Ebitda margin at 8-quarter high; growth prospects are bright; TP raised to Rs 1,497; a high-conviction idea
Balkrishna Industries’ (BIL’s) overall numbers for Q3FY20 are a stellar beat as margins at 31.2% exceeded consensus estimates (~28-29%). Volume growth turned positive (1.2%) after a ~12% decline in H1FY20 to 47,321MT. BIL delivered a big beat in Ebitda margin (up 340bps q-o-q) as gross margin jumped 179bps and other expenses fell 128 bps. BIL remains our high-conviction idea due to: (i) restart of growth cycle, which will bring better regional mix (higher US sales) and superior product mix (new OTR line in FY22); (ii) gross margin expansion being higher than expected due to backward integration benefits and benign commodity prices; and (iii) reducing capex intensity matching the growth cycle. Consensus is likely to upgrade earnings while we believe BIL remains a must-own. The current FCF yield (~7% in FY22e) remains attractive. Maintain Buy.
Highlights of the quarter: Overall topline declined marginally by ~1% y-o-y led by volume growth (1.2%) while ASP declined 2.2% (largely due to mix). Ebitda margin at 31.2% was at an 8-quarter high, driven by improvement in gross margin, which is attributable to savings in carbon black (~Rs 12/kg) and moderate materials prices. BIL had a notional MTM loss of Rs 220 mn due to revaluation on balance sheet side. Company nevertheless delivered ~53% y-o-y rise in PAT. Besides, it declared an attractive interim dividend of Rs 16/ share.
Agri segment, inventory restocking and new OTR line to boost growth: Our monthly export data tracker suggests pick-up in exports from India to developed markets. BIL too benefits from the improving demand traction seen across its key markets. We believe CY20 could mark the resumption of restocking as stock levels remain very low. Mathematically, restocking for even a couple of weeks could add 4-5% to BIL’s growth while the new 5k-MT OTR line is also expected to support growth in FY22. Overall, we assume a CAGR of ~8% over FY20e-FY22e.
Maintain BUY: BIL has transitioned from the recent slowdown phase with flying colours (~Rs 11 bn FCF to be generated even as it spent ~Rs 14 bn in capex over FY19/FY20e). As this capex phase ends, we expect copious FCF generation: Rs 9.2/15.3 bn (~4%/7% FCF yield) in FY21e/FY22e respectively. BIL thus remains one of our top ideas. We value the stock at an unchanged multiple of 20x FY22e EPS and arrive at a TP of Rs 1,497/share (earlier: Rs 1,347/share).