Balkrishna Industries reported another quarter strong operational performance, beating our earnings estimates. Net revenue grew by 26.5% yoy to Rs 1497 cr in Q3 FY21, largely driven by 26% volume growth at 59,810 MT tyres. Management has witnessed strong demand in the agriculture segment across geographies. In the other segments, Balkrishna Industries witnessed demand recovery in most markets such as industrial, construction, and mining segments.

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EBITDA margins of Balkrishna Industries improved by 50 bps yoy to 31.3% in Q3 FY21. This was aided by cost reductions and operating leverage benefits. As a result, EBITDA grew by 28.5% yoy to Rs 468 crore. Adjusted PAT increased by strong 42% yoy to Rs 314 cr, aided by other income, partially offset by increased depreciation. Balkrishna Industries has planned a 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.

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Sharekhan is concerned with the expected 75% increase in carbon black capacity, which would have a significant surplus over Balkrishna Industries captive use. Sales of carbon black to third parties are expected to contribute considerably, which will impact the company’s profitability and return ratios adversely over the medium term. Given the strong Q3 FY21 volume performance, Balkrishna Industries has raised its FY21 volume guidance for the FY21 and expects FY22E to be a strong year as well.

Balkrishna Industries is expected to continue gaining market share, driven by new product introductions and entry in new geographies. Sharekhan expects strong double-digit volume growth in FY2022E, driven by pick-up in economic growth and continued market share gains. However, despite strong operational performance in Q3 FY21, Balkrishna Industries is concerned that return ratios and EBITDA margin would decline in the medium term, owing to significant capex commitment towards the non-core business.

Sharekhan expects return ratios to decline with RoE/RoCE declining by 180 bps/50bps from 18.9%/21.6% in FY2021E to 17.2%/21.1% in FY2025E respectively due to increased share of the non-core business. Moreover, Sharekhan expects overall EBITDA margin to decline to 28%-29% over the next few years from 31%-32% currently. Thus, Sharekhan is downgrading the stock to Hold with an unchanged price target of Rs 1800.