Balkrishna Industries’ rosy volume outlook clouded by inflation woes
PremiumAt the end of Q1, the company’s raw material cost per kg was up 19% annually and 8% sequentially, analysts point out
Despite poor volumes in the June quarter (Q1), tyre manufacturer Balkrishna Industries Ltd is confident of achieving robust growth in FY22. The company has maintained its volume guidance of 250-265 kilo tonnes (kt) for FY22, which implies a 10-17% growth over FY21. This is impressive considering that on a sequential basis, volume growth was flat at 68.6 kt.
In a post-earnings conference call, the management said that volumes grew in the European Union and America regions on a sequential basis; growth in the rest of the world partly offset by the decline in domestic markets. It expects demand to pick up going forward and has started getting repeat orders from customers in new markets like South America and Australia. The management aims to double its market share from 5% currently to 10% in the overall off-highway tyre market in the medium term.
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But investors in this stock are hardly excited about it. Reacting to Q1 earnings, shares of the company fell more than 4% intraday on the NSE on Monday. Ongoing margin erosion on the back of elevated raw material prices is bothering them. Gross margin contracted by 160 basis points (bps) sequentially to 57.2%. One basis point is one-hundredth of a percentage point.
At the end of the June quarter, its raw material cost per kilogram was ₹114, up 19% annually and 8% sequentially, analysts point out. The management said that all raw material prices are on an uptrend and this has impacted the company’s margin profile.
Furthermore, logistics costs have gone up significantly across routes and could continue to be at similar levels through the current fiscal, the management added. Consequently, Ebitda margin contracted by 230bps in Q1 on a quarter-on-quarter basis. Ebitda is short for earnings before interest, tax, depreciation and amortization. To tackle this, the company took a 2-3% price hike in July and would be taking a quarterly price hike. With that, the company aims to maintain its operating margins in the 28-30% band annually on a long-term basis.
Even though the management expects to benefit from demand tailwinds, elevated input cost is challenging, say analysts. They expect margins to remain under pressure until price hikes fully absorb cost inflation.
What’s more, analysts are not comfortable with the stock’s valuations. They say, given the cyclical nature of the business, the stock’s valuation multiple is rich and well above its long-term average of 23 times.
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“At current market price, valuation remains expensive at 31.2 times 2023 earnings per share estimates even after building strong operating performance over the near term," said analysts at Kotak Institutional Equities.
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