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Balkrishna Industries Q1FY23 Review: Disappoints with EBITDA margin at new low of 17.2%!


What's Buzzing:
Balkrishna Industries (BIL) posted a muted performance in Q1FY23. Historically lowest operating margin was key negative surprise for the current quarter.
Context:
Standalone net sales for the quarter were at Rs 2,646 crore, up 11.5% QoQ. Tyre volumes in Q1FY23 was up 7.8% QoQ at 83,153 tonne. EBITDA in Q1FY23 was at Rs 455.5 crore with corresponding EBITDA margins at 17.2% (down 380 bps QoQ). Gross margin decline for the quarter was ahead of estimates at ~150 bps QoQ while other expenses (driven by higher freight costs) were up ~210 bps QoQ, resulting in overall decline in margin trajectory. Consequent PAT for the quarter came in at Rs 319.7 crore, down 14% QoQ, aided by higher than anticipated other income.
Our Perspective:
Balkrishna Industries (BIL) is the market leader in the niche off-highway tyres (OHT) in export space, which is used primarily in agriculture (~66% of sales), mining and other allied activities. As of FY22, Europe and US combined form ~71% of sales, while India constitutes ~18% of sales, with replacement accounting for ~69% of channel mix with OEM share pegged at ~28%. BIL stands apart from the rest of domestic tyre peers in areas of capital efficiency, margins and strong b/s (net debt free). Its global cost leadership - a result of frugal engineering, backward integration and low manpower costs, helps the company exhibit hallmarks of anti-commodity behaviour i.e. consistent high double digit operating margins (~20%) & return ratios (~20%). However, the same is under challenge in the last few quarters due to unprecedented rise in key raw material prices (crude derivatives, natural rubber) as well as high ocean freight costs. Management commentary suggests Q2FY23 to be weak (QoQ decline) amid sluggish demand prospects in Europe and the US. It also expects high logistics costs to taper Q3FY23 onwards while RM costs is expected to provide some relief starting Q4FY23. It, however, retained its sales volume guidance of 3.2-3.3 lakh tonne for FY23. With an ambition to reach ~10% global market share in OHT segment in coming years vs. ~5-6% currently, amid impressive capex plan under execution and recent correction in crude prices, we expect the company to report healthy profitable growth, going forward, albeit with a lag.
Disclaimer – I ICICI Securities Ltd. ( I-Sec). Registered office of I-Sec is at ICICI Securities Ltd. - ICICI Venture House, Appasaheb Marathe Marg, Prabhadevi, Mumbai - 400 025, India, Tel No : 022 - 6807 7100. I-Sec is acting as a distributor to solicit bond related products. All disputes with respect to the distribution activity, would not have access to Exchange investor redressal forum or Arbitration mechanism. The contents herein above shall not be considered as an invitation or persuasion to trade or invest. I-Sec and affiliates accept no liabilities for any loss or damage of any kind arising out of any actions taken in reliance thereon. Investments in securities market are subject to market risks, read all the related documents carefully before investing. The contents herein mentioned are solely for informational and educational purpose.
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