Tyremaker Balkrishna's stock in top gear, but beware the bumps

Inventory at the dealer level in the key European market normalized to 40-45 days in the March quarter, similar to what it was in the preceding three months, the management said.

Contrary to expectations of shipment delays due to the Red Sea crisis, business picked up for export-focused Balkrishna Industries between January and March.

In effect, volume rose 13% year-on-year to around 82,085 tonne in the March quarter. This was driven by strong growth in the agriculture tyre segment and improved replacement demand from the North American market. The jump comes after the company's volumes declined in financial year 2023-24, although only by 3% year-on-year.

Due to the ongoing geopolitical tensions, Balkrishna's management refrained from providing volume guidance. However, volume decline is not expected in FY25. The management foresees stable demand in the US. And in the domestic market, Balkrishna eyes a 10% market share in the medium-term, up from 5-6% market share currently.

The Street gave Balkrishna's upbeat commentary and better-than-anticipated fourth-quarter results a thumbs-up. The stock zoomed 10% on Tuesday, hitting a fresh 52-week high of ₹3,174.30 per share on NSE.

“Post a period of subdued demand impacted by channel destocking (flat volumes over FY22-24), we expect Balkrishna Industries to benefit from the upcycle," Nomura Financial Advisory and Securities (India) said in a report.

“Balkrishna Industries has gained market share in India (mix increased from 11% in FY22 to 27% in FY24), and globally as well, according to our analysis of listed peers, which should help it to outperform industry growth," it added.

The double-digit volume growth translated into higher-than-anticipated revenue in the fourth quarter. Realization improved by 3% sequentially, largely aided by a favourable product mix and better forex exchange rate.

Despite the positives, the coast is not completely clear for Balkrishna Industries. In the fourth quarter, Ebitda margin at 25.9% was ahead of consensus estimate of 23.1%. The company aims to maintain margins at this level in FY25. But there can be challenges.

Near-term headwinds, mainly in the form of higher freight cost due to the Red Sea crisis, could limit margin expansion.

Also, the higher costs of crude-based raw material and natural rubber are a worry. In the fourth quarter, Balkrishna's total raw material basket cost stood at Rs152/kg, compared with Rs150/kg in the preceding three months. The management expects this cost to marginally increase to ₹154/kg in the ongoing first quarter of FY25.

Balkrishna Industries is a very strong franchise and has a competitive advantage owing to its low-cost operation, but the company may have limited pricing power amid increasing competition, cautioned Antique Stock Broking.

The broking house has built in a slightly lower margin estimate of 25.5% for Balkrishna Industries in FY25.

In this backdrop, price hikes in the ongoing June quarter, if any, could come as a breather. The company did not increase prices in the March quarter.

However, increasing the prices could dampen the volume growth momentum. It remains to be seen how the company maintains a balance between volume growth and operating margin.

Balkrishna Industries has planned a capital expenditure of ₹500-600 crore for FY25. It is setting up a mold manufacturing capacity at Bhuj, which will require a capex of ₹300 crore.

The aim of setting up this unit is to reduce lead time to market and better its quality control. The facility is expected to be commercialized by June, the management said. With large capex behind, the company anticipates becoming debt-free by the end of FY25.

Meanwhile, in the last one month, the stock has seen a steep rally of 30%. However, the risks mentioned can put investors' optimism to test amid Balkrishna's expensive FY25 price-to-earnings multiple of around 37 times.