Q3FY24 Review: Balkrishna Inds: Past the down-cycle, but see minor hiccup in Q4

29 Jan 2024 , 11:58 AM

Balkrishna’s (BKT) Q3FY24 marked the first YoY volume growth after four quarters of declines, and came in slightly ahead of analysts of IIFL Capital Services estimates (3% Ebitda beat). Mgmt mentioned that demand has stabilised and is gradually trending upwards. Dealer stock is below normal at the lower end of 30-45 days, with scope for restocking as demand visibility improves. The ongoing Red Sea crisis may hurt Q4 volumes (Q4 volumes flattish YoY) and margins (increased freight costs). However, this should be a short-term phenomenon. ASP and margins should improve from FY25, driven by higher EUR-INR realisation and commencement of specialty carbon black plant. Analysts of IIFL Capital Services have trimmed FY24-26 EPS estimates by 2- 4%. They like Balkrishna as a play on cyclical recovery in OHT tyre volumes; up-cycles last three years, on an average. Retain BUY, with TP of Rs2,800. 

Q3 Ebitda 3% above estimate: 

Revenue grew 5% YoY (in-line), led by 9% growth in volumes. Ebitda margin rose 100bps QoQ to 25.3% (70bps beat), led by operating leverage. Absolute Ebitda came in 3% above analysts of IIFL Capital Services estimate, owing to lower opex. Significantly higher forex loss (below Ebitda, unrealised) resulted in 13% miss at the PAT-level. 

End-demand stable and gradually improving; dealer stock below normal: 

In Q3, volumes grew YoY after four successive quarters of YoY decline. Mgmt mentioned that end-demand has stabilised and is now showing signs of gradual improvement. Dealer inventory is at the lower end of 30-45 days across markets. In Q4, volumes may be flattish YoY and QoQ due to the Red Sea issue. Freight delays may lead to dealer stock falling further. This means BKT would enter FY25 with improving demand and sub-normal dealer stock, with potential for restocking. 

See levers for improvement in ASP and margins: 

ASP has declined 10-11% from Q2FY23 levels due to price cuts (cost pass-through, subdued demand). However, ASP is expected to improve in FY25, driven by the higher EUR-INR realisation and commencement of specialty carbon black plant. Analysts of IIFL Capital Services also expect operating leverage benefits to kick in as volumes improve. They expect BIL’s margins to improve from 25.3% in Q3 to 27-27.5% over FY24-26. Q4 may see slight deterioration in margins owing to elevated freight rates, but this drag should be temporary.