Balkrishna Industries rating: Buy, rebound in overall exports continues

Balkrishna Industries’ (BIL’s) key export markets continue to witness improving demand (Nov’20 industry exports grew 14% y-o-y). The latest industry export data (Nov’20) continues to be driven by agri (Ag) demand (up ~23% y-o-y) while OTR witnessed a flattish ~1% decline. Interesting to note, demand in the US region improved across segments (OTR+Ag was up ~34% m-o-m) as post-election political uncertainty fades away.

The latest export data continues to support the V-shaped demand rebound: YTD exports are up 6% led by Ag (up 16%). On a regional basis, in Nov’20, growth was led by RoW (up 34%) followed by the EU region (up 14%). As BIL reaches peak utilisation in FY23e (assuming ~15% revenue CAGR over FY20-FY23e), we expect the best in class RoICs of >25%, justifying its superior valuation vis-à-vis peers. Maintain Buy.

Overall export rebound continues: Agri and OTR segments combined grew at a ~14% y-o-y in Nov’20. On an end-product basis, growth acceleration continued in Ag tyres (up ~23% y-o-y) and contributed ~68% of total exports. On OTR side, momentum remained stable with 1% decline y-o-y in Nov’20.

EU growth surge continues: On a regional basis, EU continues to deliver strong growth (Ag+OTR) at ~14% y-o-y while RoW outpaced at ~34% y-o-y. The two regions together represent ~76% of Nov’20 exports. On the flip side, the US region decline narrowed to ~6% y-o-y (Ag was flat while OTR declined ~15%). Growth in RoW exports driven by Australia, Canada and South Africa reflects a more broad-based improvement across regions. In the EU, smaller nations of Austria, Poland drove growth even as the larger economies of France, Spain and Germany (flat y-o-y) were a drag due to Covid resurgence.

On a sub-segment basis, OTR growth was driven by RoW (up ~21% y-o-y/~44% contribution) while the US and EU declined ~13% (~31% contribution) and ~15% (25% contribution), respectively. However, on the Ag side, EU and RoW grew rapidly (up ~24% and 46%, respectively).

Agri exports recover, OTR hit by Covid: After the initial Covid shock (~23% decline) in Q1FY21, exports had shown signs of recovery, only to be hit by the second wave. This has led to the overall industry clocking ~10% decline YTD. 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 and beyond as commodities outlook remains firm.

Maintain BUY: We expect strong FCF generation of ~Rs 28 bn over FY22e/ FY23e. We maintain our valuation multiple at 24x Dec’22e EPS of Rs 82.1 and maintain our TP of Rs 1,969.