Multi Baggers

Balkrishna Industries

We initiate coverage on Balkrishna Industries Limited (BKT) as a buy with a price objective of Rs 216 (target PE of 7x) over a period of 18-24 months. At the CMP of Rs 152 the stock is trading at 6.2x / 4.7x its estimated earnings for FY12/FY13 representing a potential upside of 49.3%. Buoyed by the absence of competition, low manufacturing cost, competitive pricing and a wide array of SKUs, BKT with 3.5% global market share has emerged as a significant player in the OHT segment. Riding on enhanced capacities we expect revenues to grow at a 2 year CAGR of 24.5%. In our view rubber prices are near to peak and are expected to correct in the medium which should lead to improved profitability. We expect earnings growth of 23.9% over the next 2 years.

Capacity expansion to cater the global demand

Buoyed by the strong global demand for OTH products, the company is in the process of expanding its existing capacity from 1,60,000 MT in FY11 to 3,07,000 by end of FY13. The expansion is expected to come up in two phases – brownfield (27,000 MT) at Chopanki, Rajasthan and greenfield expansion (1,20,000 MT) at Bhuj, Gujarat with a capital outlay of Rs 1,400 crore and should be operational by Q3FY13. On back of the expanded capacities and expected improvement in realizations we forecast revenues to grow at a CAGR of 24.5 % to Rs 3,411.4 crore over the period FY11-13.

Significant strategic kickers augur well for future growth

BKTs competitive pricing, low cost manufacturing and niche presence in the OTH segment are the key drivers for its future growth. Further foray into newer markets, deepening penetration in existing geographies and launch of new products, particularly agri radial tires, should help boost market share from the current 3.5% to ~5% in the medium term. Aided by volume growth and aforementioned factors we expect earnings to grow at CAGR of 23.9% over the period FY11-13.

Margins near trough and set to expand

We believe that EBITDA margins which have been under pressure are near lows and should bottom out in the medium term as NR (32% of RM cost) prices are expected to correct in the medium term (CY13) on back of improved supply. Meanwhile better product mix and higher realizations are expected to provide additional cushion to the margins in the short term. We forecast one more year of margin compression to 15.9% in FY12 before the cycle troughs. We expect the company to post EBITDA margin of 18.6% in FY13 (+150 bps from 17.1% in FY11).

Valuation

We initiate coverage on Balkrishna Industries Limited (BKT) as a buy with a price objective of Rs 216 (target PE of 7x) over a period of 18-24 months. At the CMP of Rs 152, the stock is trading at 6.2x / 4.7x its estimated earnings for FY12/FY13 representing a potential upside of 49.3%.

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