Balkrishna Industries - "On a strong wicket" ::LKP

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Q1 FY12 results above expectations, margins improve on higher realizations, rationalizing other expenses

Balkrishna Industries (BKT) reported a robust Q1 FY12 performance above our expectations. Net revenues grew by 28% yoy and 1.5% qoq. Volumes for the quarter were at 28,720 MT, up 8% yoy, while the rest of the growth in the top line came with more than 19% price hike and product mix. Utilization rate was unusually high at 96% which indicates capacity constraints restricting volume growth. Europe contributed 50% of total sales, while Americas were at 23%, Asia at 15% and ROW at 12%. EBITDA margins jumped 210bps sequentially at 18.1% on better cost rationalization on the other expenses side despite rubber prices jumping as high as $6000/MT and crude based derivatives soaring high. PAT came in 27% higher on a yoy basis at Rs.561mn above our expectations on robust operational performance.

Capacity expansion and strong replacement demand to take care of volume performance going forward

BKT faced capacity constraints in Q1 on account of strong replacement and agri demand. The company sold 28,720MT in the quarter, which the company expects to extend beyond 30,000 MT from next quarter onwards on the back of 10% debottlenecking initiative taken by the company. With this, the company expects to sell more than 130,000 MT this year, which we believe is very much possible, as replacement demand (~80% of revenues) is very robust in US and Europe especially on the agri side. This is insulating BKT from any slowdown on the OEM side (15% of total revenues). With the introduction of two new products on the mining radial and forestry sides and aggressive entry into Russia and CIS countries, we believe BKT would excel on the volume front. Also BKT has an order book of 65,000 MT (Rs.13bn) which gives us a volume visibility for the next two quarters. Furthermore, the Greenfield Bhuj plant (90,000 MT achievable capacity) commencement expected in Q2 FY13 will nearly double the capacity and the turnover of the business from FY 14, though some impact will be felt in FY13.

Margin performance to improve hereon on price hikes taken and easing rubber prices

BKT’s margins for the quarter were strong at 18.1% aided by ~19% price hike yoy, out of which 15% was taken from January 2011 and a superior product mix. Despite escalating NR and crude derivative prices, company through its price hikes, better cost rationalizing and higher sale of radial tyres managed to post a good operating performance. Expecting a softening NR prices on demand supply gap narrowing, BKT has reduced its NR inventory from 6.5 months to 2.5 months, thus gaining advantage of falling rubber prices. In spite of taking significant price hikes, BKT’s product prices are still at 30-35% discount to market leaders, thus providing BKT an edge over its competitors in times of slowdown and also allow the company to take further price hikes if required. Withdrawal of DEPB may impact the margins slightly as the company avails benefits largely under the Advanced License Scheme.

Outlook and valuation

Despite not being free cash positive due to heavy capex, given improved visibility on volumes and margins, we are slightly increasing our estimates for BKT. BKT has corrected after achieving our price target of Rs.186 (refer to our last update in April) and we now value the company at 6x FY13E earnings of Rs.34 and reiterate BUY with a revised target price of Rs.204.