Balkrishna Industries: Accumulate

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Manu Jain | Published: 09 Jul, 2012 | Source : ValueNotes.com | Follow Author |

Balkrishna Industries (BKIL) reported 35% YoY revenue growth in Q4FY12 led by higher volumes and realizations. The increase in volumes was ~19% and the increase in realizations was~15%. EBITDA margins improved 110bps to 17.1% due to lower rubber prices and price increase in the previous quarter. Profit after tax inclined 47% on a YoY basis to 76.3 crores. Debt during the quarter increased due to capex undertaken by the company. The company is expanding its capacity through a green field facility at Bhuj, Gujarat. The company has delivered excellent performance during the last five years with a CAGR of 30% in earnings and average RONW of 26%+.

BKIL is a niche player in the tyre segment with a presence in OHT Segment. OHT stands for “Off-Highway Tyres” such as those used in highway farm equipment and earth moving equipment. The company invests heavily in R&D too. The products are produced in a short amount of time in-house within a matter of a few weeks. All Analysts/Brokers covering the stock expect revenue CAGR of 20-30% and earnings CAGR of 19-20% in the next two years. The company’s expansion plan is set to come up in two phases - a) Brownfield - 27000 MT in Rajasthan and b) Greenfield - 1,20,000 MT in Bhuj, Gujarat. Since raw material prices (that of rubber) have corrected significantly, the EBITDA margins are expected to improve going forward. An example was the Q4FY12 performance where EBITDA margins improved 110 bps. The tyres produced by BKIL cater to earth moving equipment, agricultural, forestry and lawning equipment. The fact that BKIL is a low cost manufacturer and caters to a niche segment spells good times for it going ahead. 90% of the company’s revenue comes from overseas markets and the remaining 10% comes from India. This and the fact that it caters to OHT segment implies that it has no comparable listed peers in India. Also what augurs well for the company is a depreciating currency since it is predominantly an exporter. The tyres are priced at a discount to competitors and hence even in recessionary times there is less chance of losing market share.

Key risks to the recommendation are -
a) Any escalation in the cost of raw materials
b) Forex related risks

Valuation Matrix
CMP	270.15	Rs
	Sales	NP	P/E	P/Bv	ROE (%)
FY13E	34879.5	3215.5	8.107441	1.835297	21.25%
FY14E	41298	3756	6.940755	1.465771	23.48%

Projections	Consolidated
Rs Mns	FY13E	FY14E
Sales	34879.5	41298
EBITDA	6417.5	7534.5
EBITDA M	18.40%	18.24%
PBT	4781.5	5461.5
PBT M	13.71%	13.22%
PAT	3215.5	3756
No of Shares
Mns	96.5	96.5
EPS	33.32124	38.92228
Debt		23062.5
Interest		933.5
NW	14204.5	17785.5
ROE	21.25%	23.48%
BVPS	147.20	184.31
#Consensus Estimates

Balkrishna Industries		FY14E
Debt	23062.5	t rate	0.325
Networth	17785.5	Beta	0.4
D+E	40848	D/(D+E)	0.564593
ROE	23.48	E/(D+E)	0.435407
TGR	2	Interest	933.5	RFR
WACC	6.218848	Risk Prem	6	8.34
Cost of Debt		2.732195	WACD	1.542579
Cost of Equity		10.74	WACE	4.67627

TGR/WACC-TGR		0.474063
ROE-WACC		17.26115
*ROEWACC**		146.0186
*((TGR/WACC-TGR)((ROE-WACC)/(ROEWACC))*					5.603995
*1/WACC100**					16.08015
JUSTIFIABLE P/E					21.68414

Coloured Cells are output cells and not to be touched

Method 2
g	0.02
1+g	1.02
DPS	1.8
EPS	38.92228
1-D Payout	0.953754
r	0.062188
Justifiable PE		23.05911
TP	897.5133

Method 3
Div Payout Ratio		0.046246
COE		0.1074
Ret Rate		0.953754
Exp Growth in Div		0.102433
Justfiable P/E		9.310987
PT		362

(Inputs into the spreadsheet based on consensus estimates)

Valuation and Recommendation:
The stock is attractively valued at 8.1x and 6.9x FY13e and FY14E EPS estimates. Value the stock at 9.3x FY14E EPS to arrive at a price target of Rs362. Expect an upside of ~34% in the Medium term. Reiterate Accumulate.

Disclaimer: The author has taken due care and caution to compile and analyze the data. The recommendations are his/her personal views. He/she shall not accept any liability whatsoever arising from the use of any of the above content.

Sources have been mentioned at relevant places in the article. In spite of this, the author does not guarantee the accuracy, adequacy or completeness of any information and is not responsible for any errors or omissions or for the results obtained from the use of such information.

The author does not hold positions in the stock.

About Manu Jain

Manu Jain is a Market/Investment Analyst based in Delhi. He can be contacted at manujain1232003@yahoo.co.in or his blog http://talkmanujain.blogspot.com/

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