Improving outlook leads to re-rating for Balkrishna Industries, stock gains

Capacity expansion expected to improve profitability

The stock of Balkrishna Industries has gained over 37 per cent in the last two months, on strong June quarter results and expectations of an uptick in global demand for off-the-road tyres. 

Brokerages have re-rated the stock after the quarterly results, given they expect robust volume growth and low-cost operations to reflect both on revenue and earnings trajectory over the next two years. The firm's net profit, for example, is expected to grow upwards of 30 per cent annually from FY18-20.

The key trigger, recently, has been the 36-per-cent year-on-year growth in revenues, led by 23 per cent growth in volumes in the June quarter. The performance of the company at the operating profit level has been even better, with growth of 67 per cent. The better operational performance was on the back of a favourable product mix and lower input cost. Margins, too, saw an impressive 500 basis points jump to 29.1 per cent. A weaker Indian currency also aided the gains. 

Some of the bullishness on the stock is also on account of the upward revision in volume growth guidance of about 4 per cent, which means a volume growth of 14 per cent for the current fiscal. The company expects strong growth in off-the-road and agriculture tyres in Europe and the US. Market rebound in the mining segment, which accounts for 13 per cent of volumes, is also expected to keep volume growth strong. The company expects to improve its market share, currently at 4 per cent, to 6-7 per cent over the next four years.

The company's backward integration will help improve profitability. Given the volume growth, it is building a carbon black manufacturing facility, with capacity of 140,000 tonnes. Analysts at Anand Rathi say the backward integration will improve the company's profitability over the next 3-4 years. Analysts also estimate gains of about 1.5 per cent annually at the operating profit level, once utilisation levels peak. 

At the current level, the stock is trading at 28 times its FY19 earnings estimates. Investors can look at the stock on dips.