Balkrishna Industries | After a 40% rise in two years, is there more upside in near term?

Tyre maker Balkrishna Industries (BKT) has appreciated significantly over the past decade, with the stock price rising nearly 10x from the Rs 200 level in 2013.

The stock saw a breakout in late 2020 and has since climbed by more than 40 percent.

Exports is the largest revenue vertical of this off-highway tyre (OHT) maker. Exports to the EU and the US brought in 80 percent of its revenue in FY21. However, with exports now facing headwinds, is there more upside to the stock?

Largely, the Street seems cautious about the stock, with concerns chiefly around volumes. BKT’s revenue for the quarter ended December 2022 grew 7 percent year on year (YOY) to Rs 2,215 crore while its operating profit fell 16 percent to Rs 423.8 crore. Both revenue and operating profit were below the Street’s estimates by 9.2 percent and 13.6 percent, respectively.

Thinning volumes

HDFC Securities, which has a ‘Reduce’, or sell call on the stock with a target price of Rs 1,936, highlighted the demand slowdown in the company’s key export markets—Europe (around 63 percent of the company’s exports in FY21) and the US (around 18 percent)—which are currently witnessing recessionary trends.

“Given the challenging demand environment, management has refrained from providing any volume guidance for FY24, although indicating a low single-digit growth in the near term,” read the recent report.

Foreign brokerage firm Nomura’s report noted that volumes in the December quarter, at 66,500 tonnes, were 5 percent lower than the year ago due to channel destocking. The report said that realisation on the volumes fell 6 percent quarter on quarter (QoQ) because of the absence of the surcharge (6% of the Average Selling Price or ASP), placed on customers with lower freight costs. The brokerage has a neutral rating on the stock and a target price of Rs 2,015, which is nearly 2 percent lower than the current market price (CMP).

Profits affected

Analysts at ICICI Securities noted that the removal of the surcharge on average selling price (ASP) of CIF (cost, insurance, freight) exports weighed on the company’s margins.

There are several other factors too that affected BKT’s bottom line, according to ICICI Securities’ analysts. “This (the removal of the surcharge) coincided with the usage of higher cost raw material inventory and gradual transition towards falling container contracts. Also, despite euro/INR moving to ~89 from ~80 in three months, BIL could realise ~85 in Q4, along with subsequent MTM losses on outstanding debt, impacting reported EBITDA by Rs880mn on a net basis,” they wrote in their latest report. While forex losses in the December quarter were around Rs 88 crore, the company had made a forex gain of Rs 8 crore a year ago.

While Nomura’s analysts see channel destocking to affect BKT more than its peers and the drag of it to be felt till the first quarter of the next fiscal (1QFY24), those at ICICI Securities see the channel destocking pressure to ease from the final quarter of this fiscal. “With dealer inventory coming down to ~2.5 months (from levels of 4 months) six months back, BIL is looking at Q3 volume as the bottom and would deliver higher volume QoQ and improve subsequently across FY24 with ASP stabilising at current levels. With the surcharge removal exercise being done fully, improving mix and euro/INR realisation from ~85 to ~87 in coming quarters would aid ASP ahead,” ICICI Securities, which has maintained a ‘Buy’call on the stock although with the target price revised downwards, said a report.

The brokerage sees the operating profit margin recovering to 25 percent in FY25, thanks to the better scale, lower raw material cost, lower freight charges, favourable currency rates and a better product mix.

While other analysts also see cost reduction and a fall in raw-material prices and operational costs, they aren’t sure if BKT will be able to benefit from that or will be forced to pass it on to customers to fight weak demand.

BKT’s pricing is already at a discount of 12-15 percent to the competition.

Sharekhan, which has a hold call on the stock, has stated in its latest report that it believes in BKT’s structural growth story which is supported by the company’s massive capital expenditure cycle. This has also managed to broadly protect the company’s global market share (5-6 percent). That said, the brokerage has near-term concerns about the company’s operating performance.

“Despite the correction in the RM basket, we believe BKT’s operating performance would remain under pressure and a significant revival would be visible on the return of operating leverage led by volume uptick as the company would have to partially pass on the soft input cost to the end-customer to remain competitive in the market. Considering the near-term volatility in demand and challenging business situation in the European market, we retain our Hold rating on the stock with a target price of Rs 2,163. The stock trades at a P/E multiple of 22.9x and EV/EBITDA multiple of 16.0x its FY2025E estimates,” they wrote in their post-Q3 earnings report.

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