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.