY22, primarily led by higher inventory days amidst global supply-chain turmoil. With ports in China opening up, BIL expects working capital reversal to ease off cashflow; e) BIL has largely improved on various ESG parameters in FY22, though consistent shortfall in CSR spends continued. BIL invested ~Rs2.5bn in AIF/PMS/equity instruments in FY22 as a part of its investment book, amidst low interest rate scenario in H1FY22 to maintain overall yield.

Useful aspects to know more about BIL and missing in the AR

* The strategies BIL is targeting to implement in order to reach ~10% market share in global OTR market. How BIL is targeting to ramp up its share in the industrial space where its presence has been relatively weaker vs agriculture segment? How is BIL looking at Indian manufacturers entering the global OTR market in recent years?

* Massive increase in raw material basket resulted in 600bps decline in gross margin despite being able to improve gross profit/kg by ~2% YoY. Outlook on gross margin going ahead from present lows and how is BIL planning to do the needful?

* With spot euro/INR having moved from ~86 a year back to ~82 currently, how is BIL planning to tackle this adversity over and above the raw material cost pressures?

* With freight cost/ton having inched up ~2.2x in FY22, how is BIL looking at that cost in FY23? How much freight cost can be passed on to customers? Is there any shift in pricing contracts going ahead to factor in freight cost volatility?

* 360k ton capacity seems to be running at full by FY24 on assumption of 10% volume CAGR in FY22-FY24E. When is BIL likely to plan for its next leg of capex?

Outlook:

With global OTR demand continuing to remain strong in Q1 despite inflationary pressures along with prices of key agricultural commodities like corn and soya remaining steady, we do not see much risk to BIL’s guided volume growth of ~10-12% in FY23. With no reduction in crude oil prices and container rates being hardly down ~10% in its key routes, we are building ~25% EBITDAM for FY23E. We maintain BUY on BIL with DCF-based price target of Rs2,587, implying ~22x FY24E earnings.

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