Anand Rathi maintains Buy on the stock with a target price of Rs 1,686. Balkrishna’s growth prospects continue strong led by robust demand in the agricultural sector in Europe and the US. Also, margin expansion through backward integration continues to contribute to earnings. We maintain a Buy, at a target price of Rs 1686.

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Positive trends to continue for the company: 

Management’s confidence about its growth prospects in the U.S. and Europe from the agricultural sector continues. While it expects slightly higher volumes than those of FY21, Anand Rathi continues to expect 5% volume growth based on their channel checks. Management indicated that the second lockdown in Europe has not halted economic activity. Also, revenues from carbon black over and above that required for captive purposes would be the catalyst of overall growth. Accordingly, they expect 18% revenue growth in FY21 and 13% in FY22 to Rs 63.5 bn.

Margin expansion:

Against the backdrop of volume growth and backward integration benefits, Anand Rathi expects the margin to expand 150 bps in FY21. Also, they expect it to improve in FY22 driven by volume leverage and revenue from carbon black.

Q2 FY21 concall highlights:

1) Reduction in capacity by 7% due to technology change.
2) The company plans to increase capacity through brownfield expansion at space available in Bhuj.
3) Geographic mix in H1 FY21: USA 14%, Europe 51%, India 23%, RoW 13%.

Valuation:

Anand Rathi expects revenue to register a 17% CAGR over FY20-22 to Rs 65.81 bn and earnings to come at Rs 13.6 bn, leading to an EPS of Rs 70.2.

Key Risk: 

Less than expected volume growth.

Sharekhan retains Buy rating on Balkrishna Industries revised target price of Rs 1800. Balkrishna Industries is witnessing strong demand traction particularly agri segment and has raised FY21 volumes guidance to marginal growth from flat expected earlier; market share gains to continue. Margin to sustain at higher levels driven by operating leverage, better product mix and favourable Euro / INR realisation; expect margins to be at higher end of historical average of 28-30%.

Key positives:

Q2 volumes were highest ever for Balkrishna Industries at 61,244 MT, beating the street’s estimates. Operating margins improved by 540 bps YoY to 32.8%, exceeding estimates.
Soft commodity prices, operating leverage and a better product mix led to margin improvement.
Given strong volume growth in Q2, the company has raised its FY21 volumes guidance to marginal growth as compared to flat volumes earlier.

Key negatives:

Balkrishna Industries stated that rising Covid-19 cases have led to lockdown in key countries of Europe. As of now, economic activities continue as dealerships are allowed to remain open, but if the cases surge and stricter restrictions are imposed then it could have an impact on demand.