Domestic brokerage house ICICI Securities is bullish on tyres major Balkrishna Industries on the back of strong demand trends. The brokerage has a 'buy' rating on the stock with a target at ₹2,516 per share, indicating around a 20 percent upside in the stock.
In the last 1 year, the stock has risen around 25 percent, outperforming the Nifty Auto as well as Nifty indices, which added 15 percent and 19 percent, respectively in this period.
Meanwhile, MRF and Ceat have fallen 11 percent and 17 percent, respectively, however, Apollo Tyres is one percent.
However, in the last 10 years, the tyre-maker has surged around 1,400 percent. With a market capitalisation of over ₹40,000 crore, the firm is engaged in offering pneumatic tires. It focuses on the manufacture of a range of off-highway tires (OHT) that are mainly meant for agricultural, industrial and construction, earthmover and port, mining, forestry, lawn and garden and all-terrain vehicles (ATV).
Here's why ICICI Securities is bullish
According to ICICI Securities, Balkrishna Industries’ (BIL) key export markets reported strong demand trends with Feb’22 industry exports up 20 percent YoY. Though the data indicate continued momentum in the off-the-road (OTR) segment and sturdy agri-demand at around 20 percent YoY, overall sales are flattish QoQ, in line with management commentary of lower supply due to capacity constraints, it added.
The data continues to support the robust demand momentum driven by both agri and OTR segments (FY22-YTD industry exports are up ~47 percent YoY on the dollar basis), noted ICICI. However, the recent inflation in international rubber prices coupled with capacity constraints are likely to sustain pressure on H1FY23E margins, it further stated.
"Decadal-high US new housing construction starts and higher infra/mining investments across key markets of US/EU lend realism to our revenue growth assumption of 15 percent CAGR over FY22-FY24E (12 percent growth in volumes)," the brokerage firm forecasted.
It also pointed out that with its cost arbitrage advantage versus peers, the firm is able to price its products at discount to global peers and in turn make a return on capital employed (RoCE) of around 20-25 percent, thus enabling sustainable free cash flow (FCF) generation.
Earnings Preview
ICICI Direct expects Balkrishna Industries to report net profit at ₹355 crore in the March quarter (Q4FY22), down 4.5 percent year-on-year (YoY), but up 8.2 percent quarter-on-quarter (QoQ).
Net Sales are expected to increase 22.4 percent YoY (up 5.3 percent QoQ) at ₹2,137 crore in Q4FY22, as per the brokerage.
It added that earnings before interest, tax, depreciation and amortisation (EBITDA) is likely to fall 8.2 percent YoY (up 12.1 percent QoQ) to ₹497 crore.
