Q2FY24 Review: Balkrishna Inds: Bottom of cycle, but recovery may be gradual

25 Oct 2023 , 10:36 AM

Balkrishna’s Q2 results were slightly ahead of analysts of IIFL Capital Services estimates (3% Ebitda beat). Volumes improved sequentially and seem to be bottoming out. However, the pace of volume recovery may be gradual, given the recessionary trends in the West, further amplified by recent geopolitical events. ASP and margins should improve from here, driven by higher EUR-INR and external revenue of advanced carbon black (starting H2FY25). Analysts of IIFL Capital Services have increased analysts of IIFL Capital Services FY24 EPS by 4% (ASP, FX gains), but maintain FY25/FY26 EPS. The stock may look expensive at 26x FY25 EPS, but they note that FY25 may be the first year of volume upcycle (typical upcycles are 3-4 years). Retain BUY, with TP of Rs2,730. 

Q2 Ebitda 3% above estimate:

Revenue declined 20% YoY (2% beat), led by 11% contraction in volumes and lower ASP. On a QoQ basis, revenue grew 6% (5% vol., 1% ASP). Ebitda margin improved 140bps QoQ to 24.4% (40bps beat), led by slight gross margin expansion and operating leverage. Absolute Ebitda beat by 3%. Significantly higher Other income (driven by forex gains) resulted in 9% beat at PAT-level. 

Volume cycle bottoming, but recovery may be gradual: 

Inventory de-stocking by dealers is largely done. If and when end-demand improves, volumes should benefit from higher retail offtake as well as restocking by dealers. Having said that, demand improvement may be gradual given the recessionary trends in the West, further amplified by recent geopolitical events. Demand in India (28% of vol.) is quite strong. Overall volumes improved from 67.2k MT in Q1 to 70.6k in Q2. However, further improvement is needed to meet analysts of IIFL Capital Services estimates (quarterly avg. of 75k MT in H2FY24 and 82k MT in FY25). 

Multiple catalysts for ASP and margins: 

ASP, which was on a declining trend for three consecutive quarters, improved QoQ in Q2. Analysts of IIFL Capital Services expect further increase in coming quarters, driven by: i) Price hikes (in response to rise in input costs), ii) Higher EUR-INR (up from 85 in FY23 to 89 in FY24 and 93-94 in FY25) and iii) Commencement of advanced carbon black plant in H2FY25, which can add Rs4-6bn to revenue (external revenues). The above catalysts, in addition to operating leverage on volume improvement, would also result in margins going up from 24% in FY24 to mgmt target of 26-28%.