Balkrishna Industries: Margin outlook weighs on near term prospects

Balkrishna Industries: Volume constraints and valuations are the other concerns

The December quarter results of Balkrishna Industries, which makes tyres for the off-the-road or off highway segment, were a mixed bag with revenue outperformance offset by margin decline. Despite a price hike of 2-3 per cent in the quarter, the gross margins of the country’s largest listed tyre maker by market capitalisation, slipped by 620 basis points y-o-y to 53.5 per cent. Higher natural rubber cost, which gained about 6.4 per cent in the December quarter, was the key reason for the sharp drop at the gross level.

The performance at the operating level was worse as higher freight, power and advertising costs led to incremental pressure on profitability. The rise in power costs was on account of a shutdown at a captive cogeneration plant. Operating profit margins dipped 751 basis points to 24.4 per cent. Raw material basket is expected to see a 2-3 per cent rise in the March quarter (Q4FY22) given the current trend in crude oil prices. The company is considering a price hike to offset the impact of rising raw material and freight costs.  

While the company highlighted challenges in terms of raw material and logistics cost along with the availability of containers it continues to maintain a 28-30 per cent operating profit margin target on a sustainable basis over the long term.

The muted growth (6 per cent) in operating profit was reported despite a strong show on the revenue front. Sales for the quarter were up 39 per cent aided by an equal contribution from higher volume growth and increased realisations due to price hikes. Volume growth of tyres within the agricultural and industrial segments was up a robust 12-19 per cent.

Commenting on the outlook, analysts at Nomura Research say that global agricultural crop prices remain elevated and will continue to drive near term demand. Given the strong commentary/outlook from global peers such as Michelin/Titan International, the brokerage expects pricing power to sustain. Given the strong demand trends, the company revised its upper end of the FY22 volume guidance to 285,000 million tonnes which translates to a growth of 25 per cent as compared to the earlier guidance which pegged growth at 23 per cent.

Though demand is strong, volumes may remain stagnant for the next few quarters given the constraint on capacity. The company’s expansion will come online in the second half of FY23 with incremental additions at Bhuj and Waluj, taking its total capacity to 360,000 million tonnes per annum (mtpa) from the current 285,000 mtpa.

Rishi Vora of Kotak Institutional Equities expects volumes to grow 13 per cent on an annual basis over FY21-24 led by a recovery in the OTR segment on account of higher commodity prices and higher capex spends by governments and market share gains. He expects share gains on account of product expansion, distribution, aggressive marketing and attractive pricing vis-a-vis peers.

While the outlook remains strong, brokerages have cut earnings per share estimates for FY22-24 by 4-8 per cent given lower margin assumptions. This coupled with capacity constraints and valuations led to a correction in the stock price of Balkrishna Industries. The scrip was the biggest loser in the BSE 200 group shedding about 6 per cent on Wednesday. At the current price, the stock is trading at 24 times its FY23 earnings estimates and could be a long term buy at these levels.