Balkrishna Industries: Pricing pressures to remain in near term

Given lower volume forecast, higher expenses, margins are likely to remain at current levels for next few quarters

Pricing pressures in its key overseas markets, cut in volume guidance and a weak September quarter performance saw Balkrishna Industries’ stock fall a steep 23 per cent in two trading sessions. The company, which manufactures off-highway tyres used in the agriculture, industrial and construction sectors,  announced its results after market hours last Thursday. The stock recovered a bit in Tuesday's trading and ended the day up 1.5 per cent.

But, going ahead, the management has indicated that pricing pressure in international markets will continue (exports form nearly 90 per cent of revenue) as it passes on some of the benefits of softer rubber prices to customers. While demand is improving in the US market, there is slowdown in Latin America, Asia and Africa. The company has indicated that Europe, its largest market (53 per cent of revenues) is passing through tough times but so far its operations have been relatively stable. Analysts say demand remains weak in Europe leading to higher discounts brought on by price cuts by major competitors such as Michelin, Pirelli and Goodyear among others. The company took price cuts of four to five per cent in the September quarter and five to six per cent in the first half of the current financial year.

It is the high discounts and lower volumes that led to the disappointing performance in the September quarter. While volumes grew 12.5 per cent year-on-year, they were 10 per cent lower than expectations due to weak demand in Europe. Thus, revenue growth was a mere five per cent.  Given the current outlook, the company has also cut its volume guidance for FY15 from 160,000 tonnes to between 155,000 and 160,000 tonnes, and is confident of meeting the lower end of this guidance.

Weak volumes and higher other expenses (discounts), which were up 25 per cent year-on-year, lead to a 60 basis points fall in Ebidta margins to 23.5 per cent versus analysts’ expectations of 25 per cent. Given the lowering of margin expectation from 25-26 per cent earlier to 23-24 per cent currently, lower volumes and utilisation as its new capacity come on stream, most analysts have cut their earnings estimates for FY15 and FY16 by 8-15 per cent.  Despite the earnings revisions, 70 per cent of analysts continue to have a ‘Buy’ on the stock, as they believe that its low cost of manufacturing and global presence should ensure higher market share and steady margins. Employee expense as a percentage of sales is at 4 per cent as compared to 7-26 per cent for global majors. Given the sharp fall in prices, the stock gets an 11 times multiple to its FY16 earnings estimates as against a higher multiple of 12 times one-year forward estimates.