Strong agri tyre exports momentum to help Balkrishna Industries

In addition to revenue growth, lower costs should help the management to meet margin guidance for FY21

Even as peers are struggling for growth, Balkrishna Industries is expected to benefit from strong demand for agriculture tyres. This coupled with backward integration is expected to help Balkrishna Industries post strong revenue growth as well as improve profitability. The stock which has gained over 40 per cent over the last three months is expected to get support from the demand trends. 

Led by Europe, agriculture tyre exports from India have been strong and are up over 40 per cent y-o-y in July. Balkrishna Industries is expected to be a major beneficiary of this trend as it gets 60 per cent of its revenues from agriculture tyres and Europe accounts for half its revenues. While year to date exports are still down, analysts expect the positive trend which started to improve from April to continue going ahead. 

The other geography which should aid growth is the Indian market which accounted for a quarter of Balkrishna’s volumes in the June quarter. Government policies for the farm sector, favourable monsoons and strong sowing in the current season are expected to be good demand triggers. The company could improve its market share given expansion of its reach in the Indian market and a low base.

Its agricultural tyre market share in core markets of the US, Europe and India ranges from 7-15 per cent. However, the bigger opportunity for the company to gain market share both by value and volumes is in the industrial tyres segment (mining and construction) where it has a share of under 3 per cent. Balkrishna Industries is looking at doubling the same over the next three years. 

While the company posted an operating profit margin of just under 27 per cent in the June quarter, it has guided for a margin of 28-30 per cent for FY21. This is on the back of lower commodity costs (crude oil derivatives) and backward integration. 

Most brokerages have upgraded the stock on the back of higher volumes, increased margins and higher free cash flows in FY22 as it completes its capex. While prospects are sound, the stock which has gained 95 per cent from its March lows captures most of the gains.