Balkrishna Industries rating – Add: Momentum in exports boosts prospects

Key risk: meaningful change in demand outlook. Downgrade to Add.

Balkrishna Industries’ (BIL’s) key export markets have reported robust demand (May’21 industry exports grew 72% y-o-y respectively). The latest industry export data (May’21) indicates strong pick-up in OTR segment (up 85% y-o-y) while agri (Ag) demand growth remained healthy at ~67% y-o-y. The latest data continues to support the strong demand momentum driven by both Ag and OTR. On regional basis, growth was led by the US (up 121%), followed by RoW (92%) and EU (51%).

The pace of export growth in Q1 currently remains ahead of consensus expectations. As BIL reaches high utilisations in FY23e (assuming ~23% revenue CAGR over FY20-FY23e), we expect RoCEs to improve (>27%), justifying its valuation premium vis-à-vis peers. Key risk: meaningful change in demand outlook. Downgrade to Add.

Overall export growth continues as OTR rebounds: On an end-product basis, growth sustained in Ag tyres (up ~67% y-o-y) and contributed ~69% of total exports (down 209bps y-o-y). On the OTR side, momentum picked up with 85% growth y-o-y in May’21, which signals steady increase in mining, and construction offtake. 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 FY22/23 as investments pick up pace.

Downgrade to ADD: We expect healthy FCF generation of ~Rs 24 bn over FY22e/ FY23e. Considering the current momentum, we raise our earnings estimates by 2%/2.6% for FY22e/FY23e, respectively. We also raise our target multiple to 25x (earlier: 24x) based on strong growth and top-quartile return metrics. Post a >40% rally YTD-CY21, the stock factors in many of the positives and potentially limits near-term upsides. Downgrade to Add (from Buy) with a revised TP of Rs 2,425 (earlier: Rs 2,269).