Balkrishna Industries rating: Buy, rebound in overall exports continues

By: |
January 2, 2021 4:00 AM

Outlook for Ag exports is strong; best-in-class RoICs of >25% likely by FY23e with peak utilisation; ‘Buy’ retained with TP of Rs 1,969

We expect strong FCF generation of ~Rs 28 bn over FY22e/ FY23e. We maintain our valuation multiple at 24x Dec’22e EPS of Rs 82.1 and maintain our TP of Rs 1,969.

Balkrishna Industries’ (BIL’s) key export markets continue to witness improving demand (Nov’20 industry exports grew 14% y-o-y). The latest industry export data (Nov’20) continues to be driven by agri (Ag) demand (up ~23% y-o-y) while OTR witnessed a flattish ~1% decline. Interesting to note, demand in the US region improved across segments (OTR+Ag was up ~34% m-o-m) as post-election political uncertainty fades away.

The latest export data continues to support the V-shaped demand rebound: YTD exports are up 6% led by Ag (up 16%). On a regional basis, in Nov’20, growth was led by RoW (up 34%) followed by the EU region (up 14%). As BIL reaches peak utilisation in FY23e (assuming ~15% revenue CAGR over FY20-FY23e), we expect the best in class RoICs of >25%, justifying its superior valuation vis-à-vis peers. Maintain Buy.

Overall export rebound continues: Agri and OTR segments combined grew at a ~14% y-o-y in Nov’20. On an end-product basis, growth acceleration continued in Ag tyres (up ~23% y-o-y) and contributed ~68% of total exports. On OTR side, momentum remained stable with 1% decline y-o-y in Nov’20.

EU growth surge continues: On a regional basis, EU continues to deliver strong growth (Ag+OTR) at ~14% y-o-y while RoW outpaced at ~34% y-o-y. The two regions together represent ~76% of Nov’20 exports. On the flip side, the US region decline narrowed to ~6% y-o-y (Ag was flat while OTR declined ~15%). Growth in RoW exports driven by Australia, Canada and South Africa reflects a more broad-based improvement across regions. In the EU, smaller nations of Austria, Poland drove growth even as the larger economies of France, Spain and Germany (flat y-o-y) were a drag due to Covid resurgence.

On a sub-segment basis, OTR growth was driven by RoW (up ~21% y-o-y/~44% contribution) while the US and EU declined ~13% (~31% contribution) and ~15% (25% contribution), respectively. However, on the Ag side, EU and RoW grew rapidly (up ~24% and 46%, respectively).

Agri exports recover, OTR hit by Covid: After the initial Covid shock (~23% decline) in Q1FY21, exports had shown signs of recovery, only to be hit by the second wave. This has led to the overall industry clocking ~10% decline YTD. We believe the outlook for global Ag exports remains strong under the rising commodity price environment. OTR demand is also likely to be supported by infrastructure/mining investments in FY22 and beyond as commodities outlook remains firm.

Maintain BUY: We expect strong FCF generation of ~Rs 28 bn over FY22e/ FY23e. We maintain our valuation multiple at 24x Dec’22e EPS of Rs 82.1 and maintain our TP of Rs 1,969.

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