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Highlights of Q2FY11 results
• Balkrishna Industries (BKT) Q2FY11 results have been below our estimates primarily on account of higher than
expected input cost pressures.
• Net sales for the quarter were up 57%yoy (up 4%qoq) at Rs4.7bn (we saw Rs4.5bn) driven by 40%yoy tonnage growth
at 26,531MT (flat qoq) and 12%yoy growth (up 4%qoq) in average realizations to Rs179 per kg.
• However, rising input costs significantly impacted margins qoq. Blended raw material cost increased 61%yoy (up
6%qoq) to Rs110 per kg on account of the sharp increase in rubber prices.
• Resultant, EBIDTA margins for the quarter declined 110bps qoq to 18.9% (we saw 21.6%). Absolute EBIDTA for the
quarter declined 3%yoy (down 2%qoq) to Rs897mn (we saw Rs969mn)
• BKT reported a forex translation gain of about Rs50mn during the quarter. On account of a substantial input cost
pressure, PAT (adjusted for the forex gain) for the quarter declined 3%yoy to Rs460mn (we saw Rs506mn).
Conference call highlights
• Management’s guidance for tonnage sales for FY11 stands at 100000MT-110000MT (H1 tonnage sales at 53,131MT)
• Revenue break-up for the quarter is as below: OE: 15%, replacement 75%, offtake to global tyre manufacturers: 10%
• Average realization in H1FY11 has gone up to Rs175 per kg (Rs159 per kg in H1FY10). The company has taken
cumulative price hike of about 10-12% over the last 12 months.
• Average procurement cost for natural rubber in Q2FY11 was at USD3300 / MT (~USD3200 / MT in Q1FY11). The
average price for H2FY11 is likely to be at USD3500 / MT. However, as the rubber prices are currently hovering
around USD4200 / MT, raw material costs are likely to further go up in H1FY12.
• BKT is planning to hike its achievable capacity to 130000MT (120000MT currently) through de-bottlenecking over the
next 12 months at a capex of Rs2bn funded through internal accruals. Further, BKT is setting up a Greenfield plant at
Bhuj with an annual achievable capacity of 90000MT at an investment of Rs12bnwhich would commence operations
by H2FY13. Part funding of the Bhuj expansion would be done through USD175mn ECB facility (avg interest rate of
~3%, tenure 6.5 years, would likely be availed in phases beginning Q4FY11) and the balance through internal accruals.
• The board has approved for a stock split of 1:5 subject to shareholders approval
• The balance FCCB of USD22mn (total payout USD24mn including redemption premium) would be due for
redemption in Q3FY11 and would be redeemed through internal accruals.
Outlook
Demand for OTR tyres in the US market appears to be strong led by robust replacement demand as well as the antidumping
duty imposed on Chinese tyres in those markets. Further, demand for both agricultural and industrial tyres has
significantly picked up in the European markets. Robust demand across geographies is expected to boost topline growth
for BKT in FY11. The significant rise in input costs (particularly rubber) over the last few quarters is expected to be
partially offset by higher tonnage sales, improved realizations as well as favorable currency hedges (BKT has hedged its
FY11 USD exports at ~Rs49 against Rs46 in FY10 and Euro exports at ~Rs69 against Rs66 for FY10). At 7.1x FY12E and at
5.1x EV / EBIDTA, the stock appears attractively valued. Maintain Outperformer.
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