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Healthy results but outlook remains weak Demand likely to moderate, while RM/freight costs to increase

* BIL’s overall performance was healthy in 1QFY25, led by volume growth and lower operating expenses. However, the management has guided for a muted outlook as demand is likely to moderate and RM and freight costs are likely to increase in the coming quarters, which will dent overall margins.

* In the light of these challenges, we cut our FY25/FY26 EPS estimates by ~4% each. We maintain our Neutral rating with a TP of INR2,770, based on ~24x Jun’26E EPS.

Marginal growth guidance for FY25 despite strong Q1 growth

* BIL’s standalone 1QFY25 revenue/EBITDA/PAT grew 30%/47%/53% YoY to INR27.4b/INR7.1b/INR4.8b (est. INR25.6b/INR6.6b/INR4.1b).

* Volumes grew 24% YoY to 83.6k tons (est.78.6k tons). Realizations grew 4% YoY at INR328.1k/unit (est. INR325.3k).

* Gross margins expanded 140bp YoY (-20bp QoQ) to 53.1% (est.53%). The company expects RM costs to increase by 2-3% QoQ in 2QFY25.

* Along with lower operating expenses, EBIDTA margins expanded 300bp YoY to 26% (est. 25.6%). However, the freights cost is expected to increase by ~200bp in the coming quarter.

* Further aided by lower interest costs and higher other income, adj. PAT grew 53% YoY to INR4.8b (est. 4.1b).

* The board has declared the first interim dividend of INR4/share for FY25.

* The company would be incurring a capex of INR13b to add capacity of about 35k MTPA at its Bhuj facility. Its current achievable capacity stands at 360k MTPA.

Highlights from the management commentary

* Demand outlook- Despite a 24% YoY volume growth posted in Q1FY25, BIL has guided for minor volume growth YoY in FY25 as it expects demand headwinds in its key markets in Europe, North America and Middle East in the coming quarters. There has been some channel filling as well by distributors due to increased transit time on account of the Red Sea Crisis.

* Freight cost- This was already negotiated for Q1. The freight cost is expected to increase to 8-9% of revenue in 2Q, largely due to the Red Sea crisis. It was 6.4% in 1QFY25.

* Raw material costs- BIL expects a 2-3% increase in 2Q. The company has not taken any price hike as market demand is weak.

* Margin guidance - While Q1FY25 margins stood at 26%, management has indicated that they would strive to maintain margin at FY24 levels of 25% in FY25, given the rising cost pressure highlighted above

* European Union De-forestation Union (EUDR): Effective 31st Dec’24, EUDR requires that rubber supplied to the EU must not come from land deforested after Dec’20. While the company has secured compliant suppliers, costs could increase by USD300 per metric ton over the current base price of USD1,800 per metric ton.

Valuation and view

* Retail demand in key global markets is currently weak and is likely to remain uncertain due to ongoing geopolitical challenges. As a result, despite the strong growth in Q1, management has guided for flat volume growth in FY25. Further, rising cost pressures are likely to cap margin upside – management expects margins to remain stable in FY25.

* At a P/E multiple of 36x/28x FY25E/FY26E EPS, the stock appears fairly-valued. We value BIL at 24x June’26E EPS (vs ~22x, 10-year LPA) to arrive at our TP of INR2,770. We reiterate our Neutral stance on the stock.

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SEBI Registration number is INH000000412