Balkrishna Industries Ltd has been facing a tough time in boosting volume. For four straight quarters now, the tyre-maker’s overall volume has dropped over the comparable period of the previous year. Channel inventory led issues and weak export markets have weighed on volume. In the June and September quarters, Balkrishna’s volume fell by 19% and 10.5%, respectively, to 67,209 units and 70,585 units. International markets formed about 71% of Balkrishna’s sales in the first half of FY24.
In the September quarter (Q2FY24), Balkrishna said it faced challenges owing to heat waves and recessionary fears in export markets. Further, inventory-related challenges in international markets have normalized. “Confidence levels in distribution channel is moderate, leading to a gradual and slow improvement,” said the company.
As such, there is still some uncertainty in export markets due to geopolitical tensions. In FY24, overall volumes should drop. Balkrishna expects volume performance in the second half of FY24 to be better than the first half, implying double-digit growth for the next two quarters. Here, the efforts to gain market share would help. Balkrishna’s market shares globally and in India are within the range of 5-6% each. It aims to increase market share levels to 10% over the medium term by identifying new areas of growth and adding new products.
“We factor in volume recovery of about 11-12% year-on-year in H2FY24 and FY25 as well,” said analysts at Nomura Financial Advisory and Securities (India). But there are risks to the recovery due to falling crop yields in Europe and the ongoing adverse weather in the region, said Nomura’s analysts in a report dated 23 October.
Coming to profitability, in Q2FY24, Balkrishna clocked an Ebitda margin of 24.4%, up 433 basis points (bps) year-on-year and 141 bps sequentially. Ebitda refers to earnings before interest, tax, depreciation and amortization.
But the path ahead is not smooth. For one, the price of crude oil, a key input, is volatile. In the Q2 earnings call, Balkrishna said it expects crude oil prices to be stable or sequentially higher. Unless there is a sharp escalation in commodity costs, near-term price hikes are ruled out. Nomura’s analysts believe that hikes may be critical to sustain margins. The brokerage’s commodity cost index is up about 200 bps quarter-on-quarter currently. Balkrishna aims to maintain Ebitda margin within the range of 23-25% in H2.Meanwhile, Balkrishna has raised its capital expenditure guidance for FY24 to ₹900 crore from ₹600 crore estimated earlier. The incremental amount would be spent on setting up a mould manufacturing capacity at Bhuj. Hereon, investors would follow how Balkrishna navigates the woes of export markets. To be sure, “Balkrishna’s export-oriented business model has strengths of a wide product portfolio with over 3,200 stock keeping units, short lead times for product launches (in-house mould and testing track facility), competitive pricing (12–15% lower than global peers), and a growing distribution network,” said a Nuvama Research report dated 23 October. These strengths have aided growth in the off-highway tyres segment, which is a non-focus area for bigger tyre companies, said the Nuvama report. Balkrishna Industries primarily caters to the off-highway tyres segment.
Notably, the domestic demand is on a firm footing. For now, the scope for meaningful expansion in the stock appears limited as valuations are not exactly cheap. The stock trades at about 28 times its FY25 estimated earnings.