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Demand remains strong across geographies

Price increases to pass on cost inflation and logistics cost

* BIL’s 1QFY22 performance was driven by strong demand tailwinds across geographies and segments, leading to its highest ever volumes. Strong economic activity, increased government spending on Infrastructure, and supporting underlying commodity prices augurs well for demand for both Agri and OTR tyres.

* We upgrade our FY22E/FY23E EPS by ~7%/6% to factor in strong demand. However, we maintain our Neutral rating due to the rich valuations.

Price hike dilutes impact of cost inflation on margin

* Revenue grew 4.5% QoQ to INR18.3b in 1QFY22. EBITDA/adjusted PAT declined by 3%/4% QoQ to INR5.3b/INR3.58b.

* Volumes grew 1% QoQ (+80% YoY) to 68.6kt – the highest ever quarterly sales volume. Realizations grew 3.5% QoQ (+8% YoY) to INR266.5k.

* Revenue grew 4.5% QoQ (94% YoY) to INR18.3b.

* Gross margin contracted by 160bp QoQ (387bp YoY) to 57.2%.

* EBIDTA margin contracted by 230bp QoQ (+300bp YoY) to 28.9% due to higher logistics cost (90bp impact). EBIDTA fell 3% QoQ (+117% YoY) to INR5.28b. Higher other income boosted adjusted PAT to INR3.58b (-4% QoQ).

* The company declared its first interim dividend of INR4/share for FY22.

Highlights from the management commentary

* Outlook: Volume guidance remains at 250-265kt for FY22, despite strong tailwinds due to the COVID-led uncertainty in the ecosystem.

* Price hike: It took a 2-3% price hike in Jul’21. It is taking a quarterly price hike and should maintain a 28-30% operating margin annually on a long term basis.

* RM inflation remains a challenge on a pricing perspective. It believes that RM cost is at its peak and should remain stable at these levels.

* Logistic costs have increased (impact of 90bp). It expects other expenses to remain at current levels for the remaining part of FY22.

* Inventory: Dealer level inventory has normalized to 35-40 days (v/s 20-25 days earlier and a normal of 40-45 days).

* Capex for FY22 to be at INR9-10b.

Valuation and view

* We expect BIL’s outperformance to the industry to continue, driven by expansion of product portfolio and ramp-up in 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 30.7x/25.8x of FY22E/FY23E EPS. We value BIL at 25x Sep’23E EPS (at a 25%/80% premium to its five/10- year average P/E), with a TP of INR2,600. We maintain our Neutral rating.

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