Smooth ride for tyre exporter Balkrishna Industries as peers struggle

Exports and market share gains have helped the company to pull ahead

Larger listed domestic-focused tyre companies have underperformed the benchmarks in the last three months but exporter Balkrishna Industries has bucked the trend.

The company, which exports off-highway tyres, has generated 43 per cent returns in this time compared to MRF and Apollo Tyres, which are down 5-10 per cent. In addition to better-than-expected performance in the March quarter, exports and market share gains have helped Balkrishna pull ahead of peers.

Rishi Vora and Praveen Poreddy, analysts at Kotak Institutional Equities, said MRF, Ceat, and Apollo Tyres had a weak quarter due to weak demand for tyre replacements in the commercial vehicle segment and obligations for extended producer responsibility (EPR). The second makes manufacturers responsible for the environmental impact of the products from initial production to the efficient disposal of tyres.

Apollo and Ceat have announced price hikes to offset the obligations for EPR as well as raw material costs. MRF has not announced any hike.

In contrast, Balkrishna reported a strong quarter led by sales volume growth, product mix, tight cost control, and favourable foreign exchange.

Riding on a volume growth of 13 per cent to 82,085 tonne, the company reported a 15 per cent rise in standalone net sales for the quarter to Rs 2,673 crore. Operating profit margins in the March quarter were robust at 24.9 per cent, up 460 basis points year-on-year (Y-o-Y) and 125 basis points sequentially. Volume growth, margin expansion, and higher other income led to a net profit of Rs 481 crore, up 88 per cent Y-o-Y and 56 per cent sequentially.

The company, whose tyres are used in agriculture, mining, and industries, has a market share of 5-6 per cent and is aiming to take this to 10 per cent. In addition to diversification initiatives, serving companies in the non-farm tyre segments is expected to aid in market share expansion. While the last two years were muted with volumes under 300,000 tonnes, there were green shoots in the March quarter. However, the company is cautious on end-user demand given geo-political risks. ICICI Securities has modelled an annual sales volume growth of 9.4 per cent over FY24-26 to 350,000 tonnes by FY26.

Balkrishna stands out amongst its peers because of its healthy margins, return ratios profile, and strong balance sheet, according to analysts Shashank Kanodia and Manisha Kesari of ICICI Securities. The brokerage has a hold rating on the stock given the sharp run-up in its price over the past month with gains of about 25 per cent.

The street will monitor the movement of raw material costs. Kotak Institutional Equities said that international and domestic natural rubber prices (spot) have risen by 16-21 per cent from Q3FY24 average levels, driven by supply concerns and adverse weather in rubber-producing countries. If these prices hold at current levels, the brokerage expects a 300 basis points margin erosion for tyre companies.

Keynote Research is positive on the prospects of Balkrishna and has revised its rating from ‘reduce’ to ‘neutral’ with a target price of Rs 2,995 at 36 times its FY25 earnings. Chirag Maroo, an analyst of the brokerage, said the company would be able to pass on the increase in costs to customers, leading to a stable operating profit.