Q4FY23 Review: Balkrishna Inds: Q4 in-line; Volumes, margins set to improve

30 May 2023 , 11:18 AM

Balkrishna (BIL) reported an in-line Q4, with higher-thanexpected volumes offsetting the miss on ASP and margins. Reported volumes still lag underlying demand, due to inventory de-stocking. While volumes would be flat sequentially owing to the last leg of channel destocking, we expect it to gradually pick up from the subsequent quarters. ASP, which surprised negatively in Q4, is likely to improve in FY24, led by the favourable EUR-INR realisations and ramp-up of specialty carbon black sales. However, analysts of IIFL Capital Services have cut their ASP assumption by 4% in FY24/25, after a weaker-than-expected Q4. Unlike other tyre-makers, Balkrishna’s Ebitda margin is yet to fully reflect the benefit of lower input costs (crude, rubber) due to high cost inventory.

Q4 results in-line as top-line beat offsets margin miss: 

Rev grew 5% QoQ (4% beat) with good increase in volumes (+9% QoQ), while ASP came off marginally (-4% QoQ). Gross margin expanded 60bps QoQ to 49.3% (in-line). Ebitda margin rose 220bps QoQ to 21.3% (70bps miss), on volume recovery and lower freight costs. Absolute Ebitda came in line with estimates. Significantly lower other income led to 9% miss on PAT.

Volumes to drive revenue; ASP to improve: 

Mgmt mentioned that the end-demand is holding up well and volumes should keep improving. While volumes would be flattish sequentially owing to the last leg of channel destocking, analysts of IIFL Capital Services expect it to gradually pick up from further quarters. ASP surprised negatively, coming off 4% QoQ in Q4. They have cut their ASP assumption by 4% in FY24/25, after a weak Q4. However, they expect ASP to improve in FY24, vs Q4 levels. EUR-INR realisations would be higher in FY24 (89) vs FY23 (85). Analysts of IIFL Capital Services expect third-party carbon black sales to scale up to 10% of revenue (currently 6%) and push up reported ASP.

Margins recovering from lows and well geared to improve; Retain BUY: 

As analysts of IIFL Capital Services mentioned in their last upgrade note, Ebitda margin in Q3, which was at a 43-quarter low, marked the low. Margins, although below estimates, supports their thesis on margin recovery. Analysts of IIFL Capital Services expect margins to improve driven by: 1) Fall in prices of crude and natural rubber as high-cost RM is exhausted 2) Fall in international freight rates 3) Higher EUR-INR realisations 4) Operating leverage on volume growth.