RESULTS REVIEW 3QFY17 14 FEB 2017

Balkrishna Industries
NEUTRAL

INDUSTRY AUTOS Margins peaking out

CMP(as on 13 Feb 2017) Rs 1,170 Balkrishna Industries (BIL) top line at Rs 8.6bn (+5% Highlights of the quarter
YoY) was marginally below expectations. Strong Strong growth across channels and regions: 3QFY17
Target Price Rs 1,152 volume growth of 22% YoY was slightly offset by volumes jumped 22% YoY on account of 25/12/16%
Nifty 8,805 lower ASP (-8% YoY). EBITDA margins beat our growth across Europe/US/India respectively. In terms
Sensex 28,352 expectation of 31% to come in at 31.5%.
of end-user segments, BILs agri volumes rose 10% YoY,
KEY STOCK DATA while OTR saw a 21% YoY growth. Replacement
BIL enjoys significant cost (30% lower than peers)
Bloomberg BIL IN and product mix (OTR) advantages, and is thus able volumes were up 17% YoY.
No. of Shares (mn) 97 to generate high margins. However, the Maintain volume guidance: The management has
MCap (Rs bn) / ($ mn) 113/1,687 management indicated that the margins earned over maintained a volume guidance of 160-170k tonnes in
6m avg traded value (Rs mn) 121 the last few years are not sustainable, given the high FY17, of which the company has achieved 124k tonnes
STOCK PERFORMANCE (%) price of rubber (+17% from the average levels of in 9MFY17. We expect a strong demand from across
52 Week high / low Rs 1,286/547
3QFY17). Global peers witnessed a decline, with geographies and increasing utilisation levels of the Bhuj
their revenues slowing in the last quarter and believe plant (3Q utilisation stood at 45%). The company
3M 6M 12M
turnaround in industry demand will take time. doesnt see any impact of demonetisation n their
Absolute (%) 14.4 59.3 94.8
Relative (%) 10.3 58.4 76.7 We raise FY17/18/19E earnings by ~4-5% to business.
SHAREHOLDING PATTERN (%) incorporate better-than-expected margins in Near-term outlook: We expect volume growth to
Promoters 58.30 3QFY17. We maintain Neutral with upgraded TP of continue to be strong, but margins would taper off
FIs & Local MFs 14.51
Rs 1,152 (rolled forward to 14x Dec-18E EPS). owing to an increase in natural rubber prices.
FPIs 17.95
Financial Summary
Public & Others 9.24
(Rs mn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%) FY16 FY17E FY18E FY19E
Source : BSE
Net Sales 8,822 8,356 5.6 9,325 (5.4) 34,471 38,413 43,420 48,107
EBITDA 2,780 2,746 1.2 3,075 (9.6) 10,722 12,054 13,765 14,835
Sneha Prashant
[email protected] APAT 1,510 1,362 10.9 1,842 (18.0) 5,630 6,359 7,405 8,138
+91-22-6171-7336 Diluted EPS (Rs) 19.2 19.7 (2.5) 25.1 (23.6) 58.3 65.8 76.6 84.2
P/E (x) 20.2 17.9 15.4 14.0
Abhishek Jain EV / EBITDA (x) 11.6 9.9 8.1 7.1
[email protected] RoE (%) 22.1 20.7 20.3 18.8
+91-22-6171-7320 Source: Company, HDFC sec Inst Research
HDFC securities Institutional Research is also available on Bloomberg HSLB <GO>& Thomson Reuters
 BALKRISHNA INDUSTRIES : RESULTS REVIEW 3QFY17

Quarterly Financials Snapshot

Net revenue was ahead of (Rs mn) 3QFY17 3QFY16 YoY (%) 2QFY17 QoQ (%)
estimates. Tonnage sales Volumes (MT) 40,415 33,010 22.4 42,550 (5.0)
stood at 40.4k MT (+21% Net ASP (Rs/kg) 218 253 (13.8) 219 (0.4)
YoY, -5% QoQ) led by strong Net Sales 8,822 8,356 5.6 9,325 (5.4)
growth across all regions Material Expenses 3,584 3,300 8.6 3,666 (2.2)
Employee Expenses 562 480 17.1 540 4.1
Other Operating Expenses 1,896 1,830 3.6 2,045 (7.3)
The management indicated EBITDA 2,780 2,746 1.2 3,075 (9.6)
that the demand Depreciation 788 760 3.7 725 8.7
environment has remained EBIT 1,992 1,986 0.3 2,350 (15.2)
stable across regions and Other Income 285 106 169.9 448 (36.4)
expect it to improve going Interest Cost 49 90 (45.6) 47 4.5
ahead FX gain/loss 347 543 (36.1) 588 (41.0)
PBT 2,574 2,544 1.2 3,339 (22.9)
Tax 718 640 12.1 909 (21.1)
PAT 1,857 1,904 (2.5) 2,429 (23.6)
APAT 19.2 19.7 (2.5) 25.1 (23.6)
Gross margin contracted by Source: Company, HDFC sec Inst Research
113 bps YoY owing to a
sharp rise in rubber prices. Margin Analysis
Natural rubber constitutes 3QFY17 3QFY16 YoY (bps) 2QFY17 QoQ (%)
35% of total volumes and Material Expenses As % Of Net Sales 40.6 39.5 113 39.3 131
synthetic rubber, 16-17% Employee Expenses As % Of Net Sales 6.4 5.7 63 5.8 58
Other Expenses As % Of Net Sales 21.5 21.9 (41) 21.9 (43)
EBITDA Margin (%) 31.5 32.9 (135) 33.0 (146)
Management is planning to Tax Rate (%) 27.9 25.2 271 27.2 63
hike prices in 1QFY18E to Net Profit Margin (%) 21.0 22.8 (174) 26.0 (500)
counter the increase in Source: Company, HDFC sec Inst Research
commodity costs

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 BALKRISHNA INDUSTRIES : RESULTS REVIEW 3QFY17

Key Assumptions
FY16 FY17 FY18E FY19E
The management indicated
Volumes (MT)
that EuropesAgri tire
Europe 82,553 81,468 91,244 100,369
demand is recovering and
% YoY 9.2 (1.3) 12.0 10.0
believe that Construction
USA 28,617 22,669 24,936 27,429
and Mining demand will
% YoY 7.4 (20.8) 10.0 10.0
follow suit soon. BIL is also
ROW 42,987 44,107 49,404 54,345
focused on growing its US
% YoY 5.9 2.6 12.0 10.0
and India business
Total 154,156 148,244 165,584 182,143
% YoY 7.9 (3.8) 11.7 10.0

Blended ASP (Rs/kg) 253 233 231 237

% YoY 0.8 (7.9) (0.5) 2.5

Blended RM (Rs/kg) 122 95 96 99

% YoY 1.0 (21.7) 0.2 3.5

EUR/INR (x) 77 75 75 75
% YoY (4.5) (3.1) (0.1) -
Source: HDFC sec Inst Research

Change In Estimates
New Old % chg
Increase in EPS estimates of In Rs mn
FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E
4-5% given sustained Net Sales 38,413 43,420 48,107 38,413 43,420 48,107 - - -
margins in 9MFY17 EBITDA 12,054 13,765 14,835 11,640 13,293 14,299 3.6 3.5 3.8
Adj PAT 6,359 7,405 8,138 6,081 7,089 7,773 4.6 4.5 4.7
Adj EPS (in Rs) 65.8 76.6 84.2 62.9 73.3 80.4 4.6 4.5 4.7
Source: HDFC sec Inst Research
We have rolled our numbers
to Dec-18E and increased our
TP to Rs 1,152 (based on 14x
Dec-18E), Maintain Neutral

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 BALKRISHNA INDUSTRIES : RESULTS REVIEW 3QFY17

Steady Volume Growth Volume Mix Was Stable QoQ

Sales (MT) - LHS % growth YoY Europe America RoW

As per the management, MT 100%

45,000 25%
demand environment across 43,000 20% 28% 30% 26% 31% 32% 30% 26% 31% 30% 31%
80%
channels and segments is 41,000 15%
39,000 14% 14%
gradually improving 10% 60% 19%
23% 14% 16% 16% 16% 16% 16%
37,000
5%
35,000
0% 40%
33,000
31,000 -5% 60% 54% 60%
53% 47% 52% 53% 53% 53% 53%
29,000 -10% 20%
BIL is witnessing robust
27,000 -15%
demand growth in the 25,000 -20% 0%
domestic and export markets

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17
2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17
of Europe and America

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

OTR Mix Improved QoQ/YoY Replacement Volumes Continue To Be Strong

Agricultural OTR Others Off-take OEM Replacement
4% 5% 4% 4% 4% 4% 3% 4% 4% 4% 100%
100%
OTR segment continues to 80%
80% 32% 34% 32% 33% 35% 34% 33% 32% 34% 36%
show stronger growth
60%
60%

40%
40%
64% 61% 64% 64% 61% 62% 64% 64% 62% 60%
20%
20%

Replacement and OE 0%
0%

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17
volumes witnessed strong
2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17

-20%
growth

Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

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 BALKRISHNA INDUSTRIES : RESULTS REVIEW 3QFY17

Gross Margin Dipped Driven By Higher RM Prices EBITDA Margin Remained Steady
GMs declined modestly on GM/kg - LHS Gross margin EBITDA (LHS) EBITDA margin (%)
150.0 65.0%
QoQ basis on account of 3,500 Rs mn 35%
higher prices of rubber 140.0 60.0% 3,000 30%
during the quarter 2,500 25%
130.0 55.0%
2,000 20%
120.0 50.0% 1,500 15%

EBITDA margins were quite 1,000 10%

110.0 45.0%
strong at 33%. However, the 500 5%
management reckons that 100.0 40.0% 0 0%
margins are likely to decline

2QFY15
3QFY15
4QFY15
1QFY16
2QFY16
3QFY16
4QFY16
1QFY17
2QFY17
3QFY17

2QFY15

3QFY15

4QFY15

1QFY16

2QFY16

3QFY16

4QFY16

1QFY17

2QFY17

3QFY17
to 28-30% on higher
commodity prices
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

FCF Generation to Aid Deleveraging One-year Forward P/E Chart

Net Debt (Rs bn) - LHS Net Debt/Equity (x) 1 Yr Fwd PER Mean + 1 SD - 1 SD
25.0 1.4 20.0
Deleveraging trend 20.0 1.2
continues and BIL on track to 1.0 16.0
15.0
be net debt-free by FY19 0.8
10.0 12.0
0.6
5.0 0.4
8.0
0.2
-
Current valuations at +1SD - 4.0
(5.0) (0.2)
may not sustain with
(10.0) (0.4) -
improved volume growth

Feb-15

Feb-16

Feb-17
Jun-15

Dec-15

Jun-16

Dec-16
Aug-15

Aug-16
Oct-15

Oct-16
Apr-15

Apr-16
FY14

FY15

FY16

FY17E

FY18E

FY19E

outlook and massive

available capacity
Source: Company, HDFC sec Inst Research Source: Company, HDFC sec Inst Research

Page | 5
 BALKRISHNA INDUSTRIES : RESULTS REVIEW 3QFY17

Peer Valuations
MCap CMP Adj EPS (Rs/sh) P/E (x) EV/EBITDA (x) RoE (%)
Rating TP
(Rs bn) (Rs/sh) FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E
Bharat Forge 242 1,041 NEU 943 24.8 31.0 40.0 42.1 33.6 26.0 18.4 16.3 13.3 16.4 17.4 19.8
Exide Industries 183 216 BUY 223 8.3 9.1 10.8 25.8 23.7 19.9 16.3 14.7 13.3 17.5 21.9 21.6
Balkrishna Industries 113 1,170 NEU 1,152 65.8 76.6 84.2 17.8 15.3 13.9 9.5 8.3 7.7 31.4 31.7 30.8
Suprajit Engineering 27 206 BUY 231 8.4 11.1 14.6 24.6 18.5 14.1 14.1 10.8 8.7 23.2 24.8 26.0
Jamna Auto 16 200 BUY 222 12.1 14.6 17.3 16.5 13.8 11.6 8.1 6.7 5.7 35.4 34.2 32.9
Ramkrishna Forgings 12 423 BUY 474 22.0 30.5 37.1 19.3 13.9 11.4 9.9 8.3 7.2 12.6 15.6 16.5
Subros 11 187 NR - 5.9 10.0 13.8 31.9 18.7 13.5 9.1 6.8 5.4 10.1 15.7 19.3
Lumax Autotech 5 441 BUY 673 27.3 37.4 45.4 16.1 11.8 9.7 7.1 5.2 4.2 12.6 15.5 16.6
Source: Company, HDFC sec Inst Research

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 BALKRISHNA INDUSTRIES : RESULTS REVIEW 3QFY17

Income Statement Balance Sheet

(Rs mn) FY15 FY16 FY17E FY18E FY19E (Rs mn) FY15 FY16 FY17E FY18E FY19E
Sales (MT) 154,156 148,244 165,584 182,143 200,357 SOURCES OF FUNDS
Net Revenues 38,930 34,471 38,413 43,420 48,107 Share Capital - Equity 193 193 193 193 193
Growth (%) 8.8 (11.5) 11.4 13.0 10.8 Reserves & Surplus 22,723 27,760 33,203 39,541 46,508
Material Expenses 18,760 14,124 15,813 18,003 20,497 Total Shareholders Funds 22,917 27,953 33,396 39,735 46,701
Employee Expenses 1,943 2,091 2,349 2,636 2,957 Long-term Debt 23,578 16,534 11,334 5,134 1,634
Other Operating Expenses 8,833 7,534 8,196 9,016 9,817 Short-term Debt - - - - -
EBITDA 9,393 10,722 12,054 13,765 14,835 Total Debt 23,578 16,534 11,334 5,134 1,634
EBITDA Margin (%) 24.1 31.1 31.4 31.7 30.8 Net Deferred Taxes 1,887 2,382 2,882 3,382 3,382
EBITDA Growth (%) 5.1 14.1 12.4 14.2 7.8 Long-term Provisions & Others 14 37 38 39 40
Depreciation 2,380 2,807 2,927 3,234 3,434 TOTAL SOURCES OF FUNDS 48,395 46,905 47,650 48,289 51,757
EBIT 7,013 7,915 9,126 10,531 11,402 APPLICATION OF FUNDS
Other Income (Incl EO Items) 80 854 500 600 600 Net Block 24,148 28,538 30,610 29,576 29,342
Interest 420 345 139 82 34 CWIP 7,115 3,085 1,200 1,600 1,500
PBT 6,673 8,424 9,487 11,048 11,968 Investments 584 5,621 5,621 5,621 5,621
Tax (Incl Deferred) 2,340 2,794 3,128 3,643 3,830 LT Loans & Advances 890 591 609 627 646
APAT 4,333 5,630 6,359 7,405 8,138 Total Non-current Assets 32,736 37,834 38,039 37,423 37,108
APAT Growth (%) (11.3) 29.9 12.9 16.5 9.9 Inventories 3,920 2,864 3,192 3,608 3,997
Adjusted EPS (Rs) 44.8 58.3 65.8 76.6 84.2 Debtors 6,018 5,533 6,166 6,970 7,722
EPS Growth (%) (11.3) 29.9 12.9 16.5 9.9 Other Current Assets 2,295 1,773 1,973 2,227 2,465
Source: Company, HDFC sec Inst Research Cash & Equivalents 8,176 5,732 5,893 6,667 9,998
Total Current Assets 20,410 15,903 17,223 19,471 24,182
Creditors 3,799 3,367 3,752 4,241 4,699
Other Current Liabilities & Provns 951 3,464 3,861 4,364 4,835
Total Current Liabilities 4,750 6,832 7,613 8,605 9,534
Net Current Assets 15,660 9,071 9,610 10,866 14,648
TOTAL APPLICATION OF FUNDS 48,395 46,905 47,650 48,289 51,757
Source: Company, HDFC sec Inst Research

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 BALKRISHNA INDUSTRIES : RESULTS REVIEW 3QFY17

Cash Flow Key Ratios

(Rs mn) FY15 FY16 FY17E FY18E FY19E FY15 FY16 FY17E FY18E FY19E
Reported PBT 6,673 8,424 9,487 11,048 11,968 PROFITABILITY (%)
Interest expenses 420 345 139 82 34 GPM 51.8 59.0 58.8 58.5 57.4
Depreciation 2,380 2,807 2,927 3,234 3,434 EBITDA Margin 24.1 31.1 31.4 31.7 30.8
APAT Margin 11.1 16.3 16.6 17.1 16.9
Working Capital Change 2,060 4,145 (379) (481) (451)
RoE 20.8 22.1 20.7 20.3 18.8
Tax Paid (2,340) (2,794) (3,128) (3,643) (3,830) RoIC (or Core RoCE) 10.8 11.6 14.9 16.9 18.4
OPERATING CASH FLOW ( a ) 9,194 12,927 9,047 10,240 11,155 RoCE 10.0 12.3 13.7 15.6 16.3
Capex (4,175) (3,168) (3,115) (2,600) (3,100) EFFICIENCY
Free cash flow (FCF) 5,018 9,759 5,932 7,640 8,055 Tax Rate (%) 35.1 33.2 33.0 33.0 32.0
Investments 3,681 (5,037) - - - Fixed Asset Turnover (x) 1.2 0.9 0.9 1.0 1.0
Non-operating Income (15) 817 483 483 (18) Inventory (days) 36.8 30.3 30.3 30.3 30.3
INVESTING CASH FLOW ( b ) (508) (7,388) (2,631) (2,117) (3,118) Debtors (days) 56.4 58.6 58.6 58.6 58.6
Debt Issuance/(Repaid) 78 (7,044) (5,200) (6,200) (3,500) Other Current Assets (days) 21.5 18.8 18.7 18.7 18.7
Payables (days) 35.6 35.7 35.7 35.7 35.7
Interest Expenses (420) (345) (139) (82) (34)
Other Current Liab & Provns
FCFE 4,677 2,371 592 1,358 4,521 8.9 36.7 36.7 36.7 36.7
(days)
Share Capital Issuance 14 46 - - - Cash Conversion Cycle (days) 70.2 35.4 35.3 35.3 35.3
Dividend (278) (640) (916) (1,066) (1,172) Debt/EBITDA (x) 2.5 1.5 0.9 0.4 0.1
FINANCING CASH FLOW ( c ) (607) (7,983) (6,255) (7,349) (4,706) Net D/E (x) 0.7 0.4 0.2 (0.0) (0.2)
NET CASH FLOW (a+b+c) 8,079 (2,444) 160 774 3,332 Interest Coverage (x) 16.7 22.9 65.5 127.9 336.9
Closing Cash & Equivalents 8,176 5,732 5,893 6,667 9,998 PER SHARE DATA (Rs)
Source: Company, HDFC sec Inst Research EPS 44.8 58.3 65.8 76.6 84.2
CEPS 69.5 87.3 96.1 110.1 119.7
Dividend 2.4 5.5 7.9 9.2 10.1
Book Value 237.1 289.2 345.5 411.1 483.2
VALUATION
P/E (x) 26.1 20.1 17.8 15.3 13.9
P/BV (x) 4.9 4.0 3.4 2.8 2.4
EV/EBITDA (x) 13.7 11.6 9.8 8.1 7.1
EV/Revenues (x) 3.3 3.6 3.1 2.6 2.2
OCF/EV (%) 7.2 10.4 7.6 9.2 10.7
FCF/EV (%) 3.9 7.9 5.0 6.8 7.7
FCFE/Mkt Cap (%) 4.1 2.1 0.5 1.2 4.0
Dividend Yield (%) 0.2 0.5 0.7 0.8 0.9
Source: Company, HDFC sec Inst Research

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 BALKRISHNA INDUSTRIES : RESULTS REVIEW 3QFY17

RECOMMENDATION HISTORY
RECOMMENDATION HISTORY Date CMP Reco Target
Balkrishna Inds TP
16-Feb-16 602 BUY 728
1,300 20-May-16 701 BUY 823
1,200 14-Sep-16 888 BUY 972
1,100 2-Dec-16 1,190 NEU 1,076
1,000 14-Feb-17 1,170 NEU 1,152
900
800
700
600
Rating Definitions
500 BUY : Where the stock is expected to deliver more than 10% returns over the next 12 month period

Dec-16
Oct-16
Aug-16
Apr-16

Nov-16

Jan-17
Feb-16

Sep-16

Feb-17
May-16

Jun-16
Jul-16
Mar-16

NEUTRAL : Where the stock is expected to deliver (-)10% to 10% returns over the next 12 month period
SELL : Where the stock is expected to deliver less than (-)10% returns over the next 12 month period

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 BALKRISHNA INDUSTRIES : RESULTS REVIEW 3QFY17

Disclosure:
We, Sneha Prashant, MBA and Abhishek Jain, MBA, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect
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view(s) in this report.
Research Analyst or his/her relative or HDFC Securities Ltd. does not have any financial interest in the subject company. Also Research Analyst or his relative or HDFC Securities Ltd. or its
Associate may have beneficial ownership of 1% or more in the subject company at the end of the month immediately preceding the date of publication of the Research Report. Further
Research Analyst or his relative or HDFC Securities Ltd. or its associate does not have any material conflict of interest.
Any holding in stock No

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