BIL’s 2QFY18 volumes grew by a strong 16% yoy and 6% qoq, surprising positively in a seasonally weak quarter. Our industry interactions indicate that due to strong OEM demand in the European market, supplies of some large agri tyre players in Europe have drifted towards OEM, buoying aftermarket growth for players like BIL. We thus raise our FY18E volumes by 4% to 193k; management too has revised its guidance upwards to 190-195k from 185-190k earlier. The Euro-INR hedge rate is expected to inch up higher in 2H due to an increase in the Euro-USD rate over the last few months; this should negate some impact of rising RM prices. We increase our FY18/FY19E EPS by 11.7%/12.4% due to higher volume and margin assumptions, and retain ADD with a Dec’18 TP of Rs 1,955
set at 20x Dec’18 EPS (vs. Rs 1,739 earlier).
Specialty tyre market doing well, volume growth to remain strong
: Industry leader Michelin’s specialty tyre sales grew 13% yoy in Sep’17 quarter, pointing towards buoyancy in the market. While a large part of Michelin’s growth is driven by mining tyres, even the agri market has picked up. BIL management also indicated that they have seen better growth in construction and mining tyres. Ultra large mining tyre trials are going well and we expect some pick up in those volume from FY19. We upgrade our volume growth estimates for BIL given its strong qoq volume growth in a seasonally weak quarter; management has also increased its FY18 volume guidance.
Margins to remain strong due to better Euro hedge rate in 2H:
The Euro-INR hedge rate during 2Q was at 80; management has guided for FY18 average of 81-82, implying that 2H realizations would be around 83, which should help ASPs. On the RM cost front, management has guided for a decline in 3Q as the entire high-cost inventory has been consumed. While RM costs may increase in 4Q due to rising crude prices, we believe that a better hedge rate would keep margins healthy.
Growth across geographies drives volumes; benefits of operating leverage visible
: Volume growth was good across geographies driven by a revival in the market, especially in the mining and construction space. Management stated that the company’s penetration in the US is improving. RM cost per kg increased 29% yoy and despite a 7% increase in ASPs, contribution per kg declined 14% yoy. However, a 441bps yoy decline in other expenses as percentage of sales due to operating leverage led only to a marginal 1% yoy decline in EBITDA/kg. Ramp-up of the Bhuj plant is also helping BIL as operating expenses are lower at the plant and there are savings in freight cost as well, plant being close to port.
Click here to read the full report