Markets
Balkrishna Industries struggles with muted volumes
Summary
This is the second consecutive quarter of year-on-year drop in volumes. Balkrishna continues to face challenges in end markets, particularly on the channel inventory front.Balkrishna Industries Ltd’s is having a tough time in boosting sales volume. In the March quarter (Q4FY23), volumes dropped by almost 6% year-on-year to 72,676 tonnes. This is the second consecutive quarter of year-on-year drop in volumes. Balkrishna continues to face challenges in end markets, particularly on the channel inventory front. This means it could not benefit in the seasonally strong Q4. Unsurprisingly, Balkrishna’s shares fell by almost 8% to ₹2,281 apiece on Monday.
Balkrishna believes channel inventory-led issues may be resolved June onwards. In an earnings call, its management said the business momentum seen in India and the US in FY23 is expected to continue in FY24. Demand in Europe is seen recovering in the second half of FY24 (H2FY24). Note that risks of a recession in the company’s key market of Europe has hit volumes in recent quarters.
Further, the company aims to achieve a 10% market share in the next four-five years. Currently, its overall market share is 5-6% and it is focused on boosting its branding efforts in foreign markets. In India, its market share is 3-3.5%, the management added. However, the management has refrained from sharing guidance on volume growth.
Analysts are also worried about the macro-economic outlook in the US, given any potential risks arising from debt ceiling-related issues. “The pain on volumes growth is not yet out of the way for Balkrishna Industries," Varun Baxi, an analyst at Antique Stock Broking, said. “For FY24, we expect volume to see mid-single digit growth, but that too could come at the fag end." Meanwhile, the sequential improvement in margin brings comfort. In Q4, Ebitda margin stood at 21.3% aided by better absorption of high-cost raw material inventory and lower freight costs. Raw material costs are expected to decline by 1-2% in Q1FY24. In FY24, margin levers such as favourable raw material costs, better hedge rate, complete normalization of logistics costs are expected to give margin a fillip. The management expects operating margin to further improve by 200-300 basis points in FY24 with most of improvement likely from H2FY24 onwards. In general, the margin outlook of tyre companies has improved owing to the tailwinds from lower raw material prices. So, while margin recovery would continue for Balkrishna, operating margin is unlikely to touch historical levels of 25-26% soon, Baxi cautioned.
To be sure, the niggling worry on volumes has marred the stock’s returns. In the last one year, Balkrishna’s shares have risen by a mere 2%, significantly underperforming the Nifty Auto index, which has gained 26%. Interestingly, the stock hit a new 52-week high of ₹2,491.95 on Friday. “The up move was most likely a rub-off effect as other tyre stocks such as Ceat, MRF and Apollo Tyres have hit new highs in May. The sector seems to be in a sweet spot due to easing raw material prices/supply chain issues, aiding margin outlook," said an analyst requesting anonymity.
Balkrishna’s shares trade at FY25 price-to-earnings multiple of 25x, showed Bloomberg data. In current backdrop, valuations seem rich.
“Margins are likely to recover from here on the back of reduced input costs and favorable hedge rate. Their net debt at about ₹1,200 crore is also at a manageable level, but that is not enough," said Aniket Mhatre, institutional research analyst at HDFC Securities. “A rebound in volume is crucial for the stock to see a re-rating from here. However, we feel there could be some more downside in the stock, as the volume recovery could lag expectations given weak demand conditions in Europe,"he added.
