Q1FY24 Review: Balkrishna Inds: Soft near-term, but cyclical recovery story intact

8 Aug 2023 , 11:36 AM

Balkrishna’s (BIL) Q1 Ebitda missed analysts of IIFL Capital Services estimate by 8%, primarily due to lower-than-expected volumes. Overall volume guidance in the near-term stays soft, due to adverse climatic conditions and global recessionary fears. BIL’s ASP came off in Q1 and may reduce further over the course of FY24. Thay now forecast 4% volume decline and 7% ASP drop in FY24. Price cuts by BIL (due to weak demand), even before margins reach normal levels, has been a big negative surprise in recent months. On the positive side, destocking by dealers is largely done. When end-demand improves, the positive sentiment would lead to dealers restocking, creating double tailwind for BIL’s volumes. Analysts of IIFL Capital Services expect ASP to improve in FY25 due to i) higher EUR-INR realizations, ii) commencement of specialty carbon black plant. They cut FY24-26 EPS estimates by 5%/4%/2% to account for lower volumes/ASP. They maintain BUY, as volumes and margins are at cyclical lows and have potential to improve substantially from current levels. 

Q1 miss on lower-than-expected volumes: 

Rev came off 9% QoQ (4% miss) due to contraction in volumes (-8% QoQ). Gross margin expanded 240bps QoQ to 51.7% (130bps beat). Ebitda margin improved 170bps QoQ to 23.0% (70bps miss), on higher GM. Absolute Ebitda came in 8% below estimates. However, higher other income and forex gain led to 5% beat at PAT level. 

Near-term volume outlook is soft; ASP to stay muted: 

Key markets (US, Europe) still face recessionary fears, with the recent heat waves making demand worse. End-demand has been soft since mid-FY23. Q2FY24 will see seasonal weakness, but may be offset by some positive spillover of volumes from Q1 (Cyclone in Gujarat hurt Q1 production). Clean-up of excess channel inventory is largely done; volumes should recover swiftly if end-demand normalizes. 

ASP and margins to improve in FY25: 

Analysts of IIFL Capital Services expect ASP to bottom out in FY24 and improve in FY25, driven by higher EUR-INR realization and commencement of specialty carbon black plant. They expect the above factors to be positive for margins and Ebitda/MT. BIL’s 23% margin in Q1FY24 is despite very low volumes and adverse mix. As volumes and mix improve, they expect it to move to mgmt. guidance range of 26-28%.