Balkrishna Industries - Decent show in a tough quarter - ICICI Securities

Balkrishna Industries' (BIL) earnings for Q1FY21 missed estimates as volumes declined 25.7% (38k MT) while margins were a tad lower at 26.7%, up 236bps YoY. Management has maintained its guidance of flattish YoY volumes in FY21 on the back of agri segment growth even as OTR demand remains sluggish. We factor-in 0.5%/16.5% volume growth in FY21E/FY22E. We continue to like BIL due to: a) strong product offerings providing competitive edge, which would be aided by new OTR line in FY22; b) further scope for cost-led margin expansion coupled with improving forex rate (EUR/INR: ~88); and c) high FCF generation (~Rs14bn) from FY22 (FY20: Rs6bn). Yes, the stock has appreciated ~60% from its Mar'20 lows, yet we believe it provides better risk-reward vis-à-vis peers due to its standout earnings strength (expect ~15% EPS CAGR {FY20-22}). Maintain BUY.

- Highlights of the quarter: Overall topline declined 22.7% YoY to Rs9.4bn as volumes shrunk 25.7% and ASP rose 4.2% (we believe largely due to mix and forex benefits). EBITDA margin at 26.7% was impacted by higher fixed costs (sticky employee costs, up 173bps). Gross margins expanded 831bps to 61% driven by cost reduction. Reported PAT decline of ~31% YoY was due to forex-related MTM losses (Rs290mn). BIL also declared an interim dividend of Rs3/share.

- Key highlights from earnings call: Management indicated : a) Geography-wise contribution: US: 12%, Europe: 55%, India: 24-25% and RoW: 11%; Segment-wise split: agri: 65%, OTR: 35%; End-use split: OEM 27%, replacement: 73%; b) Market share: In agri: 12-15% in Europe and 7-10% in the US; for OTR: 2-3% market share in mining and construction (target: 5-6% in 3-5 years); c) Carbon black production at Rs110k-115k MT, of which 15-18% is sold externally; d) Slowdown and China production de-risking by OEMs has assisted in market share gains for BIL; e) India sales stood at 20-22% (target 30-35% in three years); EBITDA margin trajectory to continue at 28-30% as RM prices remain benign; f) BIL would invest in its advertising and marketing expenses at 2-3% of sales; g) Current EUR/INR hedge rate for Q1FY21 is ~Rs84; FY20 hedge rate was ~Rs78; and h) Channel inventory across global distributors stands at 2-3 months.

- Maintain BUY: The quality of a business comes to fore in challenging times and BIL is transitioning well from the slowdown with focus on new products and strong FCF generation (~Rs14bn in FY22E). We prune our estimates (EPS cut 3.0%/5.7% for FY21E/FY22E respectively) factoring-in lower financial income. We value the stock at an unchanged multiple of 22x FY22E EPS and arrive at a revised target price of Rs1,514/share (earlier: Rs1,606). Maintain BUY.

Shares of BALKRISHNA INDUSTRIES LTD. was last trading in BSE at Rs.1306.8 as compared to the previous close of Rs. 1314.4. The total number of shares traded during the day was 17548 in over 1719 trades.

The stock hit an intraday high of Rs. 1349 and intraday low of 1295.85. The net turnover during the day was Rs. 22978044.

Source : Equity Bulls

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