Balkrishna Industries

Annual Report Analysis Balkrishna Industries Accumulate Distribution expansion is the focus area Balkrishna Industries (BKT) has highlighted the importance of distribution reach and higher number of SKUs to sustain volume growth momentum. Focus will also be on the backward integration through carbon black plant in Bhuj ensuring continuous supply and control on input cost. BKT endeavors to continues its strong growth momentum which will be driven by the expansion in the distribution through entering new geographies and going for deeper penetration in existing areas. Addition in the number of SKUs enables BKT to be a preferred vendor for major OEMs across the globe. With backward integration through carbon black plant in FY19, we feel that gross margins should expand. Distribution headroom and acceptability with more global customers will ensure healthy volume growth of double digit. Volume Growth remains strong Demand for the product profile catered by BKT is mainly driven by the economic development in the developed world. Challenges on growth will remain but BKT strategy to expand its distribution reach and penetrate deeper in its existing areas of presence will enable BKT to grow much ahead of the industry. Global industry is expected to grow in the range of 4% - 5% and we believe that BKT will be able to clock double digit volume growth. Input cost pressure to subside BKT key advantage compared to the competition is to produce equal quality products at a lower cost which is driven by the lower man power cost. However, this has been an accepted strength and BKT has a challenge to handle this cost difference as the input material prices get volatile / show upward trend. Carbon Black is under shortage and has seen a price surge of nearly 2% in the last year. BKT is going to get its carbon black plant up and running in FY19 and thereby negating any supply side issues. At the same time, pricing stability will also come and BKT can expand its margins due to this backward integration from second half of FY219. Raw material supply and currency volatility BKT currency exposure gets a natural hedge continues as 85% of revenues comes from exports. Major chunk of the raw material is imported. BKT also goes for near to medium term contracts for sourcing of key raw material like natural rubber. Policy to buy and stock during a lean period has paid off in the past and BKT will be open to any such opportunities in the future also. With BKT expanding its vendor base for raw material sourcing, risk of timely sourcing and pricing issues gets reduced to a large extent. FINANCIALS (` Mn) Particulars FY16 FY17 FY18 FY19E FY2E Net Sales 32,225 37,279 44,473 51,657 58,934 Growth (%) (14.7) 15.7 19.3 14.2 14.2 EBITDA 8,381 11,32 11,67 14,881 17,98 OPM (%) 26. 3.4 24.9 28.8 3.4 PAT 4,386 7,156 7,393 9,777 11,913 NPM (%) 13.6 19.2 16.6 18.9 2.2 EPS (`) 22.7 37. 38.2 5.6 61.6 Growth (%) (1.3) 63.2 3.3 32.3 21.9 PER (x) 52.1 31.9 3.9 23.4 19.2 ROANW (%) 16.8 2.2 19.3 21.6 21.8 ROACE (%) 15.7 23. 23.2 28.1 3. July 13, 218 CMP ` 1,182 Target / Upside ` 1,356/15% BSE Sensex 36,542 NSE Nifty 11,19 Scrip Details Equity / FV ` 387mn/` 2/- Market Cap ` 229bn USD 3.3bn 52-week High/Low ` 1,352/718 Avg. Volume (no) 484686 NSE Symbol Bloomberg Code BALKRISIND Shareholding Pattern Mar 18 (%) BIL IN Promoters 58.3 MF/Banks/FIs 11. FIIs 18. Public / Others 12.7 17 16 15 14 13 12 11 1 9 BIL Relative to Sensex Aug-17 Sep-17 Oct-17 Nov-17 Dec-17 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 BIL BSE Sensex Sr. Analyst: Priyank Chandra Tel: +9122 496 9737 E-mail: priyank@dolatcapital.com Analyst: Kushal Shah Tel: +9122 496 9768 E-mail: kushals@dolatcapital.com

Valuation BKT has rapidly progressed as a global player in the OHT segment and with lot of headroom available on distribution front, we expect BKT to grow at more than double the industry growth rate. Margins will further improve due to backward integration and with no major capex in coming 2-3 years, return ratios will expand. Despite the outperformance in the stock price, we believe that BKT is a structural bet and should be accumulated at all dips. Recommend Accumulate with a target price of ` 1,356. KTAs from Directors report and MDA BKT deals with specialized tyre segment and hence due to the nature of the business also deals with higher inventory levels. The developed countries, especially European and USA region, forms major part of the revenue generating economies for such segments. Around 2/3 rd part of the revenue for BKT comes agricultural segment which is characterized as non-cyclical while the rest of the revenue of BKT which majorly comes from industrial, construction and mining segment are cyclical in nature. As major part of BKT s revenue comes from export, the cyclical part of the revenue is dependent on the economic outlook of the world. The OHT segment grew by 4-5% in FY18 and the industry is witnessing good momentum since last 2 years. The industry is facing high shortage of carbon black coupled with increasing raw material prices because of rising crude prices. Despite challenges relating to shortage, BKT faced no production loss in FY18. BKT has planned to overcome the headwind by setting up its own carbon black plant with capacity of 6, MT at the capex of ` 1.5 bn. The plant is expected to commence production by the end of FY19. BKT issued 1:1 bonus shares in the month of December in FY18. BKT operates in the segment which is characterized by high capital requirements as well as being a labor-intensive industry. The segment benefits from stable demand and rarely suffers from any technological disruptions. BKT is also exploring others related segments such as Earthmovers & Mining tyres to push the top line growth further. BKT is also actively looking to capture the market through change in customer preference and hence have forayed into the all-steel OTR radial tyre plant at Bhuj location. BKT also faces challenges from smaller players in the industry, retention of employees and increasing raw material prices. July 13, 218 2

Annual Charts 7, 6, 5, 4, 3, 2, 1, Revenue (` mn) Revenue Growth (%) 58,934 51,657 44,473 37,279 32,225 FY16 FY17 FY18 FY19E FY2E 25 19.3 2 15.7 16.2 14.1 15 1 5 (5) (1) (15) -14.7 FY16 FY17 FY18 FY19E FY2E 21, 18, 15, 12, 9, 6, 3, EBITDA (` mn) EBITDA Margin (%) 32 17,98 31 3.4 3.4 14,881 3 28.8 11,32 11,67 29 8,381 28 27 26. 26 24.9 25 FY16 FY17 FY18 FY19E FY2E 24 FY16 FY17 FY18 FY19E FY2E PAT (` mn) PAT Margin (%) 14, 11,913 12, 9,777 1, 8, 7,156 7,393 6, 4,386 4, 2, FY16 FY17 FY18 FY19E FY2E 21 2.2 2 19.2 18.9 19 18 17 16.6 16 15 14 13.6 13 12 FY16 FY17 FY18 FY19E FY2E July 13, 218 3

ROE (%) ROCE (%) 23 32 3. 21.6 21.8 22 3 28.1 21 28 2.2 19.3 26 2 23. 23.2 24 19 22 18 16.8 2 17 18 15.7 16 16 15 14 FY16 FY17 FY18 FY19E FY2E FY16 FY17 FY18 FY19E FY2E 3, 25, 2, 15, 1, 5, Capacity utilisation Segment sales (%) 1 1 3 3 3 4 4 49 57 66 74 83 FY16 FY17 FY18 FY19E FY2E Achievable Installed Capacity (MTPA) - LHS Sales Volumes (MTPA) - LHS Capcity Utilization (%) - RHS 8 6 4 8 6 4 2 33 33 34 34 34 63 63 63 62 62 FY14 FY15 FY16 FY17 FY18 Agriculture OTR Others 1 8 Sales Channel Profile (%) Geographical Revenue Breakup (%) 4 4 3 3 3 1 9 12 15 16 17 2 22 24 24 26 8 2 15 15 15 15 6 6 19 19 15 15 15 4 77 75 74 74 72 2 FY14 FY15 FY16 FY17 FY18 Replacement OEM Others 4 2 53 54 55 54 54 FY14 FY15 FY16 FY17 FY18 Europe America (North & South) Rest of the World India July 13, 218 4

Income Statement (` Mn) Particulars Mar17 Mar18 Mar19E Mar2E Net Sales 36,616 43,527 5,86 58,4 Other Operating Revenue 663 946 851 894 Total Income 37,279 44,473 51,657 58,934 Total Expenditure 25,959 33,46 36,776 41,27 Cost of Material Consumed 15,731 21,652 24,387 27,279 Purchase of Stock-In-Trade 78 276 Employees Benefit Exp. 2,243 2,488 2,737 3,1 Other Expenses 7,93 9,42 9,653 1,737 EBIDTA (Excl. OI) 11,32 11,67 14,881 17,98 EBIDTA (Incl. OI) 13,816 14,429 18,411 21,614 Other Income 2,496 3,362 3,53 3,77 Interest 214 131 157 125 Depreciation 3,38 3,113 3,44 3,438 PBT & EO Items 1,563 11,185 14,813 18,51 Profit Before Tax 1,563 11,185 14,813 18,51 Tax 3,47 3,792 5,37 6,137 Net Profit 7,156 7,393 9,777 11,913 Balance Sheet (` Mn) Particulars Mar17 Mar18 Mar19E Mar2E Sources of Funds Equity Capital 193 387 387 387 Securities Premium 125 Other Reserves 35,194 4,566 49,212 59,542 Net Worth 35,512 4,952 49,598 59,929 Secured Loans 4,99 2,597 1,298 649 Unsecured Loans 2,915 3,676 1,838 919 Loan Funds 7,824 6,273 3,137 1,568 Deferred Tax Liability 3,528 3,288 3,354 3,421 Total Capital Employed 46,864 5,514 56,89 64,918 Applications of Funds Gross Block 34,38 37,476 4,476 42,976 Less: Accumulated Dep. 5,894 8,987 12,427 15,865 Net Block 28,486 28,49 28,49 27,111 Capital Work in Progress 1,97 1,183 6 375 Investments 13,9 11,113 11,335 11,561 Current Assets, Loans & Advances Inventories 4,597 5,942 6,264 7,156 Sundry Debtors 4,122 5,19 6,264 7,156 Cash and Bank Balance 136 246 9,978 18,754 Loans and Advances 1,89 2,799 2,939 3,86 Other Current Assets 3,49 3,655 3,838 4,3 sub total 14,74 17,661 29,282 4,181 Less : Current Liabilities & Provisions Current Liabilities 1,59 7,728 12,953 14,63 Provisions 182 24 224 247 sub total 1,692 7,932 13,177 14,31 Net Current Assets 3,382 9,729 16,15 25,871 Total Assets 46,864 5,514 56,89 64,918 E Estimates Cash Flow (` Mn) Particulars Mar17 Mar18 Mar19E Mar2E Profit before tax 1,563 11,185 14,813 18,51 Depreciation & w.o. 3,38 3,113 3,44 3,438 Net Interest Exp 72 6 157 125 Direct taxes paid (3,125) (3,858) (5,37) (6,137) Change in Working Capital (1,133) (2,151) 3,356 (99) Other (997) (816) (53) (644) (A) CF from Opt. Activities 8,417 7,533 16,2 13,844 Capex (1,613) (4,19) (2,417) (2,275) Free Cash Flow 6,85 3,424 13,783 11,569 Inc./ (Dec.) in Investments (4,45) 3,49 222 227 Other 321 141 22 256 (B) CF from Invt. Activities (5,337) (919) (1,975) (1,792) Inc./(Dec.) in Debt (5,299) (5,28) (3,137) (1,568) Interest exp net (218) (132) (157) (125) Dividend Paid (Incl. Tax) (644) (1,212) (1,131) (1,583) (C) CF from Financing (6,162) (6,553) (4,424) (3,277) Net Change in Cash (3,81) 61 9,82 8,776 Opening Cash balances 3,196 115 176 9,978 Closing Cash balances 115 176 9,978 18,754 Important Ratios Particulars Mar17 Mar18 Mar19E Mar2E (A) Measures of Performance (%) Gross Margin 57.6 51.7 52.8 53.7 EBIDTA Margin (excl. O.I.) 3.4 24.9 28.8 3.4 Interest / Sales.6.3.3.2 Tax/PBT 32.3 33.9 34. 34. Net Profit Margin 19.2 16.6 18.9 2.2 (B) As Percentage of Net Sales Exc. Duty % of Gross Sales 1.5.4.. Cost of materials consumed 42.4 48.3 47.2 46.3 Employee Benefits Expense 6.1 5.7 5.4 5.2 Other Expenses 21.6 21.6 19. 18.5 (C) Measures of Financial Status Debt / Equity (x).2.2.1. Interest Coverage (x) 64.4 11.5 117.4 172.3 Average Cost of Debt (%) 2.1 1.9 3.3 5.3 Debtors Period (days) 41.1 42.1 45. 45. Closing stock (days) 45.8 49.8 45. 45. Inventory Turnover Ratio (x) 8. 7.3 8.1 8.1 Fixed Assets Turnover (x) 1.1 1.2 1.3 1.4 WC Turnover (x) 1.8 4.5 3.2 2.2 Non-Cash WC (` Mn) 3,246 9,483 6,127 7,117 (D) Measures of Investment EPS (`.) 37. 38.2 5.6 61.6 CEPS (`.) 52.7 54.3 68.4 79.4 DPS (`.) 8. 8. 5. 7. Dividend Payout (%) 21.6 2.9 9.9 11.4 Book Value (`.) 367.4 211.8 256.6 31. RoANW (%) 2.2 19.3 21.6 21.8 RoACE (%) 23. 23.2 28.1 3. RoAIC (%) 24.8 23.3 31.1 39.4 (E) Valuation Ratios CMP (`.) 1,182 1,182 1,182 1,182 P/E (x) 31.9 3.9 23.4 19.2 Market Cap. (`. Mn.) 228,51 228,51 228,51 228,51 MCap/ Sales (x) 6.2 5.2 4.5 3.9 EV (`. Mn.) 236,188 234,528 221,66 211,316 EV/Sales (x) 6.5 5.4 4.4 3.6 EV/EBDITA (x) 2.9 21.2 14.9 11.8 P/BV (x) 3.2 5.6 4.6 3.8 Dividend Yield (%).7.7.4.6 E Estimates July 13, 218 5

DART RATING MATRIX Total Return Expectation (12 Months) Buy > 2% Accumulate 1 to 2% Reduce to 1% Sell < % Rating and Target Price History 14 13 12 Month Rating TP (`) Price (`) * Apr-18 Buy 1,345 1,81 May-18 Buy 1,348 1,118 11 1 9 8 Jan-18 Feb-18 Mar-18 Apr-18 May-18 Jun-18 Jul-18 BKT Target * As on Recommended Dated DART Team Purvag Shah Managing Director purvag@dolatcapital.com +9122 496 9747 Amit Khurana, CFA Head of Equities amit@dolatcapital.com +9122 496 9745 CONTACT DETAILS Equity Sales Designation E-mail Direct Lines Dinesh Bajaj VP - Equity Sales dineshb@dolatcapital.com +9122 496 979 Kartik Sadagopan VP - Equity Sales kartiks@dolatcapital.com +9122 496 9762 Kapil Yadav VP - Equity Sales kapil@dolatcapital.com +9122 496 9735 Derivatives Strategist Designation E-mail Bhavin Mehta VP - Derivatives Strategist bhavinm@dolatcapital.com +9122 496 975 Equity Trading Designation E-mail P. Sridhar VP and Head of Sales Trading sridhar@dolatcapital.com +9122 496 9728 Chandrakant Ware AVP - Equity Sales Trading chandrakant@dolatcapital.com +9122 496 977 Derivatives Trading Designation E-mail Shirish Thakkar AVP - Derivatives shirisht@dolatcapital.com +9122496 972 Hardik Mehta Sales Trader hardikm@dolatcapital.com +9122496 9748 Dolat Capital Market Private Limited. 2, Rajabahadur Mansion, 1st Floor, Ambalal Doshi Marg, Fort, Mumbai - 4 1

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