RESULT UPDATE 3 rd August 2017
Aug-16 Oct-16 Dec-16 Feb-17 Apr-17 Jun-17 Aug-17 Please vote for us in Asiamoney Brokers Poll 2017: https://www.euromoney.com/article/b13j49qfcr6j pp/asiamoney-brokers-poll-2017-vote-now India Equity Institutional Research II Result Update Q1FY18 II 3 rd August, 2017 CMP INR 1,601 Target INR 1,832 Potential Upside 15% Market Cap (INR Mn) 156,452 Market share gains to drive revenue ahead Recommendation BUY Sector Auto Ancillary 2 Result highlights In Q1FY18, (BKT) reported sales of INR 10,128 Mn which (was slightly above our estimates of INR 9,901 Mn) increased by 7.5% Y-o-Y on back of volume growth of 7% Y-o-Y but remained Q-o-Q. Company witnessed a soft quarter on back of slower than expected pick-up in demand from US market. The EBIDTA stood at INR 2,162 Mn (degrew by 25.71% Y-o-Y and declined 15.3% Q-o-Q) and reported below our estimate of INR 2,510 Mn. EBITDA margins came in at 21.3% in Q1 FY18 which (declined 955bps Y-o-Y and down by 411bps Q-o-Q). Increase in RM cost led to rise in COGS by 1000bps Y-o-Y and 500bps Q-o-Q. However, 10bps reduction in personnel cost and 350bps reduction in other cost helped company negate the RM prices. Adj. PAT stood at INR 14,97.1 Mn recording a de-growth of 8.9% Y-o-Y but declined 31.4% Q-o-Q (was below our estimates of INR 1,692 Mn). Adj PAT margins came in at 14.8% down by 290bps Y-o-Y and 700bps Q-o-Q. MARKET DATA Shares outs (Mn) 97 Equity Cap (INR Mn) 193 Mkt Cap (INR Mn) 156452 52 Wk H/L (INR) 1750/705 Volume Avg (3m K) 157.3 Face Value (INR) 2 Bloomberg Code BIL IN SHARE PRICE PERFORMANCE 235 185 135 85 Sensex Balkrishna Ind. MARKET INFO SENSEX 32477 NIFTY 10082 KEY FINANCIALS Particulars (INR mn) 2016 2017 2018E 2019E Net Sales 32587.3 37838.4 42166.4 47974.1 EBITDA 8784.3 11309.7 11975.3 14392.2 PAT 5759.3 8326.3 8394.8 9824.3 OPM (%) 27.0% 29.9% 28.4% 30.0% NPM (%) 17.7% 22.0% 19.9% 20.5% EPS 59.6 86.3 87.0 101.8 PE 24.7 18.6 18.4 15.7 Market share gains on back of cost competitiveness to drive revenue growth: We believe company s potential to deliver strong volume growth for the coming year will be driven by market share gains. BKT currently holds ~6% share in the global OHT segment. Over the years, BKT has built a strong brand/franchise and distribution network outside India. BKT has a low cost structure compared with peers, which enables it to price its products at ~20% discount to competition. We expect with growing share of business from existing OEM s and new relationship and gains in market share to drive the volume growth forward. BKT s Management has maintained volume guidance of 185,000 MT to 190,000MT for FY18. We expect BKT to continue its growth story on back of stable economic conditions in domestic and European market additionally led by US market. We now expect company s consolidated revenue of INR 47,974.1Mn by FY19E from 37,838.4Mn of FY17 at 12.6% CAGR. Higher Utilization to bring-in cost efficiency and to offset rising input prices Company s Management has undertaken a backward integration plan to integrate Carbon Black facility with an initial capacity of 60,000MT for a capex of INR 1,500Mn. The Management expect with successful commissioning of carbon black plant at Bhuj Plant, company will be able to have a greater control over its cost. We believe carbon black (which accounts for ~25% of the overall RM cost) should help company expand its margin. We also believe with improving utilization and key cost under control company s operational efficiency should improve going forward. Hence, we expect EBITDA margins to remain stable from 29.9% in FY17 to 30% by FY19E leading to a EBITDA growth of 12.8% CAGR by FY19E at INR 14,392.2 Mn. We believe the company will be able to offset the rising in-put by bringing operational efficiency and company s focus on foreign markets should result in better price realization. SHARE HOLDING PATTERN (%) Particulars Jun 17 Mar 17 Dec 16 Promoters 54.37 54.37 58.3 FIIs 18.3 18.29 17.95 DIIs 13.57 13.22 14.52 Others 13.76 14.11 9.24 Total 100 100 100 12.6% 8.6% PAT CAGR between FY 17 and Revenue CAGR between FY 17 and FY 19E FY 19E
Valuations & Views: We believe BKT has significant cost & focus advantages in the OHT segment compared with peers which is reflected in margin advantage with peers. We believe adding new SKU s and deepening its geographical reach BKT will witness significant top-line growth which will lead to increase in cash flow. BKT expects to repay ~USD 92 Mn by H1FY18 and expected to be net cash company going forward. The company expects to fully repay its long term debt by mid FY18-19. We believe company s premium valuation is justified as it is significantly ahead of its peers and should continue to command premium over other tyre stocks. Industry leading performance, improving utilization, lowering D/E are the key levers for the stock. At CMP of INR 1601, the stock is trading at 18.6x FY17 EPS of INR 86.3, 18.4x FY18E EPS of INR 87 and 15.7x FY19E EPS of INR 101.8. We recommend BUY rating on the stock and value the stock at 18x FY19E EPS of INR 101.8 with a target price of INR 1,832 indicating 15% upside from CMP. Exhibit 1: Consolidated Revenue (INR Mn) 3 38,168 32,587 Revenue: 5.9% CAGR (FY15 to FY19E) PAT 20.1% CAGR (FY15 to FY19E) 37,838 42,166 47,974 4,726 5,759 8,326 8,395 9,824 Revenue PAT Exhibit 2: Operational Efficiency EBITDA Margin (%) PAT Margin (%) 30.00 26.96 29.89 28.40 30.00 20.00 10.00 19.06 12.38 17.67 22.00 19.91 20.48 0.00 Exhibit 3: Return Ratio Exhibit 4: Debt-Equity Ratio 30.00 20.00 10.00 0.00 ROE ROCE 1.04 26.30 D/E 22.66 22.75 21.28 20.40 0.69 20.35 18.23 18.75 12.79 10.79 0.22 0.15 0.08
Q1FY18 Result Snapshot Exhibit 5: Result Update (INR Mn) Particulars (Mn) Q1FY18 Q4FY17 Q1FY17 Q-o-Q Y-o-Y Volume 46327 46149 43306 0.39% 6.98% Realization/unit 218613 217326 217524 0.59% 0.50% Net Sales & Other Operating Income 10128 10029 9420 0.98% 7.51% Total Expenditure 7966 7476 6510 6.55% 22.36% (Increase) / Decrease In Stocks -301 230 119-230.77% -352.77% Purchase of Finished Goods 20 31 12-34.30% 73.50% Cost of Raw Materials 5513 4457 3715 23.68% 48.39% Other Expensess 2147 2162 2119-0.71% 1.33% Employee Cost 587 595 546-1.33% 7.68% PBIDT (Excl OI) 2162 2554 2910-15.33% -25.71% EBITDA Margins (%) 21.3% 25.5% 30.9% -411bps -955bps Depreciation 755 751 775 0.56% -2.54% EBIT & Exceptional Item 1407 1803 2136-21.95% -34.11% Other Income 923 617 207 49.50% 345.96% EBIT 2330 2420 2343-3.73% -0.54% Interest 51 53 66-2.47% -21.88% EBT 2278 2367 2277-3.76% 0.07% Tax 747 993 786-24.75% -4.97% Net Profit from ordinary activity after tax 1531 1375 1491 11.40% 2.74% Other Comprehensive Income 34.30 (810.60) (154.20) -104.23% -122.24% PAT 1497 2185 1645-31.49% -8.98% EPS 15.84 22.60 15.40-29.91% 2.86% 4 Key Con-call Highlights: Management has guided FY18 volume guidance at 185,000 MT 190,000 MT, and remains confident in achieving the target During Q1FY18, company s production from Bhuj plant stood at ~15,500 MT as against ~16,000MT of Q4 FY17. (Company achieved ~57,000 MT from Bhuj Plant in FY17) Company remains confident of achieving ~30% EBITDA margins in coming quarters as it expect sharp impact of RM cost to mellow down Company expects with backward integration of carbon black to derive significant cost synergies, which will help company to have a greater control on supply chain
5 Exhibit 6: Income Statement INR Mn FY16 FY17 FY18E FY19E Total Sales 32587.3 37838.4 42166.4 47974.1 Total Raw Materials 14222.8 15796.3 17709.9 19909.3 COGS 17928.5 23960.1 22812.0 25618.2 EBITDA 8784.3 11309.7 11975.3 14392.2 Depreciation 2812.8 3040.0 3189.4 3507.2 Interest & Finance charges 346.6 220.0 187.6 119.1 Other Income 2948.9 2536.3 2108.3 1919.0 EBT (as reported) 8573.8 10586.0 10706.5 12684.9 Tax 2814.5 3417.5 3511.7 4160.7 PAT 5759.3 7168.5 7194.8 8524.3 Other comprehensive income 0.0 1157.8 1200.0 1300.0 RPAT 5759.3 8326.3 8394.8 9824.3 Extra ordinaries adj. 0.0 0.0 0.0 0.0 APAT 5759.3 8326.3 8394.8 9824.3 RPAT after pref. div. 5759.3 8326.3 8394.8 9824.3 APAT after pref. div. 5759.3 8326.3 8394.8 9824.3 Exhibit 7: Balance Sheet INR Mn FY16 FY17 FY18E FY19E Equity Share Capital 193.3 193.0 193.0 193.0 Reserves 27685.4 35235.6 43282.1 52642.0 Net worth 27878.7 35428.6 43475.1 52835.0 Total loans 19143.9 7970.2 6470.2 3970.2 Deferred tax liability (Net) 2382.4 3528.5 3376.2 3796.6 Capital Employed 49441.5 47204.1 53435.5 60729.9 Gross Block 40394.4 43262.0 44262.0 46762.0 Depreciation 11851.3 14891.3 18080.7 21587.9 Net block 28543.1 28370.7 26181.3 25174.1 CWIP 2310.7 1096.7 1327.9 2338.1 Intangible 0.0 39.9 0.0 0.0 Investments 8022.6 8950.6 9270.4 10541.6 Inventories 2969.4 4761.2 4593.7 5193.8 Sundry debtors 5579.4 4117.7 5718.5 6571.8 Cash and bank 3298.5 248.1 417.2 3443.5 Loans and advances 1822.3 239.3 253.0 479.7 Other Current Assets 1358.5 3474.6 3921.5 4557.5 Total Current assets 15028.1 17458.9 19120.4 25265.7 Total Current liabilities 4463.0 10686.7 4699.2 5438.0 Net Current assets 10565.1 6772.2 14421.2 19827.6 Capital Deployed 49441.5 47204.1 53435.5 60729.9
Exhibit 8 FY17: Cash flow statement 6 INR Mn FY16 FY17 FY18E FY19E PAT 5759.3 7168.5 7194.8 8524.3 Depreciation & Amortization 2782.8 3040.0 3189.4 3507.2 Incr/(Decr) in Deferred Tax Liability 495.3 1146.1-152.3 420.4 (Incr)/Decr in Working Capital 1695.5 742.5-7479.9-2638.0 Cash Flow from Operating 10732.9 12097.1 2752.0 9813.9 (Incr)/ Decr in Gross PP&E -7171.9-2867.6-1000.0-2500.0 (Incr)/Decr In Work in Progress 4029.7 1214.0-231.2-1010.2 (Incr)/Decr In Investments -3582.0-928.0-319.8-1271.2 (Incr)/Decr in Other Non-Current Assets 0.0-2013.9-220.9-355.8 Cash Flow from Investing -6724.2-4595.5-1771.9-5137.2 (Decr)/Incr in Debt -4411.9-10933.4-1662.7-2486.0 (Decr)/Incr in Share Capital -5471.0-6831.8-6846.5-8059.9 (Decr)/Inc in Other reserves -288.3-336.7-348.3-464.4 Dividend -5052.3-10552.0-811.0-1650.3 Cash Flow from Financing -4411.9-10933.4-1662.7-2486.0 Incr/(Decr) in Balance Sheet Cash -1043.6-3050.4 169.1 3026.3 Cash at the Start of the Year 4342.1 3298.5 248.1 417.2 Cash at the End of the Year 3298.5 248.1 417.2 3443.5 Exhibit 9 FY17: Ratio Analysis FY16 FY17 FY18E FY19E Growth (%) Total Sales -14.6 16.1 11.4 13.8 EBITDA 20.8 28.7 5.9 20.2 APAT 21.9 44.6 0.8 17.0 Profitability (%) EBITDA Margin 27.0 29.9 28.4 30.0 Adj. Net Profit Margin 17.7 22.0 19.9 20.5 ROIC 8.6 12.3 12.6 13.7 ROE 22.7 26.3 21.3 20.4 Per Share Data (Rs.) AEPS 59.6 86.3 87.0 101.8 Reported CEPS 93.8 110.5 107.6 124.7 BVPS 288.5 367.1 450.5 547.5 Valuations (x) PER (x) 24.7 18.6 18.4 15.7 PEG (x) 1.1 0.4 22.4 0.9 P/BV (x) 5.1 4.4 3.6 2.9 EV/EBITDA (x) 18.4 14.4 13.4 11.0 EV/Net Sales (x) 5.0 4.3 3.8 3.3 Dividend Yield (%) 0.2 0.2 0.2 0.2 Turnover days Debtor Days 63.8 46.8 42.6 46.8 Payable Days 95.8 115.4 123.1 72.2 Gearing Ratio D/E 0.7 0.22 0.15 0.08
7 Rating Legend Date CMP (INR) TP (INR) Recommendation Our Rating Upside 3-Aug-17 1601 1832 BUY Buy More than 15% 30-May-17 1473 1652 ACCUMULATE Accumulate 5% 15% 14-Feb-17 1190 1441 BUY Hold 0 5% 02-Dec-16 1189 1216 HOLD Reduce -5% 0 14-Sept-16 885 922 HOLD Sell Less than 5% CERTIFICATION: I, Ankit Merchant (M Com, BMS), research analyst, author and the name subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect my views about the subject issuer(s) or securities. I also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Terms & Conditions and other disclosures: KRChoksey Shares and Securities Pvt. Ltd (hereinafter referred to as KRCSSPL) is a registered member of National Stock Exchange of India Limited, Bombay Stock Exchange Limited and MCX Stock Exchange Limited. 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