ICICI Direct recommended hold rating on Balkrishna Industries with a target price of Rs 1250 in its research report dated September 04, 2018.
ICICI Direct's research report on Balkrishna Industries
The Board of Directors of Balkrishna Industries (BIL) has approved a capex outlay of ~Rs 1,700 crore, which will be completed over 30 months. Of the total capex, 1) Rs 700 crore is for setting up a greenfield tyre plant with capacity of 20,000 MT in US, 2) Rs 500 crore will be spent in Waluj where BIL will replace the existing plant with a new state-of-the-art facilities (co-generation plant & warehousing facilities) that will bring operational efficiencies to existing operations and 3) Rs 500 crore is towards setting up a new line of 5,000 MT for layers of all steel radial OTR tyres and additional mixing line in Bhuj. According to management, the entire capex would be funded via a mix of debt and internal accruals. The new capex plan is a sudden surprise as we believe the Indian operation expansion could have been delayed at least for a year while expansion of greenfield plant in US is against its earlier strategy that positioned BIL as low cost niche tyre export play. Higher than anticipated capex will dent return ratios (RoE & RoCE) and utilise existing cash & liquid investments on books thereby resulting in lower other income for BIL. Thus, we reduce our earnings estimate by 4%, 9% for FY19E, FY20E, respectively.
Outlook
Investments to the tune of ~Rs 700 crore in the US is against BIL’s moat of being an export dominated niche tyre play capitalising upon the cost arbitrage (labour). This is expected to dent core return ratios as the said project will not enjoy similar margin profile. Furthermore, with its close peer looking for a major expansion, the competition intensity will heat up in the OHT space thereby creating overhang on BIL. Incorporating the revised capex outlay disclosed by the company and consequent decline in other income, we change our PAT estimates for FY18-20E. We now expect BIL to clock PAT CAGR of 24.4% vs. 30.3% in the past. We also reduce our valuation multiple, to value BIL at 21x P/E on FY20E EPS of Rs 59.2 and assign a target price of Rs 1250 with a HOLD rating on the stock.
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