Hold Balkrishna Industries -Good business model, rubber concerns :: Anand Rathi

Please Share:: India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��


Balkrishna Industries
Good business model, rubber concerns; initiate with Hold
Balkrishna Industries focuses on agricultural tyres and the offroad
sub-segment overseas. It typically enjoys higher margins
than domestic peers. However, short-term capacity constraints
and rising rubber prices have dampened its short- to mediumterm
outlook. We initiate coverage on BIL with a Hold
recommendation.

 Robust business model. Balkrishna mainly caters to the highermargin
segments–off-road vehicles and agricultural tyres. As it
supplies heavier tyres mainly for export, it enjoys higher-thanindustry
margins.
 Rubber is a concern. The escalating price of rubber is a concern
for the entire tyre industry. While Balkrishna’s forward contracts
at lower prices insure it from higher rubber prices in FY11, the
impact cannot be avoided in FY12.
 Peaking capacity. While demand for tyres is robust, BIL’s
peaking capacity utilisation indicates that its revenue growth would
be constrained in FY12.
 Valuations and risks. We value the stock at `144 (8.25x FY12e
standalone EPS of `16.5 and `8 as value of its paper business). At
the CMP, the upside is not too compelling. We initiate coverage
with a Hold. Upside risks: decline in rubber prices, faster-thanexpected
ramp-up in new capacities, and more-than-expected
price increases. Downside risk: unfavourable currency movement.