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Margin pressure to ease; portfolio attributes intact…

About the stock: Balkrishna Industries (BIL) is the leader in the niche tyre segment used in heavy machinery for mining and agriculture purposes

Exports form a lion’s share of its sales at ~80% of its revenues

Channel mix: replacement accounts for ~70% with OEM share pegged at ~26%. Agriculture accounts for ~64% of volumes with OTR share at ~32%

It has consistently operated with high (>20%) margins & return ratios

Q3FY22 Results: BIL reported muted Q3FY22 results.

Standalone net sales for the quarter was at | 2,030 crore, down 1% QoQ

EBITDA margins in Q3FY22 came in at 21.8%, down 352 bps QoQ

PAT was at | 328.6 crore, down 12.9% QoQ, held up by higher other income and lower tax rate

What should investors do? BIL’s share price has run up ~30% CAGR in past five years, (~| 580 in February 2017), thereby vastly outperforming Nifty Auto index

We retain BUY on BIL amid robust demand prospects, healthy financials

Target Price and Valuation: We value BIL at a revised target price of | 2,650 i.e. 32x P/E on FY23-24E average EPS of | 82.9 (earlier target price | 2,900).

Key triggers for future price performance:

Ambition to double global market share to ~10% vs. ~5-6% currently

Robust demand across user segments (agri, OTR) to propel volume growth

Aggressive brownfield expansion and backward integration in place, along with optimum capacity utilisation to drive sales, PAT growth at CAGR of 21.3%, 15.3%, respectively, in FY21-24E. Margins seen at ~26% in FY24E

Net debt free b/s, double-digit return ratios and strong cash generation

Alternate Stock Idea: In our auto ancillary coverage we like JK Tyre.

Walking the talk on b/s deleveraging, sweating of assets & capital efficiency

BUY with a target price of | 170

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