Balkrishna Industries shares gain on hopes of better margins from Q4

The tyre maker recorded 2.2 percent year-on-year decline in consolidated profit at Rs 382.3 crore in Q2FY23

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Shares of tyre manufacturer Balkrishna Industries traded in the green on November 15 despite a weak second-quarter results. Analysts believe that investors see light at the end of the tunnel as the company expects margin improvement from from the fourth quarter.

At 11:30 am, the stock was quoting at Rs 1,900 per share on the National Stock Exchange, up 1.9 percent. At 10 am, it was up 4 percent, touching an intra-day high of Rs 1,968 apiece. In 2022 so far, the stock has underperformed the Nifty Auto index. It is down 18 percent while the Auto index gained equally.

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“The recent price correction in raw materials and logistics bode well for our margin profile. As guided, the benefits are expected to kick in from early Q4,” said the management in an analyst call. In Q2FY23, the company’s margins contracted to 16 percent from 25.9 percent a year back.

The tyre maker recorded a 2.2 percent on-year decline in consolidated profit at Rs 382.3 crore in the period under review. Revenue for the quarter surged 28.2 percent to Rs 2,657.5 crore, but EBITDA declined 20.7 percent to Rs 426.2 crore compared to the corresponding period last fiscal.

The company said that it is unable to provide a guidance for the annual sales volume for FY23 because of the challenging macro environment. “Current situation in Europe is challenging and it will have an impact on our H2 earnings. The demand pattern is better in North America but recession fears may impact growth,” said the management.

Analysts, however, sounded optimistic. They believe the company will achieve its earlier guidance. “Raw material prices are declining. Ocean freight rates are also decreasing. Since company has already done 1.7 lakh tonnes in first half to the fiscal, it will be able to achieve volumes of 3.1-3.2 lakh tonnes for FY23,” said an analyst of a domestic brokerage house, refusing to be identified.

At a price-to-earnings ratio of 20x in FY24, the stock looks attractive, the analyst said.

Giving an update on the capex status, the company said that the management earlier intended to replace the old Waluj plant by the newly commissioned greenfield plant. “But it was subsequently decided that operations will continue at both the plants along with modernisation of

the old plant,” as per the investor presentation.

The company will spend Rs 350 crore to bring in economies of scale. The current achievable capacity will stand reduced to 335,000 MTPA and will increase back to 360,000 MTPA by H1FY24 after commissioning of the Waluj brownfield project, the company added.

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