Favourable Growth in Global OHT Segment to Bolster Balkrishna Industries Topline in FY18

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Equity Analyst, LightStream Research

Chacko Jacob

Equity Analyst

Long-Short Analysis on Japan, Asia and the World

LightStream Research

LightStream conducts quantitatively rigorous and data-driven analysis with a focus on Japan and Asia.

We consistently cover the Tech, Consumer and Industrial sectors, and provide ECM and Events coverage more broadly.

We supplement traditional qualitative insights from company relationships with a robust quantitative foundation that examines as much historical data as is available.
We further refine the accuracy of our insights and calls through the use of alternative data to flesh out current trends, and through a valuation framework that emphasises non-superficial peer group selection and a proper attempt to understand the metrics and changes that have driven security valuations in the past.

Equity Bottom-Up

<a href="https://www.smartkarma.com/entities/15331" target="_blank" data-smartkarma-citation="entities:15331:1">Balkrishna Industries Ltd (BIL IN)</a> is India's leading off-highway-tyre (OHT) player in the global market. The company has developed a wide-reaching network that spans the Americas, Europe and Asia. The company's four plants (all in India) have a total capacity to produce 300,000MT per annum. With only 65-70% of this capacity being utilised, BIL finds itself at a sweet spot - the company can avoid heavy CapEx while utilising the remaining capacity to consolidate its global market share. While we remain positive about the company’s growth in FY2018, we think the next fiscal period might throw some surprises despite the decent economic growth forecasted in its key markets. In the time between our last report and this, the company has undertaken a stock split (1:2) and seen its shares hit a 52-week high before paring most of its gains. The stock currently trades at 27x and 21x 1-Year forward and 2-year forward PE respectively, which are also still near historical highs. Given the considerable downside risk in the next fiscal period, we think the stock might decline further, leading us to consider it overvalued. Some of the underlying risks for the next fiscal period include:<ul class=""><li class="">Higher raw material costs as rains caused by the La Nina phenomenon could hamper supply of natural rubber.</li><li class="">Domestic shortage of carbon black due to the shutdown of a key manufacturer and because of steep duty on imports. </li></ul>

Balkrishna Industries Ltd (BIL IN) is India's leading off-highway-tyre (OHT) player in the global market. The company has developed a wide-reaching network that spans the Americas, Europe and Asia. The company's four plants (all in India) have a total capacity to produce 300,000MT per annum. With only 65-70% of this capacity being utilised, BIL finds itself at a sweet spot - the company can avoid heavy CapEx while utilising the remaining capacity to consolidate its global market share. While we remain positive about the company’s growth in FY2018, we think the next fiscal period might throw some surprises despite the decent economic growth forecasted in its key markets. In the time between our last report and this, the company has undertaken a stock split (1:2) and seen its shares hit a 52-week high before paring most of its gains. The stock currently trades at 27x and 21x 1-Year forward and 2-year forward PE respectively, which are also still near historical highs. Given the considerable downside risk in the next fiscal period, we think the stock might decline further, leading us to consider it overvalued. Some of the underlying risks for the next fiscal period include:Higher raw material costs as rains caused by the La Nina phenomenon could hamper supply of natural rubber.Domestic shortage of carbon black due to the shutdown of a key manufacturer and because of steep duty on imports. 

Balkrishna Ind: Higher RM Costs Could Cast a Shadow on Earnings Growth in FY2019