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Beat in earnings amid gradual overall recovery

Balkrishna Industries’ (BIL) Q4FY23 EBITDA margin at 20.3% was in line with our estimate and up 420bps QoQ, driven by gradual decline in the cost of consumed raw material basket (RMB) and relatively lower-priced freight contracts. BIL is aiming at 200-300bps EBITDAM improvement in FY24 over current levels –on the back of lower RMB cost, better hedge rate and further normalisation of logistics cost. Post a couple of quarters of inventory destocking at dealer level, BIL is looking forward to one more quarter of the destocking exercise, thus restricting volume growth in Q1FY24 over the elevated base of last year. We are building-in ~5% volume growth in FY24E for BIL. Over Company’s current market share in global OHT market at ~5-6%, BIL is confident of taking it up to ~10% in next 4-5 years driven by: 1) cost arbitrage, 2) good product quality, and 3) continued investment towards brand-building. Management expects capex for FY24 to be ~Rs5.5bn-6bn, with ~Rs2.5bn-3bn for maintenance and rest for new product development (such as giant solid tyres). We are building-in sales volume of 316k/354k tonnes for FY24E/FY25E with EBITDAM of 22%/24.5% respectively. We downgrade BIL to ADD (from Buy) with a revised DCF-based target price of Rs2,468 (earlier: Rs2,446), implying 25x FY25E EPS, as the 9% rally in last 1 month has reduced the upside potential.

Q4FY23 conference call key takeaways and our views:

* Wholesale volume increased by 9% QoQ aided by improving retails and seasonality even after absorbing partial destocking at dealer level. This is the second successive quarter of dealer-level inventory reduction, and BIL expects it to be over by Q1FY24-end and wholesale volume growth to resume from Q2FY24. Realisation/kg remained steady QoQ at Rs320 and the company expects further correction towards Rs310/kg driven by passing-on of reduction in pass-through cost items. EUR/INR hedge rate for FY23 was at 85.3 and Q4FY23 at 86.5, and the average rate for FY24 is at ~88-89. With Waluj capex being completed and the new plant there being ready for production, BIL is now sitting on a peak capacity of 360k tonnes/year as against FY23 volume of ~301k tonnes. BIL’s market share in global OHT is at ~5-6% currently as per the management and they are targeting to take it towards ~10% in next 4-5 years with focus on brand-building and marketing campaigns. In India OHT market, BIL’s share is currently at ~3%. We are factoring-in 5%/12% volume growth in FY24E/FY25E and a long-term volume CAGR of 9%.

* In terms of profitability, BIL is aiming at ~200-300bps superior margin over current levels in FY24 with the improvement to be driven by favourable moves in raw material cost, logistics cost and currency rates on one side, against subdued operating leverage benefits and elevated branding/marketing spends on the other. BIL is expecting bulk of the margin improvement in FY24 to come in H2 as the high-cost raw material inventory gets fully consumed and dealer inventory destocking gets completed in H1. With raw material basket cost likely to further decline 2% QoQ, BIL is looking forward to ~50- 100bps gross margin improvement in the coming quarters. Capex planned for FY24 is at ~Rs6bn, 40% of which would be towards maintenance and rest for product development. Gross debt at FY23-end was at ~Rs32bn and BIL is looking forward to gradually reduce it by using the FCF generated in coming years – while keeping cash of Rs20bn as war chest for next mega capex plan of any worthwhile M&A, if at all.

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