Result Update

February 18, 2013

Rating matrix
Rating Target Target Period Potential Upside : : : : Buy | 356 12-15 months 35%

Balkrishna Industries (BALIND)

WHATS CHANGED
FY15E 4,057.8 895.0 430.6 44.6

| 263

Key Financials
| Crore Net Sales EBITDA Net Profit EPS (|) FY12 2,795 506.0 268.5 27.8 FY13E 3,229.0 673.8 357.0 36.9 FY14E 3,501.5 752.7 365.3 37.8

PRICE TARGET .................................................................................................... Unchanged EPS (FY13E) ......................................................................... Changed from | 35.8 to | 36.9 EPS (FY14E) ......................................................................... Changed from | 41.0 to | 37.8 EPS (FY15E) ......................................................................... Changed from | 41.0 to | 44.6 RATING ...............................................................................................................Unchanged

Valuation summary
P/E (x) Target P/E (x) EV / EBITDA (x) P/BV (x) RoNW (%) RoCE (%) FY12 9.5 12.8 7.6 2.4 24.9 15.4 FY13E 7.1 9.6 5.9 1.8 25.1 16.3 FY14E 6.9 9.4 5.7 1.4 20.7 14.6 FY15E 5.9 8.0 4.5 1.2 19.8 15.8

Margins vs. guidance! What do you prefer?

Balkrishna Industries (BIL) Q3FY12 results were a mixed bag as margin performance hit an 11-quarter high at 22.1%. The topline at ~| 705 crore declined ~12% on the back of 15% volume (30,125 tonnes) decline. However, a better product mix and lower raw material prices ensured that margins improved. The bottomline at ~| 74 crore came in-line with our expectations despite the forex loss of ~| 14 crore. The management has maintained its FY13E volume guidance at 1,40,000 MT. However, we feel the target would be a stretch. Still, we believe strong potential for growth in FY14E, FY15E exists with new capacity added at Bhuj. On a longer term, demand growth, market share gains outlook from BIL remain intact. We have rated the stock at 8x FY15E EPS, considering that it is the only major Indian player in the OHT, OTR segment with consistent performance across cycles and strong financials. We maintain BUY with an unchanged target price of | 356. Volume decline a worrymargins continue to impress BIL had a blow-out quarter as far as margins were concerned. Despite, 15% volume de-growth, better realisations and lower RM costs led by a decline in natural rubber prices (at | 160-165/kg) by ~8% YoY resulted in better operating margins. Capacities in place for catering to high growth potential The commencement of the Bhuj plant would start to ramp up from H2FY13E onwards raising achievable capacity to ~276,000 MT in FY15E (~80% jump from existing capacities). This capacity expansion will drive growth for future and provide BIL with new market opportunities. Attractive PEG, strong RoE & best in class margins = maintain BUY We continue to like the business franchise of BIL with its niche nature and remain positive on the longer term growth outlook. Going forward, we expect an improved performance as outlook for natural rubber remains muted and as BIL continues to gain market share. At a PEG of 0.35x FY15E, RoE of ~20% the stock looks attractive at current levels. We value the stock at 8.0x FY15E EPS and maintain our BUY rating.
Exhibit 1: Financial performance
(| Crore) Total Revenue EBITDA EBITDA Margin (%) Depreciation Interest Reported PAT EPS (|) Q3FY13 704.7 155.8 22.1 27.2 4.3 74.4 7.7 Q3FY13E 700.5 140.8 20.1 31.7 10.1 67.3 7.0 Q3FY12 798.7 142.5 17.8 20.9 14.4 72.9 7.5 Q2FY13 887.1 187.2 21.1 25.4 6.1 123.7 12.8 QoQ (Chg %) -20.6 -16.8 100 bps 7.2 -29.5 -39.9 -39.9 YoY (Chg %) -11.8 9.3 426 bps 30.4 -70.2 2.1 2.1

Stock data
Market Capitalization Total Debt (FY12) Cash (FY12) EV 52 week H/L Equity capital Face value MF Holding (%) FII Holding (%) | 2538.7 Crore | 1673.2 Crore | 357.4 Crore | 3854.5 Crore 310 / 231 | 19.3 Crore |2 19.9 10.8

Price movement
6,500 6,000 5,500 5,000 4,500 4,000 Mar-12 May-12 Price (R.H.S) Aug-12 Nov-12 Nifty (L.H.S) 350 300 250 200 150 Feb-13

Analysts name
Nishant Vass nishant.vass@icicisecurities.com Venil Shah venil.shah@icicisecurities.com

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

Exhibit 2: Assumptions Table

Capacity (MT) Achieveable Utilization (%) Tonnage Sales (MT) Average Realizations (|/kg) Natural Ruibber Price (|/kg) Carbon Black Price (|/kg) FY11 168,000 75.0 111,545 170.8 162.5 56.1 FY12 156,000 95.0 133,040 212.0 206.4 58.9 FY13E 181,000 93.5 139,545 232.0 187.8 59.3 FY14E 231,000 83.4 154,244 227.9 176.2 61.3 FY15E 231,000 83.6 183,603 222.1 164.2 64.4

Source: Company, ICICIdirect.com Research

Key management takeaways The management has stated that they are carrying ~two months of inventory including both physical stock and forward contracts with suppliers. The average natural rubber price, which is 100% imported, is in the range of | 160-165/kg for Q3. The price of natural rubber is in the range of $3000-3500/MT. No major uptick is seen in rubber prices. Exports took a hit due to the slowdown in European markets leading to 30125 MT volume tonnage for the quarter, which is ~15% decline YoY. The US business has seen a sharp cut in volumes in the quarter as channel inventory clearance happened during Q3. Right now, the channel inventory is low and the management expects a good rebound in sales from the US. Production levels for Q3FY13 were 29449 tonnes vs. 34852 tonnes in Q3FY12. The management expects demand to have bottomed out and expects a ~10% QoQ jump in volumes in the next quarter as marketing efforts in Russia, Austria and other geographies are showing good results. BIL has a current order-book of 2.5-3 months. No price hikes were taken in the quarter as raw material prices have come down. For the Bhuj facility, out of | 1800 crore, | 1200 crore has already been spent till December 2012. Capitalisation of expenditure of ~| 225 crore has been done till December and will reach ~| 1000 crore by March end. The Bhuj facility has a break-even point at ~20000 MT production levels, i.e. covering up all fixed costs. The borrowing cost for BIL is very low with working capital borrowing at ~1.5% and term loan at ~3%. Interest cost next year can hit the P&L to the limit of | 60-70 crore. For the quarter, exchange loss of | 14 crore has been recognised, which is attributable to working capital loan. The management indicated that the hedging for euro has been done at ~70/| for the next year. The management has clarified about a notification sent to the exchanges regarding divesture of paper and textile business. In the last board meeting, the management has taken an enabling resolution for divesture of the paper and textile business as there is no synergy with the tyres business. The company has a gross debt of | 2000 crore on its books as of December 2012 and a net debt of | 1700 crore. By FY15E, the target gross debt level would be | 2200 crore.

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The positive highlight of this quarters regional mix is the decline in European mix by ~200 bps QoQ and increase of the same in the US markets. We expect the US markets to do much better than Europe in FY14E, FY15E

Exhibit 3: Geographical break-up of revenues

Q3FY13 RoW 16%

Q2FY13 RoW 15% Asia 13% America 29% Europe 43%

Asia 14% America 25%

Europe 45%

Source: Company, ICICIdirect.com Research

Margins have been consistently improving on the back of a better product mix coupled with headroom for raising prices. Low natural rubber prices have also helped in improving margins as a favourable currency has improved competitiveness

Exhibit 4: Margins and costs trend as share of total income

80 70 60 50 (%) 40 30 20 10 0 Q3FY11 Q4FY11 Q1FY12 Q2FY12 Q3FY12 Q4FY12 Q1FY13 Q2FY13 Q3FY13 Raw Material Expenses EBITDA Margin c 10 5 17.6 62.2 16.3 62.0 67.3 16.1 18.4 62.6 56.7 17.8 18.9 16.1 59.0 57.4 21.1 22.1 25 20 55.5 15

Source: Company, ICICIdirect.com Research

BIL caters to a niche market segment and enjoys higher margins compared to conventional tyre manufacturers. We expect margins to trend upwards in FY14E and FY15E due to higher realisations and declining natural rubber prices

Exhibit 5: Margins and costs annual trends and forecasts

66 65.0 64 61.2 62 60 (%) 58 56 54 5 52 50 FY11 FY12 RM/Sales ratio FY13E FY14E EBITDA margin (RHS) FY15E 19.1 20.9 21.5 22.1 20 25

18.1 56.3 56.3

15 56.4 (%) 10

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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(%)

56.7

Natural rubber (RSS-4) prices had soared at a rapid pace till February 2011 with average rubber prices touching ~ | 254/kg. However, rubber prices have started to cool off and have fallen to ~| 160/kg in December. Going forward, we expect prices to remain at similar levels or trend downwards

Exhibit 6: Rubber prices trend

260 240 220 200 (|/Kg) 180 160 140 120 100 Oct-10 Oct-11 Jan-11 Jan-12 Oct-12 Jul-10 Jul-11 Jul-12 Jan-13 Apr-10 Apr-11 Apr-12 162.5 253.9

Source: Rubberboard.org, ICICIdirect.com Research

Outlook & valuation

We continue to like the business franchise of BIL with its niche nature and remain positive on the longer term growth outlook. Going forward, we expect an improved performance as the outlook for natural rubber remains muted and as BIL continues to gain market share. At a PEG of 0.35x FY15E, RoE of ~20%, the stock looks attractive at current levels. We value the stock at 8.0x FY15E EPS and maintain our BUY rating on BIL.
Exhibit 7: Revised financial estimates
FY14E Total Revenue EBITDA EBITDA Margin % PAT EPS Old 3635.8 795.9 21.9 395.9 41.0 New 3520.7 752.7 21.4 365.3 37.8 % Change (3.2) (5.4) -51 bps (7.7) (7.7) Old 4102.0 872.6 21.3 396.4 41.0 FY15E New % Change 4086.2 (0.4) 895.0 2.6 21.9 63 bps 430.6 8.6 44.6 8.7

Source: Company press release, ICICIdirect.com Research

Exhibit 8: Valuation metrics

Sales (| cr) 2794.8 3229.0 3501.5 4057.8 Growth (%) 15.5 8.4 15.9 EPS (|) 5.6 36.9 37.8 44.6 Growth (%) 564.8 2.3 17.9 PE (x) 9.5 7.1 6.9 5.9 EV/EBITDA (x) 7.6 5.9 5.7 4.5 RoNW (%) 24.9 25.1 20.7 19.8 RoCE (%) 15.4 16.3 14.6 15.8

FY12 FY13E FY14E FY15E

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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Financial summary
Profit and loss statement
(| Crore) (Year-end March) Total operating Income Growth (%) Raw Material Expenses Employee Expenses Other Expenses Total Operating Expenditure EBITDA Growth (%) Depreciation Interest Other Income PBT Total Tax PAT Growth (%) EPS (|) FY12 2,820.0 45.8 1,710.9 72.3 530.7 2,313.9 506.0 40.6 83.1 27.8 3.3 398.2 129.7 268.5 44.7 27.8 FY13E 3,249.4 15.2 1,819.5 104.8 651.3 2,575.6 673.8 33.2 111.9 26.6 2.4 528.8 171.8 357.0 33.0 36.9 FY14E 3,520.7 8.3 1,971.6 112.0 684.4 2,768.0 752.7 11.7 164.2 48.3 3.5 543.6 178.3 365.3 2.3 37.8 FY15E 4,086.2 16.1 2,285.6 122.7 782.9 3,191.2 895.0 18.9 194.0 68.2 5.2 638.0 207.3 430.6 17.9 44.6 (Year-end March) Profit after Tax Add: Depreciation (Inc)/dec in Current Assets Inc/(dec) in CL and Provisions CF from operating activities (Inc)/dec in Investments (Inc)/dec in Fixed Assets Others CF from investing activities Inc/(dec) in loan funds Dividend paid & dividend tax Others CF from financing activities Net Cash flow Opening Cash Closing Cash FY12 268.5 83.1 -250.6 -196.1 -95.1 0.0 -629.6 16.3 -613.4 1,075.1 -16.9 -3.3 1,054.9 346.5 10.9 357.4 FY13E 357.0 111.9 -136.8 208.0 540.0 -20.0 -600.0 0.2 -619.8 350.0 -16.9 0.0 333.1 253.4 357.4 610.8 FY14E 365.3 164.2 -267.9 48.4 310.0 -30.0 -600.0 -0.3 -630.3 250.0 -22.5 0.0 227.5 -92.7 610.8 518.1

Cash flow statement

(| Crore) FY15E 430.6 194.0 -385.8 149.0 387.9 -15.0 -100.0 0.1 -114.9 0.0 -22.5 0.0 -22.5 250.6 518.1 768.7

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

Balance sheet
(| Crore) (Year-end March) Liabilities Equity Capital Reserve and Surplus Total Shareholders funds Total Debt Deferred Tax Liability Minority Interest / Others Total Liabilities Assets Gross Block Less: Acc Depreciation Net Block Capital WIP Total Fixed Assets Investments Inventory Debtors Loans and Advances Cash Other current assets Total Current Assets Creditors Provisions Other current liabilities Total Current Liabilities Net Current Assets Application of Funds 1,222.7 396.0 826.7 449.9 1,278.0 32.2 481.1 479.6 587.9 357.4 24.8 1,930.8 200.4 145.4 0.0 391.6 1,539.2 2,849.4 2,072.6 507.3 1,565.2 200.0 1,766.1 52.2 527.4 530.8 597.9 610.8 54.1 2,321.0 265.4 192.5 0.0 599.6 1,721.4 3,539.7 2,672.6 671.0 2,001.5 200.0 2,201.8 82.2 623.7 614.0 688.0 518.1 52.5 2,496.2 335.8 243.6 0.0 648.0 1,848.2 4,132.3 2,772.6 864.5 1,908.1 200.0 2,107.8 97.2 754.8 711.5 802.3 768.7 95.4 3,132.6 355.8 258.1 0.0 797.1 2,335.6 4,540.6 19.3 1,060.8 1,080.1 1,673.2 62.6 0.0 2,815.9 19.3 1,400.9 1,420.2 2,023.2 62.6 0.0 3,506.0 19.3 1,743.7 1,763.1 2,273.2 62.6 0.0 4,098.8 19.3 2,151.9 2,171.2 2,273.2 62.6 0.0 4,507.0 FY12 FY13E FY14E FY15E

Key ratios
(Year-end March) Per share data (|) EPS Cash EPS BV DPS Cash Per Share Operating Ratios (%) EBITDA Margin PBT / Net sales PAT Margin Inventory days Debtor days Creditor days Return Ratios (%) RoE RoCE RoIC Valuation Ratios (x) P/E EV / EBITDA EV / Net Sales Market Cap / Sales Price to Book Value Solvency Ratios Debt/EBITDA Debt / Equity Current Ratio Quick Ratio 3.3 1.5 4.9 4.0 3.0 1.4 3.9 2.9 3.0 1.3 3.9 3.1 2.5 1.0 3.9 3.0 9.5 7.6 1.4 0.9 2.4 7.1 5.9 1.2 0.8 1.8 6.9 5.7 1.2 0.7 1.4 5.9 4.5 1.0 0.6 1.2 24.9 15.4 11.4 25.1 16.3 12.9 20.7 14.6 10.9 19.8 15.8 12.5 27.2 14.2 15.0 58.2 62.6 26.2 20.9 16.4 9.6 57.0 60.0 30.0 17.9 15.5 9.5 60.0 64.0 35.0 20.7 15.7 11.0 62.0 64.0 32.0 27.8 36.4 111.8 1.5 37.0 36.9 48.5 146.9 1.5 63.2 37.8 54.8 182.4 2.0 53.6 44.6 64.6 224.6 2.0 79.5 FY12 FY13E FY14E FY15E

Source: Company, ICICIdirect.com Research

Source: Company, ICICIdirect.com Research

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Company Description
Balkrishna Industries (BIL) is one of the world's leading manufacturers of off-highway tyres. BIL has a wide product portfolio with more than 2000 stock keeping units (SKUs) and is a one-stop shop for all off-highway tyre solutions. BIL entered into production of cross ply off-highway tyres in 1995 and the products received almost instantaneous acceptance in the European and North American markets. BIL has made its mark in specialty segments like agricultural, construction, industrial, earthmover, port, all terrain vehicle (ATV) and turf care applications in both cross ply and radial construction. BIL is in the midst of a capacity expansion phase with capacity set to increase from the current 156,000 MT to 276,000 MT by the end of FY15E. More than 90% of tyre production is exported to more than 120 countries across all five continents in all major markets of Europe, North & South America, Africa, Asia & Middle East.
Exhibit 9: Recommendation History
400 350 300 250 200 150 100 50 0 Mar-12 Apr-12 May-12 Jul-12 Price Aug-12 Oct-12 Nov-12 Jan-13 Feb-13

Target Price

Source: ICICIdirect.com Research

Exhibit 10: Recent Releases

Date 4-Apr-12 1-Jun-12 6-Jul-12 7-Aug-12 8-Oct-12 15-Nov-12 7-Dec-12 Event Q4FY12 Preview Q4FY12 Result Update Q1FY13 Preview Q1FY13 Result Update Q2FY13 Preview Q2FY13 Result Update Q3FY13 Preview CMP 271 266 270 280 286 264 255 Target Price 272 288 288 346 346 356 356 Rating HOLD HOLD HOLD BUY BUY BUY BUY

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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ICICIdirect.com coverage universe (Auto and auto ancillaries)

Sector / Company Amara Raja (AMARAJ) Apollo Tyre (APOTYR) Ashok Leyland (ASHLEY) Automotive Axle (AUTAXL)* Bajaj Auto (BAAUTO) Balkrishna Ind. (BALIND) Bharat Forge (BHAFOR) Eicher Motors (EICMOT)` Escorts (ESCORT)* Exide Industries (EXIIND) Hero Mototcorp (HERHON) JK Tyre & Ind (JKIND) M&M (MAHMAH) Maruti Suzuki (MARUTI) Motherson (MOTSUM) Subros (SUBROS) Tata Motors (TELCO) CMP (|) 289 87 23 331 1,947 263 224 2,690 64 129 1,693 112 892 1,480 200 27 306 TP(|) Rating 357 Buy 112 Buy 30 Buy 400 Buy 1,915 Hold 356 Buy 259 Buy 3,065 Hold 59 Hold 135 Hold 1,799 Hold 180 Buy 980 Hold 1,784 Buy 212 Hold 35 Buy 360 Buy EPS (|) P/E (x) EV/EBITDA (x) M Cap (| Cr) FY13E FY14E FY15E FY13E FY14E FY15E FY13E FY14E FY15E 4,942 18.0 21.7 25.5 16.0 13.3 11.4 10.7 8.3 7.0 4,381 12.4 13.5 16.0 7.0 6.5 5.4 4.7 3.3 2.8 6,160 1.4 2.7 3.3 16.9 8.7 7.0 11.1 7.0 3.2 500 29.8 43.0 53.4 12.2 8.5 6.8 6.0 4.5 3.6 56,329 106.5 123.4 136.8 18.3 15.8 14.2 15.9 15.2 12.7 2,539 35.8 41.0 41.0 7.8 6.8 6.8 6.4 5.6 4.7 5,220 17.7 12.9 16.9 12.6 17.4 13.2 6.9 7.4 6.0 7,259 120.1 156.9 226.0 22.4 17.1 11.9 16.7 12.1 5.1 759 5.8 10.5 14.6 11.9 6.7 4.8 6.4 4.3 3.4 10,982 5.4 6.0 8.6 23.8 21.7 15.1 13.0 11.3 7.8 33,816 96.6 107.8 149.9 17.5 15.7 11.3 10.0 11.6 9.6 458 2.7 33.8 44.9 41.7 3.3 2.5 7.8 5.3 4.3 52,590 50.7 61.6 72.5 17.6 14.5 12.3 11.0 8.8 7.1 42,766 68.3 103.5 132.1 21.7 14.3 11.2 11.9 8.0 5.9 11,634 7.4 15.0 15.4 27.2 13.3 13.0 8.9 6.3 4.9 160 8.1 3.0 8.6 3.3 9.0 3.1 5.1 4.1 3.4 90,853 28.0 42.5 55.1 10.6 7.0 5.4 4.5 3.7 3.1 RoCE (%) RoE (%) FY13E FY14E FY15E FY13E FY14E FY15E 38.4 38.6 36.8 29.3 27.8 26.1 18.0 16.0 16.3 18.3 14.5 14.8 6.9 12.8 14.2 8.7 15.9 16.6 22.6 26.7 28.3 16.6 20.4 21.1 58.2 48.3 41.1 40.5 37.6 33.6 15.6 15.6 16.6 24.6 15.6 15.6 13.4 10.1 13.2 18.9 12.4 14.5 16.6 18.4 21.7 18.5 20.0 22.9 6.5 9.3 10.9 4.3 7.4 9.5 19.1 19.4 24.0 15.1 14.8 18.3 38.0 40.6 44.9 37.3 34.3 37.0 7.3 12.3 13.9 1.6 17.4 19.0 21.9 22.7 23.0 22.7 22.7 21.9 10.9 16.4 18.9 11.7 15.3 16.5 13.1 20.2 21.0 20.6 31.5 25.5 7.2 7.7 12.0 17.9 6.3 15.9 22.2 23.8 24.9 22.7 27.2 27.2

Source: Company, ICICIdirect.com Research

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ICICIdirect.com Universe price movement vis--vis BSE Auto index Exhibit 11: OEM comparison with BSE Auto
The chart compares the movement of OEM stocks in the ICICIdirect.com Universe with the BSE Auto index, thereby reflecting the degree of mimicking of the index Since January 2011, Bajaj Auto and M&M have outperformed while Maruti Suzuki and Escorts have underperformed in comparison to the index by being divergent on the upside and downside, respectively
Hero MotoCorp BSE Auto

Jan-12

Mar-12 May-12 BSE Auto Tata Motors Hero MotoCorp

Jul-12 Sep-12 Bajaj M&M Ashok Leyland

Nov-12

Jan-13 Maruti Escorts Eicher Motors

Source: Company, ICICIdirect.com Research

Exhibit 12: Ancillaries comparison with BSE Auto

The chart compares the movement of auto ancillary stocks in the ICICIdirect.com universe with the BSE Auto index The volatile nature of smaller ancillary companies is reflected. These have met with numerous fluctuations with the exception of larger market capitalisation companies like Exide Industries, which mimic the index greatly. JK Tyre and Subros have grossly
Bharat BSE Auto Amara Raja

underperformed due to the intense rubber price overhang and production disruption at Maruti, respectively
Jan-12 Mar-12 BSE Auto Apollo Tyres May-12 Auto Axl Subros Jul-12 Sep-12 Bharat Forge Motherson Nov-12 Balkrishna Exide Inds Jan-13 JK Tyres Amara raja

Source: Company, ICICIdirect.com Research

ICICI Securities Ltd | Retail Equity Research

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RATING RATIONALE

ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns ratings to its stocks according to their notional target price vs. current market price and then categorises them as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional target price is defined as the analysts' valuation for a stock. Strong Buy: >15%/20% for large caps/midcaps, respectively, with high conviction; Buy: >10%/15% for large caps/midcaps, respectively; Hold: Up to +/-10%; Sell: -10% or more;

Pankaj Pandey

Head Research ICICIdirect.com Research Desk, ICICI Securities Limited, 1st Floor, Akruti Trade Centre, Road No 7, MIDC, Andheri (East) Mumbai 400 093 research@icicidirect.com

pankaj.pandey@icicisecurities.com

ANALYST CERTIFICATION
We /I, Nishant Vass MBA (FINANCE) Venil Shah MBA research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

Disclosures:
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