Balkrishna Industries skids 6% on disappointing margin performance in Q1

The management commentary suggests Q2FY23 to be weak (QoQ decline) due to sluggish demand prospects in Europe and US.

Shares of Balkrishna Industries dropped 6 per cent to Rs 2,190 on the BSE in Friday’s intra-day trade. The stock extended its two day decline after the company reported disappointing margin performance, due to higher raw material prices, for the quarter ended June 2022 (Q1FY23).

In the past three trading days, the stock of tyres & rubber products company slipped 10 per cent. In comparison, the S&P BSE Sensex was up 0.37 per cent at 58,515 points at 09:43 am.

In Q1FY23, the company’s reported standalone earnings before interest, taxes, depreciation, and amortization (Ebitda) margins down 550 basis points (bps) quarter-on-quarter (QoQ) and 910 bps year-on-year (YoY) to 20.1 per cent.

The raw material prices have remained at elevated levels during the current quarter. Raw material costs have come at 46.6 per cent of sales in Q1FY23 as against 42.8 per cent in Q1FY22 and 45.3 per cent in Q4FY22. The management expects relief in raw material prices to be visible from Q4FY23 onwards. It also expects relief in logistics costs towards the end of Q3 or early Q4.

“We continue to see sustained uptick in demand for BKT tires. However, in Q2, we expect sluggish demand given macro challenges in Europe coupled with heat waves and inflationary trends in USA,” Balkrishna Industries said. However, the management retained its sales volume guidance of 3.2-3.3 lakh tonne for FY23.

Meanwhile, the company’s standalone revenues for the quarter stood at Rs 2,646 crore, up 11.5 per cent QoQ amidst 7.8 per cent QoQ growth in volumes. Revenues grew 21 per cent YoY from Rs 1,813 crore in Q1FY22. Profit after tax, however, was down 14 per cent QoQ and 3 per cent YoY at Rs 320 crore.

“Balkrishna Industries’ margin performance was the real damper, Gross margin erosion was sharp at ~150 bps QoQ while other expenses (driven by higher freight costs) were up ~210 bps QoQ. The management commentary suggests Q2FY23 to be weak (QoQ decline) amidst sluggish demand prospects in Europe and US,” ICICI Securities said in a note.

BKT’s key product range comprises specialty tires, commonly known as ‘Off-Highway Tires’ or OHT that cater to agriculture, industrial, construction, earthmoving, mining, port, lawn and garden and all-terrain vehicle tires. Besides, the company’s carbon black product is utilised captively and balance is sold in the markets.

Tires are a highly technical and capital intensive segment, also known as the “large varieties low volume segment." Credible players are required to maintain a large number of Stock Keeping Units (SKUs) to meet the diverse needs of its customers globally and also provide preand post-sale customer service.

While agriculture is regarded non-cyclical, the other sub-segment (industrial, construction, and mining) is considered cyclical. Their performance is closely tied to the global economic outlook. Europe, America, Australasia, and India are the primary markets for the company’s tire line.