Balkrishna Industries - "Robust demand and margin performance leads us to raise estimates" ::LKP

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Capacity expansion mirrors the robust demand outlook

Balkrishna Industries (BKT) reported a robust Q3 FY12 performance above our expectations. Net revenues grew by 54% yoy and 12% qoq, of which 28% yoy came from volumes, while the rest came from growth in realizations and product mix. Volumes for the quarter were at 35,534 MT, up 28% yoy. While there was no price hike taken in the quarter, the YTD price hike was at 16-18%. Sequentially, the volumes grew by 9.5%. The robust volume growth sequentially came on the back of brownfield expansion at its Bhiwadi and Chopanki plants and robust demand for OTR and agri tyres across the globe. The achievable capacity from existing plants now stands at 144,000 MTPA for FY 12E and will move to 156,000 MTPA in FY 13E.  With Bhuj capacity commencing in 3Q FY13, total achievable capacities of BKT are expected to move up to 181,000 MTPA in FY 13E and 231,000 MTPA in FY 14E. With surging demand for OTR tyres, the company has outlayed an additional capacity builtup of 30,000 MTPA of ultra large OTR tyres in FY15E at Rs4bn of capex, which will take the total achievable capacity to 276,000MTPA in FY15E. BKT has an order book of 68,000 MTPA, worth Rs 14 bn which is equivalent to 5.5 months of volume visibility, thus boosting our confidence in the company. BKT seems to be insulated from the macro concerns, especially in Europe, which contributed 48% of total sales, while Americas were at 24%, Asia at 14% and ROW at 14%.

Margins grow to 18.9% in Q3, to move ahead further with better product mix and operating leverage

EBITDA margins grew 50bps sequentially at 18.9% on softening rubber prices and price hikes taken at different times during the year, despite other expenses to sales having increased to 19.1% of sales. RM to sales fell to 59.7% of sales from 62.4% sequentially, which would have fallen even further had the oil derivatives (synthetic rubber) prices become softer. PAT came in 91% yoy and 15% qoq at Rs729mn on robust operational performance and healthy topline growth. Viewing a slight hardening of NR prices due to end of tapping season, BKT has again increased its NR inventory from 3 months to 4-5 months, thus gaining advantage of firming rubber prices in the May quarter. In spite of taking significant price hikes over the year, BKT’s product prices are still at 30% discount to market leaders, thus providing BKT an edge over its competitors in times of slowdown and also allows it to take further price hikes if required. With capacity expansion at Bhuj, operating leverage is bound to come and assist margin growth. Also, the long term view on rubber prices remains soft as rubber prices are expected to move down in FY 13 on increased supply coming from growth in plantation and yield. Furthermore, with additional capacities coming on the high margin OTR side in the next couple of years, the margins are slated to expand by at least 200bps by that period with the Bhuj plant coming up with an in built power plant and rubber mixing plant which would save at least 150 bps of power and transportation costs. With robust Q3 FY13 margins and expectation of improvement going forward, we have raised our margin estimates for FY 12E/13E to 18.6%/19.2% respectively.

Outlook and valuation

In line with continued visibility on volumes and margins coupled with above expected results, we are increasing our estimates for BKT. At CMP, the stock trades at 6.3x times its FY 13E EPS of Rs 39. We now value the company at 7.5x times on FY 13 earnings, while increasing our target price to Rs 292 and maintain BUY rating on the stock.