February 15, 2012

Buy
Balkrishna Industries
Industry: Auto and Auto Components Industry View: Neutral

LKP
Since 1948

Result Update

Robust demand and margin performance leads us to raise estimates

Capacity expansion mirrors the robust demand outlook
Balkrishna Industries (BKT) reported a robust Q3 FY12 performance above our expectations. Net revenues grew by 54% yoy and 12% qoq, of which 28% yoy came from volumes, while the rest came from growth in realizations and product mix. Volumes for the quarter were at 35,534 MT, up 28% yoy. While there was no price hike taken in the quarter, the YTD price hike was at 16-18%. Sequentially, the volumes grew by 9.5%. The robust volume growth sequentially came on the back of brownfield expansion at its Bhiwadi and Chopanki plants and robust demand for OTR and agri tyres across the globe. The achievable capacity from existing plants now stands at 144,000 MTPA for FY 12E and will move to 156,000 MTPA in FY 13E. With Bhuj capacity commencing in 3Q FY13, total achievable capacities of BKT are expected to move up to 181,000 MTPA in FY 13E and 231,000 MTPA in FY 14E. With surging demand for OTR tyres, the company has outlayed an additional capacity builtup of 30,000 MTPA of ultra large OTR tyres in FY15E at Rs4bn of capex, which will take the total achievable capacity to 276,000MTPA in FY15E. BKT has an order book of 68,000 MTPA, worth Rs 14 bn which is equivalent to 5.5 months of volume visibility, thus boosting our confidence in the company. BKT seems to be insulated from the macro concerns, especially in Europe, which contributed 48% of total sales, while Americas were at 24%, Asia at 14% and ROW at 14%.
Stock Data Current Market Price ( `) Target Price ( `) Potential upside (%) Reuters Bloomberg Whats Changed 12 month PriceTarget (`) F2012 EPS ( `) F2013 EPS ( `) Key Data Market Cap ( `bn ) 52-Week Range (`) Avg. Daily Trading Value ( `mn) Promoters (%) FII Holding (%) DII Holding (%) Public & Others Holding (%) Fiscal YE EBITDA (%) PAT(%) EPS (`) EPS growth (%) P/E(x) P/B(x) EV/EBITDA(x) ROCE(%) ROE(%) Dividend yield (%) FY 10 24.6 13.9 22.4 193.1 10.9 3.5 7.4 46.7 31.8 0.7 FY 11 22,017 17.1 8.8 20.1 -10.3 12.1 2.7 7.9 36.5 22.6 0.7 FY 12E 29,421 18.0 9.2 28.0 38.9 8.7 2.1 6.5 32.2 23.8 1.1 245 292 20 BLKI.BO BIL IN

237 to 292 26 to 28 35 to 39

24 261 / 120 6 54 17 14 15 FY 13E 38,031 18.6 9.9 39.0 39.4 6.3 1.6 5.1 35.9 25.1 1.6

Revenues (`mn ) 15,637

Margins grow to 18.9% in Q3, to move ahead further with better product mix and operating leverage
EBITDA margins grew 50bps sequentially at 18.9% on softening rubber prices and price hikes taken at different times during the year, despite other expenses to sales having increased to 19.1% of sales. RM to sales fell to 59.7% of sales from 62.4% sequentially, which would have fallen even further had the oil derivatives (synthetic rubber) prices become softer. PAT came in 91% yoy and 15% qoq at Rs729mn on robust operational performance and healthy topline growth. Viewing a slight hardening of NR prices due to end of tapping season, BKT has again increased its NR inventory from 3 months to 4-5 months, thus gaining advantage of firming rubber prices in the May quarter. In spite of taking significant price hikes over the year, BKTs product prices are still at 30% discount to market leaders, thus providing BKT an edge over its competitors in times of slowdown and also allows it to take 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 on rubber prices remains soft as rubber prices are expected to move down in FY 13 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. With robust Q3 FY13 margins and expectation of improvement going forward, we have raised our margin estimates for FY 12E/13E to 18.6%/19.2% respectively.

Relative Price Performance

210 190 170 150 130 110 90 70 50 Feb11

A pr11 BIL

Jul11

Sep11

Nov11

Jan12

BSE Sens ex

One Year Indexed (%) 1 Month Absolute BSE Relative 50 39

3 Months 33 28

12 Months 101 103

Ashwin Patil ashwin_patil@lkpsec.com +91 22 6635 1271

Disclaimer: The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true and is for general guidance only. While every effort is made to ensure the accuracy and completeness of information contained, the company makes no guarantee and assumes no liability for any errors or omissions of the information. No one can use the information as the basis for any claim, demand or cause of action. LKP Securities Ltd., and affiliates, including the analyst who have issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell the securities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict of interest with respect to company/ies mentioned herein or inconsistent with any recommendation and related information and opinions. LKP Securities Ltd., and affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in the past.

Balkrishna Industries

Agri-OTR growing in tandem, emerging economies future growth drivers

Healthy replacement demand mainly in the agri segment (63% 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 BKTs presence in the agri sector, the company has witnessed a market share hike of 0.5% to ~4% over the last one year and aims to reach 6% by 2015. However, in nine months of FY 12, the OTR segment has increased its share to 33% from 30% in the first six months of the year, which shows that the OTR segment is growing at a faster clip and is showing pickup along with agri segment. Strengthening of business in the CIS countries, Russia and India will drive business further. In 9M FY12, ROW segment which includes all these countries expanded by 19% yoy, while Europe grew by 20% yoy and Asia grew by 9% yoy. Americas which includes developing countries of Latin America grew by a whopping 28% yoy.

Concall highlights

Market share is growing in North America, India, Russia and CIS countries Achievable production capacity is 144,000 MTPA for FY 12E and targets volumes of 130,000-135,000 MTPA for FY 12 Additional capacities of 30,000 MTPA for ultra large OTR tyres will incur capex of Rs4bn. A rubber mixing plant in the same facility will also be set up and would incur capex of additional Rs1 bn and a township for employees will be built up for Rs1 bn. This would take the total capex up to Rs18 bn, out of which Rs 7bn will be incurred by March2012(Rs4bn already incurred), Rs 7bn will be incurred by FY13 and Rs4 bn by FY 14. The additional financing will be through additional ECBs of $100 mn to be tied up in FY 13 and Rs5bn of internal accruals. Net debt to equity post this expansion will become 1.23x from current 1x, at which the management is comfortable. The repayment of this debt will start in FY14 The plant at Bhuj will become completely operational in FY 15 for the additional capacity and the rubber mixing plant and power plant together will deliver cost savings upto 1-1.5% of sales. The company will recruit 3,000 additioal employees for the Bhuj expansion The contribution of radial:bias is currently @ 30%:70%

Outlook and valuation

In line with continued visibility on volumes and margins coupled with above expected results, we are increasing our estimates for BKT. At CMP, the stock trades at 6.3x times its FY 13E EPS of Rs 39. We now value the company at 7.5x times on FY 13 earnings, while increasing our target price to Rs 292 and maintain BUY rating on the stock.

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Balkrishna Industries

Geography-wise volumes (MTPA)

50,000 40,000 30,000 20,000 10,000 Europe Americas 9M FY11
Source: Company , LKP Research

Asia 9M FY12

RoW

Operational parameters
40,000 35,000 30,000 25,000 20,000 15,000 10,000 5,000 0 Q3FY10 Q1FY11 Q3 FY11 Q1 FY12 Q3 FY12 Tonnage sold(MT)
Source: Company , LKP Research

162

174

171

179

179

190

204

210

215

250 200 150 100 50 0

Gross realizations Rs/kg

Profitability movement
70.0% 60.0% 50.0% 40.0% 30.0% 20.0% 10.0% 0.0% Q3 FY10 Q1 FY11 RM cost to sales(%)
Source: Company , LKP Research

49.5% 26.9%

55.2%

60.2%

61.3%

61.9% 59.1%

63.7%

62.4%

59.7%

25.0%

19.0%

18.9%

17.6%

16.0%

18.1%

18.4% 18.9%

Q3 FY11

Q1 FY12

Q3 FY12

EBITDA margins (%)

Results ( ` mn) Net Sales Raw material expenses Employee costs Other expenses EBITDA EBITDA margins(%) Other income EBIT Depreciation Interest PBT Tax PAT PAT margins (%)

Q3 FY12 7587.7 4531 175.5 1444 1437 18.9% 2.9 1335 208.9 46.8 1079 350.2 729 9.6%

Q2 FY12 6782.2 4230.2 173.6 1130.8 1248 18.4% 1.3 1187 205.2 45.4 936 303.9 632 9.4%

% qoq 11.9% 7.1% 1.1% 27.7% 15.2% 50bps 123.1% 12.4% 1.8% 3.1% 15.2% 15.2% 15.2% 20bps

Q3 FY11 4929 3066 129 886 869 17.6% 15 884 190 110 566 184 382 7.8%

% yoy 53.9% 47.8% 36.3% 63.0% 65.4% 130bps -80.1% 51.1% 10.1% -57.6% 90.7% 90.6% 90.7% 180bps

LKP Research

Balkrishna Industries

Financial Summary (Consolidated)

Income statement
YE Mar (`mn) Total Revenues Raw Material Cost Employee Cost Other Exp EBITDA EBITDA Margin(%) Depreciation Other income EBIT EBIT Margin(%) Interest PBT PBT Margin(%) Tax PAT PAT Margins (%) FY10 15,637 7,828 485 3,478 3,846 24.6 686 300 3,460 22.1 193 3,266 20.9 1,097 2,169 13.9 FY11 22,017 13,184 711 4,324 3,771 17.1 773 108 3,106 14.1 223 2,882 13.1 936 1,946 8.8 FY12E 29,421 17,971 825 5,335 5,290 18.0 868 (150) 4,272 14.5 268 4,004 13.6 1,301 2,704 9.2 FY 13E 38,031 22,768 1,116 7,078 7,069 18.6 1,186 60 5,943 15.6 360 5,583 14.7 1,814 3,769 9.9

Balance sheet
YE Mar (` mn) SOURCES OF FUNDS Equity Share Capital Reserves & Surplus Total Networth Total debt Total Liabilities APPLICATION OF FUNDS Net block Capital WIP Investments Current Assets Cash and Bank Inventories Sundry Debtors 54 2,177 2,532 123 4,229 3,368 5,035 -248 4,836 4,273 6,529 -123 5,731 5,211 8,231 6,465 687 617 7,247 1,608 137 8,379 6,408 617 12,193 7,408 617 193 6,621 6,814 4,777 11,591 193 8,419 8,612 6,214 14,826 193 11,152 11,346 10,382 21,728 193 14,845 15,038 12,582 27,620 FY10 FY11 FY12E FY 13E

Loan, Advances & others 3,822 Current Liab & Prov Current liabilities Provisions Net Current Assets 1,330 2,858 4,398 -576 11,591

2,575 3,743 6,437 -603 14,827

3,627 4,836 6,927 -603 21,728

4,897 6,148 8,005 -603 27,620

Key Ratios
YE Mar (mn) Per Share Data (`) Adj. EPS CEPS BVPS DPS Growth Ratios(%) Total revenues EBITDA PAT EPS Growth Valuation Ratios (X) P E P/CEPS P/BV EV/Sales EV/EBITDA Operating Ratios (Days) Inventory days Recievable Days Payables day Net Debt/Equity (x) Profitability Ratios (%) ROCE ROE Dividend payout Dividend yield 46.7 31.8 7.3 0.7 36.5 22.6 8.1 0.7 32.2 23.8 10.0 1.1 35.9 25.1 10.0 1.6 50.8 59.1 31.0 0.7 70.1 55.8 42.7 0.7 60.0 53.0 45.0 0.9 55.0 50.0 47.0 0.8 10.9 8.3 3.5 1.8 7.4 12.1 8.7 2.7 1.3 7.9 8.7 6.6 2.1 1.2 6.5 6.3 4.8 1.6 1.0 5.1 11.7 88.6 193.1 193.1 40.8 -1.9 -10.3 -10.3 33.6 40.3 38.9 38.9 29.3 33.6 39.4 39.4 22.4 10.9 70.5 1.6 20.1 12.1 89.1 1.6 28.0 8.7 117.3 2.8 39.0 6.3 155.5 3.9 FY10 FY11 FY12E FY 13E

Deferred tax liabilities Total Assets

Cash Flow
YE Mar (`mn) PBT Depreciation Interest Chng in working capital Tax paid Other operating activities FY10 3,264 686 193 (807) (1,048) (190) FY11 2,882 773 223 (2,148) (878) (118) 735 (2,306) 480 117 (1,709) (974) 1,442 (158) (240) 1,044 70 123 FY12E 4,004 868 268 (861) (1,301) (180) 2,798 (6,800) 0 0 (6,800) (4,002) 4,168 (270) (268) 3,630 (371) (248) FY 13E 5,583 1,186 360 (953) (1,814) 301 4,663 (6,000) 0 0 (6,000) (1,337) 2,200 (377) (360) 1,463 125 (123)

CF from operations (a) 2,099 Capital expenditure Chng in investments Other investing activities CFfrom investing (b) Free cash flow (a+b) Inc/dec in borrowings Dividend paid (incl. tax) Interest paid CFfrom financing (c) Net chng in cash (a+b+c) (1,419) (578) 33 (1,964) 135 139 (135) (202) (198) (63)

Closing cash & cash equiv. 54

Source: Company , LKP Research

LKP Research

LKP Team LKP

Pratik Doshi S. Ranganathan Ashwin Patil Deepak Darisi Hardik Mehta Varsha Jhaveri Hitesh Doshi Gurdarshan Singh Bharat Shah Director Head of Research Research Analyst Research Analyst Sales Sales Sales Sales Dealing Pharmaceuticals , Agriculture Automobiles & Telecom Energy 98210 47676 98212 22510 98195 78395 99301 44866 98190 66569 93241 47566 93222 45130 93228 61461 98337 97256 6635 1270 6635 1271 6635 1220 6635 1246 6635 1296 6635 1281 6635 1246 6635 1210 pratik_doshi@lkpsec.com s_ranganathan@lkpsec.com ashwin_patil@lkpsec.com deepak_darisi@lkpsec.com hardik_mehta@lkpsec.com varsha_jhaveri@lkpsec.com hitesh_doshi72@lkpsec.com gurdarshan_singh@lkpsec.com bharat_shah@lkpsec.com

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