Balkrishna Industries

India I Equities Auto Result Update Change in Estimates Target Reco 13 February 2017 Balkrishna Industries All-round performance, margin guidance reduced; Hold Seventy-five percent of the products of Balkrishna, a leading offhighway-tyre exporter, go to Europe and the US. The company expects the positive trend in volume growth to continue in Europe and the US as its business model gives it a strong foothold in the replacement market and as it currently has less penetration in the OEM market. However, with rising prices of rubber, it admitted margins would decline. We introduce FY19 estimates, and raise our estimates and target. Due to the recent run-up in the stock price, however, we retain our Hold recommendation. Q3 FY17 results all-round good performance. At `8.8bn, revenue was up 25% yoy, driven by 14% volume growth. The EBITDA margin, at 31.5%, slipped 150bps qoq on the increase in raw-material prices. However, the margin expanded 820bps yoy. This increase is attributed to a better sales-mix (more farm-tyre sales), a favourable currency rate as well as low-cost inventory. Adj. PAT came at `1.5bn, up 265% yoy. Volume growth re-affirmed. The company expects to post 15% volume growth and guided to 160,000 170,000 tons in FY17. Management said that Europe has been steady and it is seeing greater demand from the UK. The US market is also showing signs of stronger growth, re-affirming the belief of achieving ~60% capacity utilisation. Change in estimates. With greater volumes, the company acknowledged margins could come under pressure due to rising prices of rubber and of other components. We raise our FY17e and FY18e revenue 6% and 9% ` respectively, and earnings 31% (adj. PAT up 19%) and 18%. Valuation. We introduce FY19 estimates. We are building in 12% volume growth and a ~29% EBIDTA margin. The stock trades at 13.1x FY19e. We value it at 13x FY19e EPS and raise our price target to `1,160 (earlier `646). Hence, we retain our recommendation at a Hold. Risks: Slowdown in Europe and the US. Quarterly results (YE Mar) Q3 FY16 Q3 FY17 % yoy 9M FY16 9M FY17 % yoy Sales (` m) 6,987 8,822 26.3 23,633 27,428 16.1 EBITDA (` m) 1,625 2,780 71.0 5,286 8,455 60.0 EBITDA margin (%) 23.3 31.5 825bps 22.4 30.8 846bps Interest (` m) 143 49-65.8 329 162-50.7 Depreciation (` m) 764 788 3.1 2,107 2,288 8.6 Other income (` m) 102 285 179.4 1,417 1,250-11.8 PBT (` m) 820 2,228 171.7 4,267 7,255 70.0 Tax (` m) 406 718 76.7 1,514 2,413 59.4 Adjusted PAT (` m) 414 1,510 265.0 2,754 4,843 75.9 Extraordinary items 543 347 NA 281 935 NA Source: Company Rating: Hold Target Price: `1,160 Share Price: `1,165 Key data BIL IN / BLKI.BO 52-week high / low `1280 / `551 Sensex / Nifty 28352/8805 3-m average volume $2.1m Market cap `112.6bn / $1689m Shares outstanding 96.7m Shareholding pattern (%) Dec'16 Sep'16 Jun'16 Promoters 58.3 58.3 58.3 - of which, Pledged - - - Free Float 41.7 41.7 41.7 - Foreign Institutions 18.0 18.3 18.8 - Domestic Institutions 14.5 14.7 13.9 - Public 9.2 8.7 9.0 Estimates revision (%) FY17e FY18e Sales 6.0 9.4 EBITDA 22.8 20.4 PAT 30.7 18.2 Financials (YE Mar) FY17e FY18e Sales (` m) 36,721 41,745 Net profit (` m) 6,378 7,378 EPS (`) 66.0 76.3 Growth (%) 12.4 15.7 PE (x) 17.7 15.3 PBV (x) 3.3 2.8 RoE (%) 20.5 19.6 RoCE (%) 19.6 20.7 Dividend yield (%) 0.6 0.7 Net debt / equity (x) 0.2 0.0 Source: Anand Rathi Research Mayur Milak Research Analyst Anand Rathi Share and Stock Brokers Limited (hereinafter ARSSBL ) is a full-service brokerage and equities-research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient. Disclosures and analyst certifications are present in the Appendix. AnandRathi Research India Equities

13 February 2017 Balkrishna Industries All-round performance, margin guidance reduced; retaining a Hold Quick Glance Financials and Valuations Fig 1 Income statement (` m) Net revenues 37,799 32,418 36,721 41,745 47,455 Revenue growth (%) 5.7-14.2 13.3 13.7 13.7 - Oper. expenses 30,454 23,745 25,620 29,630 33,594 EBIDTA 7,345 8,673 11,101 12,114 13,861 EBITDA margins (%) 19.4 26.8 30.2 29.0 29.2 - Interest 466 346 221 162 65 - Depreciation 2,402 2,811 3,081 3,190 3,303 + Other income 2,798 2,954 1,864 1,930 1,996 - Tax 2,387 2,792 3,286 3,315 3,872 Effective tax rate (%) 32.8 33.0 34.0 31.0 31.0 + Associates / (minorities) - - - - - Adjusted PAT 4,888 5,677 6,378 7,378 8,618 + Extraordinary items - - 935 - - Reported PAT 4,888 5,677 7,313 7,378 8,618 Adj. FDEPS (` / sh) 50.6 58.7 66.0 76.3 89.2 Adj. FDEPS growth (%) 0.1 16.1 12.4 15.7 16.8 Fig 2 Balance sheet (` m) Share capital 193 193 193 193 193 Reserves & surplus 22,723 27,760 34,195 40,688 48,271 Net worth 22,917 27,953 34,388 40,881 48,465 Total debt 23,578 18,964 14,964 9,964 5,964 Minority interest - - - - - Def. tax liab. (net) 1,887 2,382 2,382 2,382 2,382 Capital employed 48,382 49,298 51,734 53,226 56,810 Net fixed assets 30,475 30,807 29,125 27,435 25,633 Intangible assets 13 42 42 42 42 Investments 4,449 8,325 8,625 8,925 9,225 - of which, Liquid 3,865 2,704 2,854 3,004 3,154 Working capital 9,134 7,097 9,760 10,562 11,705 Cash 4,311 3,028 4,182 6,263 10,207 Capital deployed 48,382 49,298 51,734 53,226 56,810 W C turn (days) 88 80 97 92 90 Book value (` / sh) 237 289 356 423 501 Fig 3 Cash-flow statement (` m) Adjusted PAT 4,888 5,677 6,378 7,378 8,618 + n-cash items 2,402 2,811 3,081 3,190 3,303 Cash profit 7,290 8,488 9,459 10,568 11,921 - Incr. / (decr.) in WC -2,515-2,037 2,663 802 1,143 Operating cash-flow 9,805 10,525 6,796 9,766 10,778 - Capex 4,832 3,172 1,400 1,500 1,500 Free cash-flow 4,973 7,353 5,396 8,266 9,278 - Dividend 278 640 878 885 1,034 + Equity raised -541-1 0 - - + Debt raised 243-4,119-4,000-5,000-4,000 - Investments 184 3,876 300 300 300 - Misc. items - - -935 - - Net cash-flow 4,213-1,283 1,154 2,081 3,944 + Op. cash & bank bal. 98 4,311 3,028 4,182 6,263 Cl. Cash & bank bal. 4,311 3,028 4,182 6,263 10,206 Fig 4 Ratio analysis @ `1,165 P/E (x) 23.0 19.8 17.7 15.3 13.1 Cash P/E (x) 15.4 13.3 11.9 10.7 9.4 EV / EBITDA (x) 17.4 14.5 10.9 9.4 7.6 EV / sales (x) 3.4 3.9 3.3 2.7 2.2 P/B (x) 4.9 4.0 3.3 2.8 2.3 RoE (%) 23.4 22.3 20.5 19.6 19.3 RoCE (%) 16.7 18.0 19.6 20.7 22.8 Dividend yield (%) 0.2 0.5 0.6 0.7 0.8 Dividend payout (%) 5.7 11.3 13.8 12.0 12.0 Net debt / equity (x) 0.7 0.5 0.2 0.0-0.2 Debtor days 58 62 62 61 60 Inventory days 38 32 41 39 39 Payables days 37 38 31 31 31 D/E ratio 1.0 0.7 0.4 0.2 0.1 Interest coverage ratio 11.2 17.1 30.9 46.2 133.8 Fig 5 Price movement Fig 6 Annual revenue (`) 1,400 1,200 1,000 800 600 400 200 0 BIL (`m) 50,000 40,000 30,000 20,000 10,000 0 Feb-12 May-12 Aug-12 v-12 Feb-13 May-13 Aug-13 v-13 Feb-14 May-14 Aug-14 v-14 Feb-15 May-15 Aug-15 v-15 Feb-16 May-16 Aug-16 v-16 Feb-17 FY14 FY15 FY16 FY17e FY18e FY19e Revenue Source: Bloomberg Source: Company AnandRathi Research 2

13 February 2017 Balkrishna Industries All-round performance, margin guidance reduced; retaining a Hold Quarterly result update Q3 FY17 results all-round performance. At `8.8bn, revenue was up 25% yoy, driven by 14% volume growth. The EBITDA margin, at 31.5%, was down 150bps qoq due to the increase in raw-material prices. However, yoy margins expanded 820bps. This increase in the margin is attributed to a better sales-mix (more farm tyre sales), a favourable currency rate as well as low-cost inventory. Adj. PAT stood at `1.5bn, up 265% yoy. Fig 7 Quarterly performance (` m) Q3 FY16 Q4 FY16 Q1 FY17 Q2 FY16 Q3 FY17 VOLUMES Volume (tonnes) 35,169 41,306 43,306 42,550 40,000 YoY (%) (8.4) 5.1 11.0 23.9 13.7 QoQ (%) 2.4 17.5 4.8 (1.7) (6.0) Average Realization 1,95,652 2,11,645 2,10,243 2,14,383 2,16,173 YoY (%) (20.9) (6.4) (3.6) (8.0) 10.5 QoQ (%) (16.0) 8.2 (0.7) 2.0 0.8 Net sales 6,881 8,742 9,105 9,122 8,647 YoY (%) (27.5) (1.6) 7.0 14.0 25.7 QoQ (%) (14.0) 27.1 4.1 0.2 (5.2) Other operating income 106 54 176 204 175 Total operating Income 6,987 8,796 9,281 9,326 8,822 YoY (%) (27.2) (1.6) 8.4 15.3 26.3 QoQ (%) (13.6) 25.9 5.5 0.5 (5.4) EXPENDITURE (Incr.) / decr. in stock-in-trade (129) (41) 119 (157) (188) Materials 3,155 3,703 3,727 3,822 3,772 % of sales 43.3 41.6 41.4 39.3 40.6 YoY (%) (37.3) (24.4) (8.0) 9.5 18.4 QoQ (%) (9.6) 21.0 5.0 (4.7) (2.2) Staff cost 471 611 546 540 562 % of sales 6.7 6.9 5.9 5.8 6.4 YoY (%) (6.5) 28.8 9.7 11.0 19.4 QoQ (%) (3.2) 29.8 (10.7) (1.0) 4.1 Other expenditure 1,865 2,133 2,290 2,045 1,896 % of sales 26.7 24.3 24.7 21.9 21.5 YoY (%) (16.7) (3.5) (17.8) 20.8 1.7 QoQ (%) 10.2 14.4 7.3 (10.7) (7.3) Total expenses 5,361 6,407 6,681 6,250 6,042 EBITDA 1,625 2,389 2,600 3,076 2,780 YoY (%) (20.1) 69.8 136.6 20.1 71.0 QoQ (%) (36.6) 47.0 8.8 18.3 (9.6) OPM (%) 23.3 27.2 28.0 33.0 31.5 Other income 102 821 517 448 285 Interest 143 81 66 47 49 Depreciation 764 705 775 725 788 Exceptional items 543-588 347 Profit before tax 1,362 2,424 2,277 3,339 2,574 Provision for taxation 406 874 786 909 718 Tax Rate (%) 29.8 36.1 34.5 27.2 27.9 Profit after tax 956 1,550 1,491 2,430 1,857 YoY (%) (26.4) 0.4 46.6 128.8 94.2 QoQ (%) (10.0) 62.1 (3.8) 63.1 (23.6) Adj. PAT 414 1,550 1,491 1,842 1,510 EPS 9.9 16.0 15.4 25.1 19.2 Source: Company AnandRathi Research 3

13 February 2017 Balkrishna Industries All-round performance, margin guidance reduced; retaining a Hold Valuation Change in estimates With greater volumes, the company acknowledged that margins could come under pressure due to rising prices of rubber and of other components. It expects to post 15% volume growth and guided to 160,000 to 170,000 tons in FY17. It has already achieved ~126,000 tons in 9M FY17. We have revised our volume growth estimates for FY17, from 156,000 to 170,000 tons. We raise our FY17e and FY18e revenue 6% and 9% respectively, and our earnings estimates 31% and 18%. Fig 8 Change in estimates Change (%) New Old (` m) FY17e FY18e FY17e FY18e FY17e FY18e Revenue 6.0 9.4 36,721 41,745 34,640 38,159 EBITDA 22.8 20.4 11,101 12,114 9,043 10,062 Reported PAT 30.7 18.2 7,313 7,378 5,595 6,241 Source : Anand Rathi Research Valuation We introduce FY19 estimates. We are building in 12% volume growth and a ~29% EBIDTA margin. We expect revenue, EBITDA and PAT to register CAGRs over FY17-19 of respectively 14%, 12% and 9%. The stock trades at 13.1x FY19e. We value it at 13x FY19e EPS and raise our price target to `1,160. However, due to recent rally in the stock price, we continue to recommend a Hold. Fig 9 PE band 1300 1100 900 14x 11x 700 500 300 8x 5x 100 Feb-13 Aug-13 Feb-14 Aug-14 Feb-15 Aug-15 Feb-16 Aug-16 Feb-17 Source: Bloomberg, Anand Rathi Research Risk Slower demand pick-up in Europe. AnandRathi Research 4

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Important Disclosures on subject companies Rating and Target Price History (as of 13 February 2017) 1410 1210 1010 810 610 410 210 10 1 2 3 Balkrishna Inds 4 6 7 8 5 Jan-11 Apr-11 Jul-11 Oct-11 Jan-12 Apr-12 Jul-12 Oct-12 Jan-13 Apr-13 Jul-13 Oct-13 Jan-14 Apr-14 Jul-14 Oct-14 Jan-15 Apr-15 Jul-15 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16 Jan-17 9 Date Rating TP (`) Share Price (`) 1 22-Feb-11 Buy 144 127 2 24-Jul-12 Buy 355 272 3 24-v-12 Buy 335 254 4 10-Jul-13 Buy 310 234 5 09-Jan-14 Buy 379 342 6 07-Apr-14 Buy 534 497 7 22-May-14 Buy 730 581 8 27-Jul-15 Buy 742 697 9 13-Apr-16 Hold 646 618 Anand Rathi Ratings Definitions Analysts ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below: Ratings Guide (12 months) Buy Hold Sell Large Caps (>US$1bn) >15% 5-15% <5% Mid/Small Caps (<US$1bn) >25% 5-25% <5% Research Disclaimer and Disclosure inter-alia as required under Securities and Exchange Board of India (Research Analysts) Regulations, 2014 Anand Rathi Share and Stock Brokers Ltd. 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