Export demand firm for BIL, depreciating rupee to add to revenue growth

Even as peers will witness a sharp sequential decline in the June quarter, the only pure play auto ancillary exporter in India, Balkrishna Industries (BIL), is expected to be the standout performer in the quarter led by higher tyre exports. Moreover, sales outlook for the key segments of agriculture and off-the-road (OTR) tyres too, remains robust. A depreciating rupee should also help the exporter post better revenue growth rates than peers going ahead.

Industry export data for May, the last month for which data is available,  points to an 85 per cent y-o-y growth in the OTR segment, while the demand for agriculture applications too, remained healthy, registering a growth of 67 per cent. About 64 per cent of BIL’s sales is to the agriculture segment and about a third are in the OTR category.

Say Nishant Vass and Pratit Vajani of ICICI Securities, “On the OTR side, momentum picked up, which signals steady increase in mining and construction offtake. We believe the outlook for global agriculture exports remains strong given the rising commodity price environment. OTR demand is also likely to be supported by infrastructure and mining investments in FY22 and FY23 as investments pick up pace.”

Balkrishna Industries, which posted sales volume of 2.27 million tonnes in FY21, is targeting growth upwards of 10 per cent given its volume target band of 250,000-260,000 million tonnes for FY22.

While growth momentum has been strong, what has helped the company perform better than peers in the June quarter is its reliance on overseas markets which are better placed than the local market. Balkrishna Industries gets 78 per cent of its revenues from the export markets, with two thirds of sales in Europe and Americas. Given this, a depreciating rupee is another positive. From its lows at the end of May, the rupee has slipped 3 per cent against the US dollar and is currently trading at Rs 74.44 to the greenback.

The company is expected to be an outlier in the auto pack on a sequential basis given its performance in June quarter. Estimates by analysts at Nomura indicate that BIL is the only company which will post revenue growth (5 per cent) on a sequential basis as compared to peers across listed auto majors and suppliers which are expected to post declines.

Operating profit margins, however, are expected to come down 180-200 basis points sequentially to 29-30 per cent due to higher commodity prices, limited price hikes and rising freight costs. While the company faces some headwinds in the India market given the muted volumes in some segments, a normal monsoon would help boost volumes to the agriculture segment.

Though prospects are sound for the niche tyre maker, this has been factored into the stock price which is up 38 per cent over the last three months. The stock is trading at over 30 times its FY23 earnings estimates; investors should await meaningful corrections before considering the stock.