We initiate coverage on Balkrishna Industries (BKT) with Buy, valuing the stock at 20x Sep’19E EPS and target price of `2,062/share, implying a target FCF yield of 5.0% on Sep19E.
We initiate coverage on Balkrishna Industries (BKT) with Buy, valuing the stock at 20x Sep’19E EPS and target price of Rs 2,062/share, implying a target FCF yield of 5.0% on Sep19E. We expect cyclical improvement in the global Off-Highway Tyre (OHT) segment and believe BKT is well-placed to gain market share in both Agri and Off-the-Road (OTR) segments in North America/Europe. Conversion cost advantage, labour cost arbitrage) v/s competitors and product mix shift towards OTRs could ensure high margin stability, ~30%. Large SKU library is the key entry barrier in the business and BKT’s >20 years’ experience wards off potential competition.
With ample capacity headroom, stable margin profile and subdued commodity prices, we expect BKT to register FY17-20E revenue/EBITDA/PAT CAGR of 14%/15%/14% respectively v/s 1%/5%/13% revenue/EBITDA/PAT CAGR FY14-17. With its manufacturing base in India, BKT has a highly favourable cost structure with employee costs forming only ~6% of revenue vs 20-25% for the other global players. Thus, despite selling at 15-20% discount to global players, BKT is able to maintain high EBITDA margins. BKT’s new plant at Bhuj spread over 300 acres has added 140,000MT/year to its capacity.
Globally ~2/3rd of the specialty tyre market caters to earthmoving and construction segments. However, BKT’s revenue share from this segment is just ~33%. With the new plant now fully ramped-up, BKT is focusing on the mining/construction segments and filling the gaps in its offerings in this space to aid its global market share, 5% currently.With demand improving in the US in both agriculture and non-agriculture segments, new product launches, market share gains and possible demand revival in Europe, we expect improvement in utilisation levels at the Bhuj plant. With no significant capex lined up in the next 2-3 years, we expect strong FCF generation, ~Rs 30 bn over FY18-FY20.