Balkrishna Industries Q1FY13: Replacement demand buoyant
**LKP Securities**| Published: 08 Aug, 2012 | Source : ValueNotes.com |Share on rss
Results above expectations, demand softens a bit
Balkrishna Industries (BKT) reported a robust Q1FY13 performance above their expectations. Net revenues grew by 42.7%YoY and 5.4% QoQ, of which 29%YoY came from volumes, while the rest came from growth in realizations and product mix. Volumes for the quarter were at 37,001 MT, up 29% YoY. While there was no price hike taken in the quarter, the YTD prices were high on improved dollar v/s rupee and favorable product mix. Sequentially, the volumes grew by 1.8%. Although the volumes have grow robustly yoy, the growth is getting stunted on a qoq basis. This is also getting reflected in the order book of the company which has come down from 70,000 MT (6.5 months) from Q2FY12 to 51,000 MT (4 months) in Q1FY13. This has been due to softness in demand in US due to drought and Europe due to the general slowdown. However the management also admitted that the production runrate has increased now and will be able to maintain order book to the minimum of 3 months in any case. This signifies resilience in replacement demand as OEM demand is falling. With new capacities at Bhuj commencing from September 2012,LKP expects better volume performance on the growing replacement OTR market which will remain insulated from any downturn in the macros. In line with the reducing order book size and some concerns on the European and American business,LKP has slightly cuttheir volume estimates from 163,000 MT/189,000 MT in FY 13/FY14 to 158,000 MT/183,000 MT in the same period.
Margins bounce back to 18.9% in Q1, crude oil prices may play spoil sport
EBITDA margins grew 280bps sequentially at 18.9% on softening rubber prices and improving product mix, despite other expenses to sales increased to 21.5% of sales. RM to sales fell to 56.6% of sales from 58.9% sequentially on fall in natural rubber prices. PAT came in 30.3%YoY while it fell by 4.2%QoQ at Rs731 mn on robust operational performance and healthy topline growth. Exceptional items worth Rs203 mn marredBalkrishna Industriesas performance at the bottomline depite robust operational performance. Management beilieves that the rubber prices will soften further and hence have maintained lower level of inventories ~ for just 3 months. BKT expects the rubber prices which are USD3,500/T to come down to USD3,200/T. In spite of taking significant price hikes prior to Q1FY13, BKTas product prices are still at 30% discount to the market leaders, thus providing BKT an edge over its competitors in times of slowdown and also allow BKT to take any further price hikes if required. With capacity expansion at Bhuj, operating leverage is bound to come and assist margin growth. Also, the long term view rubber prices remains soft as rubber prices are expected to move down in FY13 on increased supply coming from growth in plantation and yield. Furthermore, with additional capacities coming on the high margin OTR side in the next couple of years, the margins are slated to expand by at least 200bps by that period with the Bhuj plant coming up with an in built power plant and rubber mixing plant which would save at least 150 bps of power and transportation costs. Also the increase in radialization from current 20% to 30% projected for the next year will also help margin growth. With robust Q3FY13 margins and expectation of improvement going forward,LKP has maintainedtheir margin estimate for FY 13E/14E to 18.3%/19.4% respectively.Their FY13E margins are slightly lower than Q1 margins due to bounce back in the crude oil prices seen off late due to which synthetic rubber prices will somewhat negate the benefits observed in NR price getting softer.
Agri-OTR growing in tandem, emerging economies future growth drivers
Healthy replacement demand mainly in the agri segment (64% of volumes) is the major revenue driver for BKT. Inspite of the slowdown in the mainstream auto segment in Europe and US, agri demand has not taken a hit. Owing to BKTas presence in the agri sector, BKT has witnessed a market share hike of 0.5% to ~4% over the last one year and aims to reach 6%-7% by 2015 in th USD8 bn OTR global market. However, in the last one year, the OTR segment has increased it share to 33% from 30%, which shows that the OTR segment is growing at a greater pace and is showing nice pickup along with agri segment. Strengthening of business in the CIS countries, Russia and India will drive the business further. Also, the new capacities at Bhuj will contain 30% of production for the OTR segment, of which 9-10% will be mining which is showing increasing demand in the global markets.
Outlook and valuation
Although Q1 results were in line with their expectations,LKP is slightly pruningtheir estimates for BKT on the back of reducing order book and concerns mentioned by the management in Europe and the US. At CMP, the stock trades at 6.1x times its FY14E EPS of Rs45.LKP now values BKT at 7.5x times on FY 14 earnings, while increasingtheir target price to Rs340 andmaintains BUY rating on the stock, asLKP roll over to FY14E estimates. The entry of several institutional investors in the stock is a definite positive intheir view.
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