Buy Balkrishna Industries - "Volume visibility sustains level of confidence" - LKP

Capacity debottlenecking leads to robust volume performance

Balkrishna Industries (BKT) reported a robust Q2 FY12 performance in line with our expectations. Net revenues grew by 42% yoy and 16% qoq of which 13% came from volumes, while the rest came from growth in realizations. Volumes for the quarter were at 32,439 MT, up 22% yoy. The robust volume growth sequentially came on the back of brownfield expansion at its Bhiwadi and Chopanki plants. This increased the achievable capacity to 144,000 MTPA, a rise of 20,000 MTPA. With Bhuj capacity commencing in 3Q FY13, we expect to see a surge in volumes in FY 13 and doubling of volumes in FY 14. BKT has an order book of 70,000 MTPA, worth Rs 14.5 bn which is equivalent to 6.5 months of volume visibility, thus boosting our confidence in the company. BKT seems to be insulated from the macro concerns, especially in the Europe, which contributed 49% of total sales constant with its figure in Q1, while Americas were at 23%, Asia at 14% and ROW at 14%.

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

EBITDA margins grew 30bps sequentially at 18.4% on softening rubber prices and price hikes taken at different times during the year, despite other expenses to sales increased sequentially due to increased marketing efforts in Europe to the tune of Rs50 mn. PAT came in 24% yoy and 12.7% qoq at Rs632mn on robust operational performance. Viewing a softening of NR prices on demand supply gap of NR narrowing, BKT has reduced its NR inventory from 6.5 months to 3 months six months back, thus gaining advantage of the falling rubber prices. In spite of taking significant price hikes over the year, BKT's product prices are still at 30-35% discount to market leaders, thus providing BKT an edge over its peers in times of slowdown and also allows it to take any further price hikes if required. The company has indicated that they are planning to take price hikes in some geographies. With rubber prices expected to move down further from current levels, management is expecting an improvement in margin performance. With prices of crude and its derivatives still at a high, we do not envisage a significant jump in margins this year. We estimate them to stay in the similar range of Q2, i.e. 18.4% and improve in FY 13 to 18.8%.

Strong agri replacement demand is the growth engine

Healthy replacement demand mainly in the agri segment(66% of volumes)is the major revenue driver for BKT. Inspite of the slowdown in the mainstream auto segment, agri demand has not taken a hit. Owing to BKT's presence in the agri sector, the company has witnessed a market share hike of 0.5% to 3.5% over the last one year and aims to reach 6% by 2015. Strengthening of business in the CIS countries, Russia and India will drive the business further. In H1 FY12, ROW segment which includes all these countries expanded by 15% yoy, while Europe grew by 11.6% yoy and Asia grew by 2% yoy. Americas which includes developing countries of Latin America grew by a whopping 34% yoy.

Outlook and valuation

In line with continued visibility on volumes and margins, we are maintaining our estimates for BKT. However, we now value the company at 7x times FY 13EPS of Rs33.8 on stable and insulated business model and expectations of a consistent set of numbers going forward. Hence we raise our target price to Rs 237 and maintain our BUY rating on the stock.

Source : Equity Bulls

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