Tyre maker Balkrishna Industries FY23 volume, margin seen under pressure

Company's near term will be tough, but brokerages believe it will continue to gain market share

From its highs in August, the stock of Balkrishna Industries is down about 12 per cent. India’s largest listed tyre maker by market capitalisation dropped on account of weak margin performance in the June quarter (Q1FY23) and macro challenges. Some brokerages have cut their earnings per share estimates by as much as a fifth for FY23 to reflect the pressure on volumes and margins.

While the near-term outlook remains uncertain, demand in the June quarter was strong with the firm’s revenues rising 11 per cent sequentially. This was led by an 8 per cent growth in overall volumes and the rest of the gains coming from price hike-led increase in average realisations.

The company expects sluggish demand in September (current quarter) given macro challenges in Europe and inflationary trends in the US. Europe is Balkrishna’s single largest market, accounting for half of its revenues. Though retail demand is robust, distributors are reducing their inventory given macro uncertainties. Varun Baxi, of Nirmal Bang Research, expected volume growth to taper off going ahead. Demand in FY22 was exceptional and mainly driven by higher agriculture and mining commodity prices, besides an element of pent-up demand. Add to it the lingering geopolitical and inflationary challenges, he said.

The company, which hit volumes of 83,153 tonnes in the quarter (Q1), has stuck to its FY23 volume guidance of 320,000-330,000 tonnes. This will translate into a growth of 10-14 per cent y-o-y. Rishi Vora and Eswar Bavineni, of Kotak Institutional Equities, said heat waves in the European Union are downside risks to the company’s volume guidance. They pegged growth in the current financial year at a lower rate of 9 per cent. Balkrishna recently commissioned a brown field unit in Bhuj, Gujarat, adding 50,000 tonnes. The unit should take the total production capacity to 360,000 tonnes by the end of the year.

Even as revenues were slightly better than street estimates, margins saw a sharp drop of 383 basis points on a sequential basis to 17.2 per cent due to high rubber, freight, energy and advertisement costs. The company expected inflationary trends to continue in the current quarter. Given inventory levels and the fact that the long-term contracts are at unfavourable rates, gains from prices cooling could accrue towards the last quarter of the current year. Balkrishna managed Q1 by hiking prices, but with demand being sluggish it may not be able to pass on higher costs quickly and that could impair margins.

While the near term will be tough, most brokerages believe that the company will continue to gain market share (current share at 6 per cent) in the medium term in the $15 billion global speciality tyre market. Motilal Oswal Research expected the company’s performance to continue given its competitive positioning and edge in cost and pricing, product portfolio expansion and expanding reach. Motilal has a neutral rating for Balkrishna due to valuations that factor in gains.

Kotak Securities, however, has a sell rating and believes valuations (27 times FY24 earnings) is expensive given the cyclical nature of the industry and cost headwinds. Investors should await gains on the volume and margin fronts before considering the stock.