Balkrishna Industries - Weathering headwinds…Maintain BUY - LKP Research

Strong margins despite demand weakness

Balkrishna Industries (BKT)'s Q1 FY14 numbers were above our expectations despite sales going down. Due to weakness in global markets like Europe and North America, sales volumes went down 5.5% yoy to 34,491 MT, however, it was slightly up on qoq basis. Net realizations were up by 3.4% yoy and 1.8% qoq as the product mix improved, despite the company having taken price cuts of 8-10% on rubber prices moving down. Net revenues dipped by 1.7% yoy, though it went up by 4.7% qoq. Despite the revenues moving down, the company posted resilient margin performance with EBITDA margins coming in at 21.9% up from 20% sequentially and 18.9% yoy. This was due to favorable movement in rubber prices, beneficial currency trajectory and crude derivatives' prices moving down a bit. Depreciation expenses went up as per our expectations due to the commission of new plant at Bhuj. Also other income was higher than our expectations at Rs171 mn. This led to net profits coming above our expectations at Rs 1.03 mn.

Outlook and Valuation

In line with the management's outlook on the global demand scenario, we are a bit concerned on the short to medium term volume performance. However, with proliferation of distribution network and expectations of improvement in demand from OEMs mainly in second half of FY 14 or FY 15, we are positive on the long term prospects. With Bhuj plant commissioning, the company can cater to the demand coming from OTR segment at the right time. On margins, we believe the stable rubber prices, favorable product and geography mix will help the company to post EBITDA margins close to 20-21% in the coming two years. With depreciation expenses moving up as per expectations, we believe FY 14 will be a slightly subdued year for BKT, but one needs to look at the stock on FY 15 basis, when volumes are expected to move up with demand growing and Bhuj plant adding to the production volumes. In line with current softness in demand, we are cutting our earnings estimates by 5-10% for FY14E/15E and our target price from Rs 340 to Rs 293, while maintaining our BUY rating on the stock.

Source : Equity Bulls

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