Sheen of safety is off! • BIL :: ICICI Securities, link

Please Share::

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

��

-->
Sheen of safety is off!
• BIL reported revenues of | 881 crore vs. our estimate of | 944 crore
(~5% YoY growth). The growth was driven by volume growth, which
came at 37,281 MT (~7% YoY increase) even as on euro basis
realisations fell ~4% YoY to $3.9/Kg
• EBITDA margins at 23.5%, (~120 bps QoQ decline) came lower than
estimate (25.9%) due to higher other expenses due to increased
discounts, poorer contract obligations. Thus, reported PAT of | 90.2
crore, also came lower than estimate (~| 116 crore)
Focused OHT player plans to increase market share in global pie
BIL is a focussed off-highway tyre (OHT) manufacturer with contribution
of agricultural and OTR segments at 63% and 37%, respectively. With the
OHT segment forming only 10-15% of revenues for global players like
Bridgestone and Michelin, BIL’s focus on this niche segment augurs well
for the company as the it currently enjoys ~5% market share in a ~$15
billion global market. Also, the only focused global player, Titan
commands a hefty brand premium (~25%) over BIL’s products. Hence,
this outlines the headroom for volume growth for BIL in this highly capital
and labour intensive segment characterised by large number of SKUs and
frequent mould changes due to high degree of customisation level
demanded by the end-application.
Best in-class margins led by significant labour cost arbitrage
Despite selling at ~25% discount to the industry leader, BIL enjoys strong
margins as its products are competitive due to lower labour costs in India,
compared to significantly higher wage and benefits/entitlement structure
present in European facilities. For BIL, labour costs form 4-5% of revenue
whereas for companies like Titan having plants in North America, labour
costs are ~20% of revenues. In the past few quarters, BIL has benefitted
from weakness in natural rubber prices (which form 40% of total raw
material cost). Also, with ~90% of revenues coming from exports, the
weakness in the rupee has aided margins. Going ahead, as the new Bhuj
capacity ramps up, higher volumes will offset the increase in other
expenses due to initial start-up costs.
Business focus changes as management targets OEM with new capacity!
BIL set up the Bhuj facility (140,000 MT capacity) with an eye on
increasing sales in other segments like OEMs, OTR as market share gains
have been very minimal in last four years (~1% to 5%). The strategy has,
thus, shifted to a more OEM centric approach (lower margin, higher
costs) that would finally lead to modification of business model to some
extent. BIL was a low working capital requirement company supplying on
dedicated replacement orders that would now need higher inventory
management as it moves towards warehousing and JIT for OEMs.
Earnings take knock on uncertainty! Could valuations suffer same fate?
BIL’s huge capacity has raised fears it would lead to deteriorating
earnings and return ratios over the next two years as a global recovery
remains elusive and pricing trends remains highly weak. We give BIL the
benefit of doubt. We expect it to clock strong volumes of
~182,000/212,000 MT in FY16E/FY17E. We continue to like the export
dominated, strong margin and return ratio profile of BIL. However, the
recent volatility in business performance is worrying. We believe most
positives vis-à-vis volume growth are already factored in. We value BIL at
same 13x FY16E EPS but the earnings cut leads to a price target of | 734
and downgrade the stock to HOLD from BUY.

LINK
http://content.icicidirect.com/mailimages/IDirect_BalkrishnaInds_Q2FY15.pdf