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Below our estimate; margin hit by higher RM and other costs

Capacity constraints to restrict volumes over the next three quarters

* BIL’s 3QFY22 performance was affected by high RM costs, thus affecting margin. Volumes over the next three quarters will be around current levels as it is operating near full capacity.

* We reduce our FY22E/FY23E EPS by 8%/7% to account for higher RM costs and weak domestic volumes. We maintain our Neutral rating.

Higher RM costs, power costs, and marketing spends hurt margin

* Revenue/EBITDA/adjusted PAT grew 39%/5%/2% YoY in 3QFY22 to IN20.8b/INR4.9b/INR3.3b. The same grew 50%/29%/39% YoY in 9MFY22. 

* Volumes grew 18% YoY to 70.3kt (est. 73.6kt). Realizations grew 18% YoY to INR295.6k/unit (est. INR287.3k).

* Gross margin contracted by 620bp YoY and 190bp QoQ to 53.5% (est. 55%) due to RM cost inflation, despite a 2-3% price increase in 3QFY22.

* EBIDTA margin fell 760bp YoY to 23.7% due to higher RM costs and other expenses (+240bp YoY). The latter was led by higher marketing cost (~50bp) and a rise in power cost (due to a shutdown at a captive co-gen plant).

* Adjusted PAT grew 2% YoY to INR3.3b (est. INR3.8b).

* The company declared a third interim dividend of INR4/share and a special dividend of INR12/share for FY22 (INR28/share in FY22 YTD).

Highlights from the management commentary

* Demand across geographies (excluding India) and segments remains good. Growth in Europe continues to remain strong, benefitting from product approvals on the OTR/Industrial side and supported by good demand in the Agri segment.

* Volumes for the next three quarters will be around 3QFY22 level as it is operating near full capacity.

* It expects a further 2-3% QoQ increase in RM cost in 4QFY22. This is based on the current level of crude prices.

* It had raised prices by 2-3% at the beginning of 3QFY22. It hasn't taken any price hike in 4QFY22 yet as freight rates are coming down.

* Capacity expansion is on track for 2HFY23 addition at Bhuj (50kt) and Waluj (25kt), taking its total capacity to 360kt (from 285kt).

Valuation and view

* We expect BIL’s outperformance to the Specialty Tyre industry to continue, driven by expansion of its product portfolio and ramp-up in the OTR segment, with scope to strengthen its competitive positioning.

* Current valuations fairly reflect its industry-leading margin, FCF, and capital efficiencies. It currently trades at a P/E multiple of 25.6x/22.9x FY23E/FY24E EPS. Valuing BIL at 25x Mar’24E EPS (at a 25%/80% premium to its five/10- year average P/E), we arrive at our TP of INR2,320. We maintain our Neutral rating.

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