Strong FCF generation of ~Rs 28 bn estimated over FY22/23e; TP raised to Rs 1,892
Balkrishna Industries’ (BIL’s) key export markets continue to witness strong demand (Oct’20 industry exports grew 17% y-o-y). The industry growth momentum remains higher than our H2FY21 constant currency growth expectations for BIL of ~7% y-o-y. The latest industry export data (Oct’20) continues to be driven by agri (Ag) demand (up ~33%), while OTR witnessed a cool off with ~5% decline. Interesting to note, the USA region witnessed demand slack across segments (OTR+Ag: down 16%) which may be due to political uncertainty.
The latest export data continues to support the V-shaped demand rebound, YTD exports are up 5% led by Ag (up 15%). On a regional basis, in Oct’20, growth was led by EU region (up 30%). As BIL reaches peak utilisation in FY23 we expect it to clock best in class RoICs of >30%, justifying its superior valuation. Maintain Buy.
Overall export rebound continues as agri propels higher growth: Agri tyre and OTR tyre segments combine grew at a healthy 17% y-o-y in Oct’20 on solid prior year base. On an end-product basis, growth acceleration continued in Ag tyres (up 33%) and contributed ~66% of total exports (up 800 bps). On OTR side, growth momentum softened a trickle as it declined ~5% in Oct’20.
EU growth surge continues: On a regional basis, EU continues to deliver strong growth (Ag+OTR) at ~30% y-o-y, while the rest of the world (RoW) also grew ~28% y-o-y. The two regions together represent ~81% of Oct’20 exports. On the flip side, the USA region declined ~16% y-o-y (Ag dropped ~7% while OTR declined ~25%). Growth in EU exports was driven by France, Italy and Poland (together up ~90% y-o-y). In rest of the world (RoW), Australia and Argentina reported strong growth (up 192%/390% y-o-y, respectively). On a sub-segment basis, OTR growth was driven by EU region (up ~8% y-o-y/~34% contribution) while US declined ~25% (~26% contribution). However, on agri side, EU and RoW regions grew rapidly (up ~38% and 62%, respectively).
Agri exports recovery covers up the Covid-19 pandemic shock: After the initial Covid-induced demand shock (~23% decline) in Q1FY21, exports have since grown ~28% y-o-y. This has led to the overall industry clocking ~5% growth YTD. The pace of recovery has been quite sharp, surprising most investors. We believe outlook for global Ag exports continues to be strong under the rising commodity price environment. OTR demand is also likely to be aided by infrastructure investments in key developed markets in FY22 and beyond.
Maintain BUY: We expect strong FCF generation of ~Rs 28 bn over FY22e/23e. We raise our multiple to 24x (earlier: 22x) Sep’22e EPS of Rs 75.9 on the back of growth surprise to arrive at our target price of Rs 1,892 (earlier: Rs 1,735). Maintain Buy.