Balkrishna Industries - Product mix buffers impact of demand slowdown - BRICS Research

BIL reported Q4FY13 numbers that beat our estimates - revenue came in 12%, and PAT 10%, above estimate. Revenue at Rs7.8bn was down 1% yoy, largely due to decline in volume. Increased employee cost and other expenses were offset by softening in rubber prices - EBITDA was up 23% yoy, with EBIDTA margin coming in at 20%. PAT stood at Rs846mn, up 11% yoy. Higher tax rate of 37% and depreciation (up 47% yoy) in Q4 impacted profit growth. We downgrade earnings estimates by 3% and 4% for FY14 and FY15 respectively. We believe valuations are attractive and maintain Buy rating with revised target price of Rs340 (earlier Rs335) based on DCF method.

Revenue declined 1% yoy: Revenue at Rs7.8bn was down 1% yoy but up 11% qoq. Volume declined 6% yoy to 34,061MT (up 13% qoq) likely due to weak demand in the European markets. Realisation grew 5.5% yoy to Rs228,795/MT on shift in product mix (likely due to increased contribution of 31-51" tyres from Bhuj factory) and price increases.

EBIDTA supported by lower raw material costs: While the benefit of low rubber prices in Q3FY13 was visible in Q4FY13 - raw material cost, as a % of sales, was down 402bps yoy - employee cost as a % of sales was up 148bps yoy, due to low volume and manpower addition for capacity expansion at Bhuj. EBITDA came in at Rs1.6bn, up 23% yoy, flat qoq and 5.3% below our estimate, resulting in EBIDTA margin of 20% vs. 16.1% in Q4FY12.

PAT up 11% yoy: Other income was up 29% yoy in the quarter at Rs106mn. The commencement of production at Bhuj resulted in an increase of 47% yoy (18% qoq) in depreciation. BIL made a tax provision of Rs255mn - which pegged the tax rate for the quarter at 37%, up 400bps yoy. Thus PAT came in 10% above our estimates at Rs846mn, up 11% yoy but down 5% qoq.

Lower volume estimates but upgrade margin estimate for FY14

In FY13 BIL reported volume of 138,339MT, a growth of only 4% yoy as global markets, especially Europe and US, were impacted by slowdown. Although US agri machinery market has started improving, we lower volume estimates as the management provided a cautious guidance for volume of 145,000-150,000MT (5-8% growth) compared to earlier guidance of 10% for FY14. We expect overall markets for BIL will report revival in H2FY14 and BIL will be able to achieve its guidance for FY14. We lower volume estimate for FY14 by 5% at 152,173MT and FY15 by 6% at 172,716MT (assuming pick up volume will be lower than our earlier estimate). However we increase margin estimate as global rubber prices have corrected 3.7% over last six months and are likely to remain at current level which will benefit BIL (comparatively INR depreciation is less at 0.19%). However, due to increase in depreciation charges we revise earnings estimates downwards by 3% and 4% for FY14 and FY15 respectively

Valuation

The stock trades at a P/E of 6.7x FY14E and 5.5x FY15E and an EV/EBITDA of 5.8x FY14E and 5.2x FY15E. We expect BIL's revenue and earnings to grow at a CAGR of 14% and 16% over FY13-15E. We value BIL at Rs340 (earlier Rs335), based on the DCF method. At our target price of Rs340, the stock will trade at 8.6x FY14E and 7.0x FY15E.

Source : Equity Bulls

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