Balkrishna Industries - Growing from strength to strength - LKP Research

Margin growth leads the bottomline outperformance

Balkrishna Industries (BKT)'s Q3 FY14 numbers were above our expectations despite sales showing a slight growth of 2.3% qoq and 12.5% yoy to 33,901 MT. Net realizations were up by 10.3% yoy and 2% qoq as the product mix improved, despite the company having taken price cuts of 8-10% in Q1 on rubber prices moving down. Net revenues zoomed up by 26.6% yoy and 5.3% qoq. The company posted resilient margin performance with EBITDA margins soaring at 25.9% up from 24.1% sequentially and 22.1% yoy. This was due to favorable movement in rubber prices, operating leverage from Bhuj plant getting operational, beneficial currency trajectory and crude derivatives' prices moving down a bit. Also, the other expenses as a % of sales moved down to 19.9% from 21% qoq. Depreciation expenses went up as per our expectations due to the commission of new plant at Bhuj. Also interest expenses moved up to Rs 64mn on the loan repayment associated with Bhuj plant. Despite depreciation and interest costs moving up, net profits rose by 39% yoy and 14% qoq to Rs1.23 bn.

Outlook and Valuation

We expect replacement demand in both developed and emerging economies to improve hereon in line with the pickup seen in the recent quarter. With Bhuj plant commissioning, the company can cater to the demand coming from OTR segment at the right time. On margins, we believe stable rubber prices, favorable product and geography mix will help the company to post EBITDA margins close to 24% in the standalone business, higher than our previous expectation of 22% in the coming two years. With depreciation expenses moving up as per expectations, we believe FY 15 will be a slightly subdued year for BKT, but one needs to look at the stock on FY 16 basis, when volumes are expected to move up with demand growing and Bhuj plant adding to the production volumes. In line with current demand traction from the replacement markets mainly (72% of BKT's revenues) and margin traction coming in here-on, we are raising our earnings estimates for FY14E/15E and introducing FY 16E numbers, based on which we are valuing BKT at 7x times FY 16E earnings at a target price of Rs 436, thus maintaining our BUY rating on the stock.

Source : Equity Bulls

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