Large-cap CDGS stock declares 200% dividend, posted muted performance: Buy?

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With a market valuation of 38,120.22 Cr, Balkrishna Industries Ltd (BIL). is a large cap company that operates in the Consumer Discretionary Goods & Services (CDGS) industry. The company, which specialises in the production of tyres for agricultural, industrial, and off-road vehicles, is a market leader in the off-highway tyre industry. The firm offers a diverse product portfolio that includes tyres for ATVs as well as tyres for agriculture, industrial, construction, earthmoving, mining, and ports. With the release of its Q2 results, the company also issued its second interim dividend of 200%.

The company has said in a stock exchange filing that “The Board has declared an 2nd Interim dividend of Rs. 4.00 per Equity Share (200%) on the Equity Shares of Rs. 2/- each (face value) for the financial year 2022-23. And the payment thereof shall be credited/dispatched within 30 days from the date of declaration as per applicable provisions of Companies Act, 2013, to such shareholders as on Record Date i.e. 22nd November, 2022.”

On a standalone basis, the company reported revenue from operations of 2,704 Cr in Q2FY23 compared to 2,050 Cr posted in Q2FY22, representing a YoY growth of 31.9%. The company reported a net income of 2,806 Cr in Q2FY23 compared to 2,080 Cr posted in Q2FY22, representing a YoY gain of 35%. The company posted an EBITDA of 564 Cr and an EBITDA margin of 20.1% in Q2FY23. The company reported a Profit Before Tax (PBT) of 532 Cr compared to 543 Cr posted in Q2FY22, representing a YoY fall of -2% and it has declared a net profit of 404 Cr in Q2FY23 compared to 377 Cr posted in Q2FY22, representing a YoY gain of 7%. The profit after tax (PAT) margin stood at 14.4% compared to 18.1% posted in the year-ago quarter.

The management said “Looking at the current geo-political challenges across the globe especially in Europe, which is also our biggest market, there are strong headwinds. Despite these challenges during the quarter, the Company could deliver a good performance and registered sales volumes of 78,872 MT. The current situation in Europe continues to be challenging and thereby may have an effect on our performance in H2FY23. The demand pattern has been relatively better in North America however recession fears have impacted the growth rates. India continues to be stable supported by better economic environment backed by good monsoons.”

“The global economic weakening coupled with sharp uptick in interest rates has also led to a reduction in order placement by the dealers and distributors. The recent price correction in raw materials and logistics costs bode well for our margin profile. However, as guided the benefits are expected to kick in from early Q4. During this challenging macro environment, we are unable to guide for annual sales volumes for FY23,” further added the management.

The research analysts of the broking firm ICICI Securities Limited said “Balkrishna Industries’ (BIL) Q2FY23 EBITDA margin at 20.1% was in-line and flat QoQ, with gross margin decline of 225bps QoQ getting balanced by lower other expenses (down 200bps QoQ). Improved product mix (higher share of larger diameter tyres), favourable currency movement, higher freight rates and higher contribution of North America sales, have led to historically high ASP at Rs356 (up 9% QoQ). As against 320kMT FY23E volume outlook till H1FY23, we are building in 310kMT volume for FY23, implying ~75kMT volume in each of the next couple of quarters. We believe EBITDA margin would revert towards 24-25% levels from Q4FY23, with benefit of new contracts of lower freight rates and lag effect of lower RM costs. We maintain BUY on BIL with a revised DCF-based target price of Rs2,479 (earlier: Rs2,620), implying 25x FY24E EPS.”

The research analysts of the broking firm ICICI Direct Research said “BIL’s share price has grown at 12.5% CAGR in the past five years, (~ 1,040 in November 2017), vastly outperforming Nifty Auto index. We retain BUY rating on BIL anticipating a strong margin recovery from Q4FY23, estimated double digit volume growth in FY24E & continued focus to gain prominence amid unchanged ambition of 10% global market share. Revising our estimates, we now value BIL at a revised target price of 2,200 i.e. 22x P/E on FY24E EPS of 100 (earlier target price 2,550).”

The shares of Balkrishna Industries Ltd closed today at 1,970 apiece, down by 0.42% from the previous close of 1,978.35. On a YTD basis, the stock has fallen 15.36% so far in 2022.

The views and recommendations made above are those of individual analysts or broking companies, and not of Mint.

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