 "Here's why Balkrishna Industries slid 10% despite strong Q1 earnings")
The stock of off-highway tyre maker Balkrishna Industries declined 9.81 per cent to Rs 2,756 per share on the BSE during Monday’s intraday trade. The stock closed the day at Rs 2,846 apiece, down 6.9 per cent.
While the June quarter (Q1FY25) results were in line with estimates, the price correction followed concerns over demand and margins.
The management indicated that the demand environment remains challenging due to macroeconomic factors, such as recessionary fears in the US, geopolitical issues, and rising raw material and freight costs.
Japanese brokerage firm Nomura said the slowdown in demand was driven by weak original equipment volumes, lower farm income levels, and high interest rates affecting replacement demand.
The brokerage said global agricultural prices had started moderating, with global peers echoing similar concerns and expecting a delayed recovery.
Analysts expect the company’s volume growth to slow substantially from Q2, partly offset by strong performance in India. Further, rising commodity and freight rates will likely impact margins as well.
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Nomura has lowered its FY25 and FY26 volume projections for Balkrishna Industries by 4 per cent and reduced its earnings before interest, tax, depreciation, and amortisation (Ebitda) margins by 150 basis points and 40 basis points, respectively.
“We maintain our target enterprise value to Ebitda at 18 times and roll forward to average FY26-27F (Jun-25F earlier) to arrive at our new target price of Rs 3,115 (down from Rs 3,230).
The stock is up 26 per cent over the past three months and the current valuation is in the fair value zone,” said Siddhartha Bera and Kapil Singh of Nomura. The brokerage has downgraded the stock to neutral.
Analysts at ICICI Securities also pointed out near-term risks for Balkrishna Industries citing weak retail demand and channel inventory build-up due to a combination of geopolitical issues, inflation, and recessionary concerns. They forecast low single-digit growth for the company in FY25.
Against its 84,000 tonnes volume in Q1, the brokerage is building an average volume of 79,000 tonnes in the next three quarters, implying 10 per cent year-on-year (Y-o-Y) growth.
Analysts at ICICI Securities retained their ‘hold’ rating with an unchanged target price of Rs 3,200, implying 26 times FY26 earnings per share (EPS).
While most brokerages expect the tyre maker to face near-term headwinds, those at Nuvama Institutional Equities continued to stay positive.
“We expect the company to outpace the industry riding its compelling quality-price mix. For FY24–27, we are building in a revenue/Ebitda annual growth of 13 per cent/16 per cent. We maintain a buy rating with a target of Rs 3,500 (down from Rs 3,700) based on 30 times September-FY26 earnings,” said Raghunandhan NL, Manav Shah, and Rahul Kumar of Nuvama.
However, like others, Nuvama noted that weak demand was expected in global tractors and construction equipment tyres in the near term.
Accordingly, the brokerage said there was a possibility of a potential decline in volumes for the remaining quarters for FY25. It has also cut its FY25 revenue by 5 per cent.
Furthermore, accounting for the recent increase in input costs and logistics costs, it lowered its FY27 Ebitda by 7 per cent.
For the June quarter, Balkrishna Industries reported a 47.6 per cent Y-o-Y increase in net profit at Rs 490 crore.
Revenue from operations rose by 25.7 per cent to Rs 2,714.5 crore, compared to Rs 2,159.4 crore in the same period last year.
Ebitda surged 32.5 per cent to Rs 663.6 crore in Q1FY25, up from Rs 501 crore in Q1FY24.
The Ebitda margin improved to 24.5 per cent from 23.2 per cent in the year-ago period.