Balkrishna Inds: Long runway for growth

10 Jul 2023 , 10:14 AM

Recommendation: Buy; Target Price: Rs 2600

Analysts of IIFL Capital Services visited Balkrishna’s (BIL) Bhuj plant and interacted with the top management. They were impressed by the manufacturing facilities, backward integration and R&D setup. Demand scenario remains soft, as has been the case since mid-FY23. Despite current margins being at a 10yr low, BIL has cut tyre prices to pass on part of the benefit from fall in input costs (negative surprise). This has led them to cut FY24 EPS estimate by 9%. From a medium-term perspective, mgmt is confident of growth, with target to increase global marketshare to 10% (5-6% now). BIL is investing in R&D (new products) and marketing (significant improvement in brand recognition). Analysts of IIFL Capital Services upgraded BIL to BUY in Feb 2023, as volume growth/margins were at cyclical lows. They expect volumes/margins to see a cyclical recovery, with an upside risk if market-share targets are achieved. Retain BUY; TP is Rs2,600.

Plant visit – More of an innovator, than a manufacturer: 

BIL’s focus on R&D has enabled it to expand offerings (3,200 SKUs now vs 2,000 in FY13). BIL is collaborating with OEMs at the product-development stage, indicating that it is now becoming an innovator vs manufacturer earlier. BIL’s backward integration into carbon black has ensured seamless supply of the input, and also enabled it to become self-sufficient on power.

Long runway for growth: 

Mgmt expects off-highway tyre industry to grow at 3-5% Cagr. It targets increasing BIL’s global market share from 5- 6% now to 10% in 4 years. BIL’s initial strategy revolved around value offerings, by taking advantage of low-cost manufacturing in India. While this advantage would continue, BIL is planning to go to the next level with increased product offerings (R&D) and brand recognition (marketing spend). Mgmt mentioned that BIL has a higher market share in Agri tyres in France, compared to Michelin. Analysts of IIFL Capital Services feel BIL’s pricing discount vs Tier 1 (now 15%) may come off over time, leading to better margins.

Near-term outlook stays a bit soft; analysts of IIFL Capital Services cut FY24 EPS:

Mgmt mentioned that end-demand remains soft, as has been the case since mid-FY23. There is further scope for dealer de-stocking (now at 70 days vs normal 45-60 days). This means wholesales may stay below retails in the near-term. BIL has cut tyre price to pass on input cost benefit, despite current margins being at 10yr lows. Once demand improves, margins should move closer to the medium-term target of 26-28%.