Balkrishna Industries: Valuations factor in sustainable performance: Avendus

BIL reported revenue growth of 53% y‐o‐y, led by volume and realization growth of 28% and 20% y‐o‐y, respectively. EBITDA margins improved by 50‐bp sequentially to 18.9%, supported by price hikes taken during the previous quarter and stable rubber prices. The strong operating performance, combined with normalized interest costs resulted, in 91% y‐o‐y growth in PAT to INR729mn. Increasing volumes, improving realizations and softening rubber prices are likely to support margin expansion for BIL over FY13f‐FY14f. Accordingly, we raise our EPS forecasts by up to 28% over FY12f‐FY14f. The implied PAT CAGR over FY12f‐FY14f works out to 22% against 12% earlier. We raise our target P/E band from 6.0x‐6.5x to 6.5x‐7.0x and assign a Dec12 fair value range of INR230‐INR247 (from INR168‐INR182 earlier). The stock has a potential upside of c2% at the upper end of its fair value range.

PAT up 91% y‐o‐y, led by strong operating performance

BIL reported strong revenue growth of 53% y‐o‐y to INR7.6bn during the Dec11 quarter, led by a combination of higher volumes and better realizations. Tyre volumes grew 28% y‐o‐y to 35,534, whereas realizations were higher by 20% to INR213/kg. EBITDA margins stood at 18.9%, up 50‐bp q‐o‐q, supported by the price hikes undertaken during the previous quarter and stable rubber prices. Strong operating performance, combined with normalized interest costs, resulted in 91% y‐o‐y growth in PAT to INR729mn. During the Dec10 quarter redemption premium for FCCBs inflated interest costs; adjusted for the same, PAT growth stood at 58% during the Dec11 quarter.

Enhanced scope of expansion at Bhuj to provide additional capacity

BIL has further enhanced the scope of expansion for its greenfield project at Bhuj. Under the revised plan, the company would be augmenting its annual achievable capacity by 120,000 tonnes, instead of 90,000 tonnes earlier. Additionally, a rubber mixing plant and supporting infrastructure for the plant and employees is likely to be set up. This enhanced scope is likely to increase the total project cost from INR12bn to INR18bn. BIL is likely to raise an additional USD100mn for the same. The first phase of expansion is likely to be completed by 2QFY13, while entire project is likely to be complete by end FY15.

Revise estimates by 28%; Dec12 fair value range of INR230‐INR247

The strong demand in the tyre segment, improving realizations and softening rubber prices augur well for BIL's growth prospects. Accordingly, we raise our EPS forecasts by up to 28% over FY12f‐FY14f, factoring in higher volume growth and lower rubber prices. The implied PAT CAGR over FY12f‐FY14f works out to 22% against 12% earlier. We also raise our target P/E band from 6‐0x‐6.5x to 6.5x‐7.0x, owing to improved growth prospects, and arrive at a Dec12 fair value range of INR230‐INR247 (from INR168‐INR182 earlier). The stock has a potential upside of c2% at the upper end of the fair value range. A higher‐thananticipated increase in input costs and any delay in planned capacity addition are key risk factors.

Source : Equity Bulls

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