Balkrishna Industries-Hold Balkrishna Industries; target Rs 198: Sushil Finance

Sushil Finance has recommended hold rating on Balkrishna Industries (BIL) with a target of Rs 198, in its September 23, 2011 research report.

“Balkrishna Industries (BIL) is one of the leading players in the ‘Off-Highway Tyres’ space having widest & comprehensive product portfolio of over 1900 SKU’s. Almost 94% of revenues is derived from Agriculture (65%) and OTR (29%) space wherein it caters to the customized demands of tyres for tractors, trailers, farm equipments, earth movers etc. It has market presence in more than 120 countries & derives ~90% of its revenues through exports. In order to meet increasing demand, the Company is almost doubling its capacity from 125,000 MTPA to ~230,000 MTPA by FY13E through Greenfield expansion and de-bottlenecking exercise at its existing plants. Greenfield expansion at Bhuj would enhance its achievable production capacity by 90,000 MTPA which is likely to get operational by Q2FY13E whereas de-bottlenecking exercise is already underway & nearing completion by Q2FY12. Total estimated capital outlay for the expansion is ~Rs.12 bn which is likely to be funded through debt & internal accruals (65:35).”

“Strong global network with over 200 distributors in more than 120 countries has enabled the Company to capture growing replacement market. BIL derives ~80% of its revenues from replacement market which fetches higher margins which are in the range of 18-20%. Also lower operating cost mainly employee and selling & distribution expenses compared to its global peers further facilitates in fetching higher margins. Being labor-intensive business & with cheaper availability of labor in India, the employee cost is ~1/5th of the cost incurred by the global peers. Also distribution model adopted by the Company in which sales is carried on by the distributor network not only results in lower inventory levels but also reduces distribution expenses. The Company has healthy return ratios as compared to industry with ROE & ROCE pegged at 25% and 22% respectively. Also historically, since 1990 the company has been consistently paying dividend every year. Even during the difficult times on the expanded equity post-bonus, the company has been paying high dividend.”

“BIL is one of the leading players in the ‘OHT’ space with wide product portfolio (~1900 SKU’s) under its kitty. Capacity expansion by ~105,000 MTPA over the next 2 years is likely to be the major growth driver for the Company in the future. Also superior margins on back of strong distribution network & comparative cost advantage offer an edge over its peers. At the CMP of Rs.180, the stock is quoting at 7.2x and 6.4x its FY12E and FY13E EPS of Rs.25.0 and Rs. 28.3 respectively. Considering the growth potential, we have a positive stance on the stock and recommend ‘HOLD’ with a price target of Rs.198,” says Sushil Finance research report.