Balkrishna Industries - Volumes dip; lower costs, higher prices boost margin - Edelweiss

Balkrishna Industries' (BKT) Q4FY13 top line of INR7.8bn (flat YoY) came in line with our estimate. The disappointment was primarily due to 7% dip in volumes, which was somewhat compensated by better realisation and favourable currency movement. The company clocked 34,061MT volume with average realisation of INR229/KG (up 5.5% YoY). Softening rubber prices enabled it to post 20% EBITDA margin (up 4% YoY). Management reiterated that the slowdown in Europe and US is impacting volumes and the company's order book, which shrunk to 1.5 months. BKT has given muted volume growth guidance for FY14 owing to tough macro environment. However, it has been able to gain market share and is confident of achieving full capacity utilisation once the macro environment improves. Maintain 'BUY'.

Mute volumes dent top line; lower costs, higher price boost margin

The disappointment was predominantly due to dip in volumes across geographies. BKT's 34,061MT volume fell 7% YoY, which was somewhat compensated by higher realisation (up 5.5% YoY). EBIDTA margin at 20% was up 390bps YoY primarily due to lower raw material cost (rubber prices correction) and higher prices.

Capex on track, but slow down will impact capacity utilisation

BKT has started Phase I (10,000MT) of Bhuj facility and is planning to add another 50,000MT during FY14, and balance 60,000 during FY15. However, due to slowdown in Europe and US, capacity utilsation during FY14 & FY15 will be lower @ 70-75%. The company's order book, which used to stand at ~4-5 months' sales until a few quarters ago, has shrunk to 1.5 months of sales in Q4FY13. We cut our volume estimates 11% and 7% for FY14 and FY15, respectively, to factor in lower demand.

Outlook and valuations: Positive; maintain 'BUY'

We cut our FY14E and FY15E earnings 2% & 15%, respectively, to factor in slowdown in Europe and US, and lower visibility due to order book decline. We value BKT at 8x (9x on FY14E EPS earlier) standalone FY15E EPS of INR39.9 to arrive at target price of INR319 (INR325 earlier). We like company's low-cost business model and believe new capacity equips it to cater to a broader product spectrum. Hence, we maintain 'BUY'.

Source : Equity Bulls

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