Balkrishna Industries - Expect a decent quarter; Buy - Anand Rathi

Tonnage to improve in 3Q. Balkrishna Industries' 1H sales tonnage was 8.2% lower yoy due to demand slowing down in Europe and North America. However, with the low base now catching up, we expect 18% sales tonnage growth in 3Q. We expect BI to report marginal tonnage growth in FY14. In terms of geographical sales mix, in FY13, Europe constituted 45%, India 9%, North America 25% and the rest of the world 21%, similar to that in FY12.

Bhuj plant starts operations. The new Rs. 18bn plant at Bhuj partly commenced operations in Sep'12, and is now in a scale-up mode. 10,000-ton capacity was available for production in FY13, which would be ramped up to 60,000 tons in FY14 and to the full extent of 120,000 tons by FY15.

Healthy EBITDA margin. On better yoy sales, we expect revenues to grow 23.9% yoy, to Rs. 8.7bn Our EBITDA margin expectation is 22.9%, 90bps higher yoy (lower 120bps qoq). We expect 19.9% yoy decline in adjusted profit, to Rs. 1bn.

Our take. We are optimistic on the company's prospects, though it may experience short-term weakness in demand (despite demand pressures, FY13 performance was good). Also, a better product mix would help it counter sluggish revenues. Catering to the replacement market, with a strong global, well-diversified distributor network, and an expanding market reach, the company is poised to do better. Factors to watch out are improvement overseas and better demand in emerging markets. We maintain Buy, with a price target of Rs. 379 (based upon 7.75x FY15 earnings). At the ruling price, the stock trades at 7x FY15e EPS, and an EV/EBITDA of 4.9x FY15e. Risks. Spike in rubber prices, adverse forex movements, a further dip in demand in North America and Europe.

Source : Equity Bulls

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