Balkrishna Inds: Heading into volume upcycle

20 Mar 2024 , 11:47 AM

Balkrishna’s (BKT) Q3FY24 marked the first YoY volume growth after four quarters of declines. Overall commentary was positive with gradual pick-up in end-demand and dealer inventory at lows. Yet, the stock has corrected about 20% since Q3FY24 results, as mgmt. guided to a flat Q4FY24 due to the Red Sea issue. Export data for Feb 2024 showed 20% YoY revenue growth for BKT. On a combined “Jan+Feb” basis, export revenues are +5% YoY. Domestic volumes have been growing 15-20% YoY. On an overall basis, analysts of IIFL Capital Services believe Q4 demand is trending much better than mgmt. guidance. Analysts of IIFL Capital Services like Balkrishna as a play on cyclical recovery in OHT tyre volumes. In the past, up-cycles have lasted for two to four years. Retain BUY, with TP of Rs2,800.

BKT is past the down-cycle:

Volume down-cycle (YoY decline) in BKT started in the Dec 2022 quarter. After four successive quarters of YoY decline in volumes, BKT clocked 9% YoY volume growth in the Dec 2023 quarter. In the past, a year of down-cycle has typically been followed by two to four years of volume upcycle. All the enabling factors are in place, with the end-demand stabilising and gradually improving, and dealer inventory at the low end of 30-45 days across markets.

Export data suggests demand is better than mgmt. guidance of “flat Q4”:

Export data for Feb 2024 showed 20% YoY revenue growth for BKT. Jan 2024 was weak at -8% YoY, possibly due to the Red Sea issue (mgmt. highlighted in Q3FY24 call). On a combined “Jan+Feb” basis, BKT’s export revenue (75-80% of volumes) are up 5% YoY. Domestic revenue (20-25% of volumes) has been growing 15-20% YoY. Overall Q4 demand is trending better than mgmt. guidance of “flat YoY”. There is a possibility of delay in “revenue recognition” of in-transit inventory for contracts based on “delivery to the customer”. This is a transient issue and will even out in subsequent quarters.

Pick-up in demand would make it easier to pass through RM increase:

Unlike domestic tyre-makers, who retained the benefit of lower input costs, BKT passed on part of the benefit to customers as demand environment was weak. Now that end-demand is improving, BKT should be in a position to increase prices in response to rise in input costs.