Why Balkrishna Industries is on a slippery slope

The road is rough ahead, however. For FY25, Balkrishna’s management has guided for marginal volume growth due to subdued demand in both industrial and agricultural tyre segments. In its key markets of the European Union and the US, retail demand is slowing due to geopolitical woes, inflation and recessionary concerns. This weakness in demand is leading to inventory build-up, the management said in the earnings call.

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Analysts at ICICI Securities Ltd are pencilling in 10% y-o-y volume growth for Balkrishna in FY25, which implies average quarterly volume dropping to around 79,000 tonnes for the rest of the year.

There are other speed bumps, too. The impact of higher freight costs was not evident in Q1FY25 due to pre-negotiated contracts. However, freight cost is expected to increase to 8-9% of revenue in Q2FY25 from 6.4% in Q1FY25, mainly impacted by the Red Sea crisis. Also, raw material cost is seen increasing by 2-3% in Q2FY25. The company didn’t take any price hike amid weak demand conditions. In Q1FY25, Ebitda margin stood at 26%, but due to the rising cost pressures, the company would strive to maintain FY25 margin at 25%, flat y-o-y.

Earnings downgrades 

Against this backdrop, it is hardly surprising that earnings downgrades are pouring in for Balkrishna. Analysts at Nomura Financial Advisory and Securities (India) have lowered their Ebitda margin forecasts for FY25 and FY26 by about 150 basis points (bps) and 40bps. They have also cut earnings per share estimates by around 7% and 3% for both fiscal years, respectively. One basis point is one-hundredth of a percentage point.

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Meanwhile, as other markets suffer, India would be in focus for Balkrishna, with the replacement demand expected to drive growth, the management said. Further, the company has guided for capital expenditure (capex) of ₹600-700 crore for FY25, out of which it has incurred capex of ₹200 crore in Q1. The capex on the advanced carbon black project, with a capacity of 30,000 million tonnes per annum (mtpa), is on schedule. The company would incur a fresh capex of ₹1,300 crore to add capacity of about 35,000 mtpa at its Bhuj facility for off-the-road tyres.

Increasing capacity bodes well for the company’s long-term growth, but with looming demand uncertainty, it is not enough to revive investors' sentiment. “Balkrishna has a history of three years of upcycle, after a year of down‐cycle. After a sharp improvement in the past two-three quarters, demand commentary has gone soft again," pointed out IIFL Securities Ltd. A worry is that subdued demand would further impact the company’s pricing power, making it challenging to pass on the increased cost burden to end consumers.

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These concerns would have a bearing on the stock and valuations as and when they play out. Some nervousness has already started creeping in, with the stock correcting 16% from its 52-week high of ₹3,375 on 1 August. So far in 2024, Balkrishna’s shares have gained 9%, meaningfully lagging the Nifty Midcap 50 Index, which has surged 23% in the same period. The stock is trading at FY26 price-to-earnings multiple of 27 times, showed Bloomberg data. Considering the bleak near-term earnings outlook, valuation does not seem appealing enough and is at a risk of moderation.