Balkrishna Industries - Capex worries overshadow strong earnings - ICICI Securities

Balkrishna Industries' (BIL) Q3FY21 result was a beat on consensus estimates, management raised volume guidance by 5% to 220k in FY21. However, investor focus primarily revolved around new capital investments. Key parts of planned capex (Rs19bn) over FY22/23E are: a) brownfield project for 50k MT augmenting capacity (Rs8bn/payback ~4 years), b) automation, modernisation investment for older facilities (Rs4.5bn/payback ~5 years), c) carbon black (CB) expansion (Rs6.5bn/payback ~5 years) for internal use (65%)/external sales (35%). Investor concerns revolves around potential RoCE dilution. We believe, as BIL approaches peak utilisation in FY23, RoCEs would continue to remain strong (~24-25%) as margins (~32-33%) have multiple levers (product mix, backward integration, better EUR hedge rates and operating leverage). However, we appreciate execution risk on new capex, thus prune our target multiple to 22x (earlier: 24x). Maintain BUY.

Highlights of earnings call:

- Management has raised the volume guidance for FY21 to 215-220ktpa and demand growth trajectory is likely to continue in FY22 as agri demand remains strong across regions and OHT segment, too, is witnessing improvement.

- BIL has completed the giant tire line (5k MT) at Bhuj as well as the phase 2 of carbon black (achievable capacity: ~115k MT). Waluj plant which also underwent modernisation is expected to commence operations in Q1FY22.

- Board has approved the setting up of a new brownfield expansion project and debottlenecking plant at Bhuj, the plant will increase capacity by 50k MT and is estimated to complete by H2FY23, reaching a total capacity of 335ktpa.

- The management believes carbon black business needs to be executed via mix of internal/external sales (65%/35%). Thus the board has approved the enhancement of achievable capacity from 115k MT to 200k MT and setting up of an additional 20MW captive power plant. This will fulfil internal demand requirement (peak tyre production ~330k MT) while the balance would be sold to external partners.

- Capex for carbon black expansion and power plant is estimated as Rs6.5bn with a payback period of ~5 years, likely to complete by H1FY23; carbon black third party sales is likely to stabilize at ~35-40% as tyre production demand rises by FY23. External sales of carbon black margins range from ~15%-20% depending on grade.

- Older plants of Rajasthan have also received approvals for modernisation, automation and tech upgradation for material movement (margin benefit of ~150bps); capex for the same is Rs4.5bn with a payback period of ~5-6 years.

- Capex for 9MFY21 stood at Rs6bn and Rs1-1.2bn is expected in Q4FY21. Management indicated dividend payout are unlikely to be affected due to capex.

- BIL has undertaken ~2-3% price hike in Jan'21 to mitigate higher RM costs (up 5%).

Valuations & risks

BIL is approaching high utilisation levels driven by strong demand on Agri side, with OTR also coming back in FY22 coupled with various cost levers we expect EPS CAGR ~22% FY20-23E. As a new capex cycle begins in FY22, we moderate our FCF yield estimate to 2.2%/3.4% in FY22E/FY23E. However, cumulative FCF (FY22/23E) would still be ~Rs20bn, RoCE>25% (FY23E). We prune down our target multiple to factor execution risk on capital allocation to 22x (earlier:24x) FY23E EPS and arrive at a target price of Rs1,937/share (earlier: Rs2,113). Maintain BUY.

Upside risk: Stronger pickup in demand in OTR and Agri.

Downside risks: Execution issues on new capex of carbon black.

Shares of BALKRISHNA INDUSTRIES LTD. was last trading in BSE at Rs.1653 as compared to the previous close of Rs. 1648.4. The total number of shares traded during the day was 33239 in over 2082 trades.

The stock hit an intraday high of Rs. 1678.6 and intraday low of 1647.3. The net turnover during the day was Rs. 55203987.

Source : Equity Bulls

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