10% UPPER CIRCUIT on Balkrishna Industries, on strong Q4 numbers - Here is what Sharekhan says

Sharekhan says that Balkrishna Industries reported another quarter of strong operational performance, beating our estimates. Net revenue grew by 25.7% yoy to Rs 1746 cr in Q4FY2021, largely driven by 17% volume growth at 68,002 MT of tyres and 7.1% improvement in average realisation. Management has witnessed strong demand in the agriculture segment across geographies. In the other segments, demand has seen an uptick because of increased commodity prices, infrastructure creation, and pick-up in economic activity.

Sharekhan maintains Hold on Balkrishna Industries with a revised price target of Rs 1923. Balkrishna Industries EBITDA margin improved by 190 bps yoy to 31% in Q4FY2021, aided by rich product mix, cost reductions, and operating leverage benefits. As a result, EBITDA grew by 33.9% yoy to Rs. 542 crore. Margin declined by 60 bps qoq due to 19.2% rise in raw-material costs. Adjusted PAT increased by strong 45% yoy to Rs 372 cr, aided by other income, partially offset by increased depreciation, says Sharekhan. 

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Sharekhan says that Balkrishna Industries has planned capex of Rs 1900 cr for the brownfield project to increase tyre capacity and carbon-black capacity at Bhuj plant. Moreover, Balkrishna Industries will use capex for automation and technology upgradation. Given strong outlook for the automobile industry and improvement in economic activities, Balkrishna Industries has guided for 10%-17% volume growth in FY2022 and expects margins at 28%-30% on a sustainable basis. 

Balkrishna Industries continues to maintain its target to achieve 10% global market share in tyres in the medium term from 6% currently. Sharekhan expects Balkrishna Industries to gain market share, driven by new product introductions and entry in new geographies. Sharekhan expects strong double-digit volume growth in FY2022E, driven by infrastructure creation and pick-up in economic activity and continued market share gains. However, despite strong operational performance, Sharekhan is concerned that Balkrishna Industries return ratios and margin would decline in the medium term, owing to increased revenue share from non-core business. Sharekhan retain our Hold rating on the stock, given limited upside due to expensive valuations, highlights Sharekhan. 

|Balkrishna Industries Key positives: 

Balkrishna Industries achieved the highest-ever quarterly volumes in Q4FY2021, led by robust growth across segments and geographies
Strong operational performance during FY2021 despite multiple challenges related to raw materials such as cost inflation and supply issues

Balkrishna Industries Key negatives:

Expect raw-material prices to remain firm in the near term, expecting incremental cost inflation of 4%-5% in Q1FY2022

Balkrishna Industries Key Risks:

Balkrishna Industries derives 23% of its revenue from India, while it derives 50% from Europe, 15% from America, and 13% from rest of the world. Any adverse movement in the macro environment of these countries or forex fluctuation could impact the company’s financial performance