Balkrishna Industries: Strong foothold

The Mumbai-based Tyre maker Balkrishna Industries stock surged more than 7% to Rs 1,241 per share in early trade as brokerages turned highly positive on the company’s near term earnings growth prospects.

The optimism was driven by better than expected fiscal third-quarter earnings performance released by the company last week.

Balkrishna Industries revenue from operations grew 8.3% on quarter at Rs 1,160.5 crore, which was above analysts’ expectations. However, revenues are down 3.7% on the year as the automobile sector continued to feel pressure from sluggish demand. In the same quarter last year, the company reported revenue of Rs 1,205.6 crore.

Earnings before interest, depreciation, tax, and adjustments (EBIDTA) stood at Rs 341.5 crore, up 13.5% on the year. It had reported EBITDA of Rs 300.9 crore in the corresponding period last year.

Strong operating performance alongside cost optimizations measure helped lift EBITDA margin to 29.4% as compared to 25% a year ago.

The company’s adjusted net profit stood at Rs 220.7 crore, much higher to analyst expectations of Rs 206 crore and compared to Rs 144.7 crore a year-ago period.

Balkrishna Industries is seen gaining a firm footing in its business. Recent changes to the operating environment, demand recovery, market share gain are likely to drive growth in the near future. The commodity tailwinds ahead will boost margin further.

Over the years, BIL has emerged as a niche export-oriented player in the off-highway tyre (OHT) segment, with Europe (48%) and North America (20%) currently forming 68% of revenues.

Industry’s OHT exports to these regions have shown signs of strength in recent months, albeit on a soft base (Q3FY20 exports up 10% YoY in US$ terms, first growth quarter post Q4FY19).

BIL commands a substantial market share in this segment (80-90%). BIL’s margin performance improved substantially in Q3FY20 to 29.4% as prices of key raw materials viz. natural & synthetic rubber, carbon black and other crude derivatives remained benign with the forward outlook also looking muted.

For Q3FY20, the Geographical mix was Europe 48%, America 20%, India 21%, others 11% while the Product mix was agri 60%, OTR 36%, & others 4%.

Further, BIL has started to realise benefits of backward integration via its carbon black plant (Phase I of 60,000 MT completed, Phase II of 80,000 MT to commence production in H1FY21), with the facility expected to structurally improve margin profile by around 125 to 130 bps, going forward.

Net net we expect a better margin picture ahead in FY21 backed by steady growth in topline growth from global markets in the coming year.

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