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Strong growth outlook remains the key

Balkrishna Industries’ (BIL) Q2FY22 operating performance missed consensus estimates with EBITDA margin down 690bps YoY to 27.1% as gross margin declined 519bps despite strong volume growth (2-year CAGR: 19%). This was largely due to higher freight cost while RM cost inflation was largely passed on to customers. However, management has raised volume guidance (8-10%) to 275k285k MT for FY22 and also accelerated plans for capacity augmentation. The growth outlook is driven by both Agri and OTR segments, and across all key regions. BIL’s traditionally conservative management’s enhanced confidence in growth also reflects on the structural improvement in export competiveness of Indian suppliers. Timely capacity expansion and improving utilisation (FY23: >90%) are likely to drive FCF generation of ~Rs19bn (post project capex of ~Rs23bn) between FY22E and FY23E. Valuations remain fair. Maintain BUY.

* Highlights of the quarter: Overall top line improved ~34% YoY to Rs20.8bn as volumes grew ~19% and ASP was higher by 12.8% (led by forex MTM). Gross margin came in at 55.4% (down 519bps) as commodity price pressures and logistics issues persisted. EBITDA margin stood at 27.1% (down 690bps YoY) even as ‘other expenses’ rose on higher freight cost. BIL posted PAT growth of ~11% YoY due to higher tax rate (~31%) from prior period tax liabilities.

* Key highlights of earnings call: Management indicated: a) revamp of old Waluj plant to add 25k MT additional capacity (Q3FY23 onwards); capex of Rs3.5bn is required over next 6-9 months; b) capex for H1 was Rs8.4bn, of which Rs7bn was spent on projects; BIL plans to spend Rs11bn in FY22 and FY23 towards capacity expansion; c) the company has been able to pass RM cost inflation (up 2.5% QoQ); 50% of incremental shipping cost has been recovered and balance is to be recouped through price hikes w.e.f. Jan’22; d) BIL has raised Rs5bn and swapped it via euro liabilities at a fixed rate of 0.055% p.a. to be repaid in next 3.5 years; e) dealer inventory has been lower than normal at 1.5-2 months; and f) of OTR sales share (31%), 13% is from the US mining segment (earlier: 8%); BIL sold 9k MT of carbon black in H1 (Rs880mn) to external customers; the company holds 5.5-6% market share and targets to increase it to reach ~10%.

* Maintain BUY: We continue to like BIL on its improved growth outlook coupled with top-quartile return metrics (>25% RoCE) and healthy FCF generation (~Rs19bn cumulatively in FY22E and FY23E) even as capex spends continue to aid growth. As the company approaches high utilisation levels, we expect an EPS CAGR ~25% over FY21E-FY24E. We tweak our earnings estimates by 0.3%/-1.2%/0.7% for FY22E/FY23E/FY24E, respectively. We value the stock on an unchanged multiple of 26x Sep’23E EPS on the back of improving growth visibility and arrive at a target price of Rs2,831/share (earlier: Rs2,837). Maintain BUY.

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