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Balkrishna Ind.: Ends on a high note
Jun 4, 2013

We present herewith the March 2013 quarter result analysis of Balkrishna Ind.

Performance summary
  • Net sales declined by 1.2% YoY during the fourth quarter of the financial year 2012-2013 (4QFY13). For the full year ended March 2013 (FY13), net sales increased by 13.1% YoY.
  • Operating margins improved to 20% during the quarter from 16.1% seen during the same period last year. For FY13, operating margins increased by 2.9% YoY to 20.8%.
  • Net profits increased by 11% YoY during the quarter thanks to higher operating margins as well as higher other income during the quarter. For FY13, net profits increased by 32.5% YoY.
  • The Board has recommended a dividend of Rs 1.5 per share (dividend yield of 0.6%).

Standalone financial snapshot
(Rs m) 4QFY12 4QFY13 Change FY12 FY13 Change
Net Sales 7,886 7,793 -1.2% 28,200 31,906 13.1%
Expenditure 6,617 6,234 -5.8% 23,142 25,262 9.2%
Operating profit (EBITDA) 1,269 1,559 22.9% 5,058 6,644 31.4%
Operating profit margin (%) 16.1% 20.0%   17.9% 20.8%  
Other income 82 106 29.2% 33 42 27.6%
Depreciation 218 321 47.3% 831 1,077 29.6%
Interest 56 35 -38.0% 182 200 9.7%
Exchange gains/(losses) 60 32   (95) (57)  
Profit before tax 1,137 1,341 17.9% 3,982 5,352 34.4%
Tax 374 494 32.2% 1,297 1,794 38.3%
Profit after tax/(loss) 763 846 11.0% 2,685 3,558 32.5%
Net profit margin (%) 9.7% 10.9%   9.5% 11.2%  
No. of shares (m)       96.7 96.7  
Diluted earnings per share (Rs)*         37.4  
P/E ratio (x)*         7.0  
* On a trailing 12-months basis; Adjusted for extraordinary items
What has driven performance in 4QFY13?
  • Balkrishna Industries (BIL) reported a revenue decline of 1.2 % YoY during the quarter. This was primarily on account of a decline of 6% YoY in the volumes, which stood at 34,061 metric tonnes (MT) during the quarter. The decline in volumes was offset to some extent by the 5% increase in realisations during the quarter. The decline in volumes was primarily due to the slowdown in the European region which led to weaker demand.

  • BIL reported an increase of 22.9% YoY in operating profits (on an absolute basis) during the quarter. As a result, operating margins improved to 20% from 16.1% in 4QFY12. The company witnessed a savings in both raw material costs as well as other expenses during the quarter. This saving offset the increase in staff costs as well as in the power & fuel costs (all as a percentage of sales). The management has stated that the raw material costs continued to be lower due to the depressed prices of key raw material rubber during the quarter.
    Cost breakup
    Rs m 4QFY12 4QFY13
    Item Amount % of sales Amount % of sales
    Raw materials 4,641 58.9% 4,273 54.8%
    Staff cost 201 2.6% 314 4.0%
    Power and fuel 248 3.1% 262 3.4%
    Other expenditure 1,526 19.4% 1,385 17.8%
    Total 6,617 83.9% 6,234 80.0%

  • The growth at the operating level was offset to some extent by the increase in depreciation charges during the quarter. Depreciation charges were higher following the partial commissioning of the plant at Bhurj which took place in September 2012. As a result, BIL reported an 11% YoY growth in profits during the quarter.

What to expect?

At the current price of Rs 262, the stock is trading at a multiple of about 7 times its trailing twelve month earnings per share.

The company saw a decline in the volumes during the current quarter. This was due to a decline in demand as the global slowdown caught up with the company. But BKT is trying to expand its markets into the CIS and Russia as well. This would help revive the growth in volumes by offsetting the decline in the European region.

The company has undertaken a Greenfield expansion in Bhuj. Total capacity at Bhuj upon completion would stand at 276,000 MT. The ramp up of this facility is expected to take place in a phased manner. Of this around 60,000 MT are expected to be commissioned during the current financial year (FY14) while the bulk of it (around 120,000 MT) would be commissioned in FY15. To fund the capex program, the company has taken an ECB (External Commercial Borrowing) loan facility of US$ 275 m. Currently, the company is capitalizing the interest on this debt. It would start to charge it to the income statement in the latter part of the current financial year, which in turn would mean higher interest costs going forward.

Given the slowdown and expected interest costs, the stock is still available at attractive valuations. However, we believe investors should not take up fresh position in the stock till there is more visibility on growth from both US and Europe which have been hurt by the global crisis. As a result, growth in volumes would not be as spectacular as that seen earlier. We also expect volumes growth to moderate on account of poor agriculture this year around the world. Plus there would be the additional burden of interest costs as well as depreciation charges related to the expanded facility. As such, we maintain a 'Hold' view on the stock from a long term perspective.

We would like to gently remind you that your allocation to equities should be decided upon after keeping aside some safe cash. Also within your overall exposure to equities please ensure that you broadly follow our suggested asset allocation and that no single small cap stock comprises more than 2-3% of your portfolio.

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