Markets
Balkrishna Industries stock is on a slippery slope
Summary
- For FY24, the company's management projects an optimistic outlook, buoyed by anticipated continued business momentum in the US and India
Balkrishna Industries Ltd's March quarter (Q4FY23) earnings performance disappointed investors. A normally robust quarter for the tyre maker was undermined by a surge in channel inventory clearance in end markets. Though sales volumes saw a sequential uptick, they were still down 6% YoY at around 72,700 tonnes, a factor the company's management anticipates will be rectified starting June. As a result, Q4 profits remained lacklustre.
For FY24, the company's management projects an optimistic outlook, buoyed by anticipated continued business momentum in the US and India. However, the specter of a recession in its crucial European market has been a damper on volumes. Despite this, the management sees the demand situation in the challenging European market stabilizing later in the year.
But for now, investors are jittery. On Monday, the stock declined nearly 5% on the NSE, in the opening trade. This is not surprising considering that the company's Q4 has missed expectations on some key parameters.
Even so, there were some bright spots. The company's margins improved sequentially. Gross margins at 49.3% rose 70 basis points (bps) in Q4 and Ebitda margin increased 220bps to 21.3%. This can be attributed to lower freight costs.
According to the management, benign raw material costs, better hedge rate, and complete normalization of logistic costs would act as levers for margins going forward.
Meanwhile, in the last year, the Balkrishna Industries stock has risen by a mere 2%, massively underperforming the Nifty Auto index which is up nearly 24%. Recovery in the stock price is expected to be gradual.
"We factor in 5% year-on-year volume growth in FY24/25F and Ebitda per tonne of Rs84,00/ to arrive at our EPS estimate of Rs90 for FY25F. The stock currently trades at ~16.8x FY25F EV/Ebitda, which we believe factors in the recovery," said a report by Nomura Financial Advisory and Securities.
