Agri tyre exports to sustain sales growth for Balkrishna Industries

However the upsides are capped given stock gains and margin pressures

Strong growth in agricultural tyre exports in October and expected recovery in off-the-road (OTR) tyres could help Balkrishna Industries sustain its sales growth trajectory. Export performance and robust September quarter numbers have helped the stock gain over 23 per cent over the past month.

The company is the main beneficiary of strong demand for agricultural tyres and its exports of the segment grew by 38 per cent in October after growing a 67 per cent year-on-year (YoY) in September. The segment accounted for 64 per cent of its revenues in the first half of FY21. The European Union is its single largest market, followed by the US.

While export growth to markets such as France, the UK, and Italy have been strong, they have declined for Germany and the US due to Covid-19 related lockdowns. Analysts at Nomura Research believe that the broad-based demand recovery across countries in the agri segment is a positive for BIL and offsets the impact of lockdowns in Germany. They also expect OTR tyre demand to bounce back as commodity prices remain elevated. After a 22 per cent uptick in September, OTR exports to segments such as mining and construction were down 2 per cent in October.

 While higher exports have reflected in the September quarter performance, the other gain has been improved profitability. Lower raw material and other expenses led to operating profit margins at near five-year highs. While input costs are expected to go up and thus put pressure on margins, some of this will be mitigated by backward integration into carbon black.

Though growth prospects remain sound, given the export numbers in recent months, investors should be cautious given the second wave of infections in Europe. The World Health Organisation has warned of a third wave in Europe in early 2021, if countries do not take necessary steps to rein in the pandemic. Given the recent gains, investors should await clarity on demand trends and consider the stock on dips.