Margin tailwinds ahead but volumes likely to be flat in FY21; FY21/22e EPS cut by 12/10%; ‘Reduce’ retained.
Balkrishna Industries’ (BKT’s) Q4FY20 revenue grew 3% y-o-y (in line with estimate). Volume rose 5% y-o-y and 22% q-o-q despite losing seven days in March due to COVID-19. For FY20, the company clocked volumes of 201,760MT (down 4.5%). In Q4FY20, Ebitda margin jumped 429bps y-o-y driven by gross margin expansion, leading to 20% Ebitda growth.
Management expects 150-340bps gross margin expansion in FY21 led by backward integration benefits, benign commodity prices and higher currency benefits. However, given the current COVID-19-induced status quo, it estimates flattish volumes. This will be led by good traction in agri tyres across regions being negated by slower capex by OTR customers. Hence, we revise down FY21/22e EPS 12/10% each. Valuations are rich at 25.4x FY22e EPS and mere 5% PBT CAGR over FY20-22e. Therefore, maintain Reduce with revised TP of Rs 1,080 ( Rs 1,109 earlier), valuing it at 22x FY22e EPS, average of three years.
Flattish volumes estimated in FY21
Revenue grew 3% y-o-y with volume increase of 5% y-o-y, but realisation fell 2.0%. According to management, across geographies, agri and replacement response is good and retail is back to pre-COVID-19 level. However, in the OTR segment, capex delay for customers compels BKT to guide for flattish FY21 volumes, with status quo conditions.
Gross margin down q-o-q, but better visibility ahead
Gross margin expanded 507bps y-o-y, but was down 310bps q-o-q due to high cost raw material inventory. As per management, BKT will reap the benefit of lower raw material prices ahead. Further, the second phase of the carbon black of 80,000MT came on stream in March, leading to total capacity of 140,000MTPA. Management expects gross margin to expand ~58-60% in FY21 versus 56.6% in FY20. Ebitda margin jumped 413bps y-o-y to 29.1% leading to 20% y-o-y Ebitda growth.
Outlook: Rich valuations
Given the current COVID-19-induced status quo, management estimates flattish volumes in FY21. Valuations are rich at 25.4x FY22e EPS and 5% PBT CAGR over FY20-22e. Maintain Reduce with revised TP of Rs 1,080.