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India’s OHT exports on gradual recovery path

Post stocking up of off-highway tyre (OHT) inventory at distributor level in endmarkets between Mar-Jul’22, India’s OHT exports from Aug’22 were muted as a result of destocking amid improving container availability. OHT exports from the country bottomed out in Oct’22 at ~US$130mn vs Mar-Jul’22 average of ~US$170mn and recovered to a 5-month high of US$152mn in Dec’22. For Balkrishna Industries (BIL), as against its long-term average share of India’s OHT exports at ~50%, it expanded to ~59% in H1FY23, likely driven by excess stocking at the dealer level. Company’s OHT exports then saw a sharp reversal in Q3FY23 with mean reversion in inventory levels taking the share down to ~40%. We believe Q3FY23 was an outlier quarter in terms of volume/share as BIL had to undergo aggressive destocking. Dec’22 OHT exports were up 6% MoM driven by improvement in agri OHT segment, though down 9% YoY. India’s OHT exports in 9MFY23 were up ~8% with the ~15% decline in the EU getting balanced by growth in US and RoW. We are building-in 8%/10% volume growth for BIL in FY24E/FY25E with EBITDAM at 24.5%/26.5%, respectively. Maintain BUY with a DCF-based target price of Rs2,378, implying 23x FY25E EPS.

* India’s OHT exports gradually reviving from Oct’22 lows: From the low of US$130mn in Oct’22, India’s OHT exports revived to US$152mn in Dec’22, with bulk of the revival being driven by the agri segment tyres. Though December is a seasonally strong month for OHT exports, we believe the Dec’22 figure included a 7- 8% deflationary impact of declining RMB and container rates. Though the destocking exercise is likely to persist for another quarter, we believe industry volumes bottomed out in Oct’22 itself and are set to gradually improve amid steady demand. We expect H1FY24 to be impacted by: 1) the elevated base of H1FY23, 2) the deflationary effect on realisation, and 2) recessionary fears in key markets (which would depress OTR demand).

* BIL’s share of India’s OHT tyre exports falls to 40% in Q3FY23 due to aggressive destocking at dealer-end: As against preceding 3-year average share of India OHT exports for BIL at 50%, in H1FY23 it moved up to ~60% led by ~10% higher-than-normal offtake by distributors to stock up amidst fears of container availability crisis getting prolonged. These fears existed in both the key markets (EU and US). With the container crisis easing off Aug-Sep’22 onwards and demand holding steady, BIL distributors (in order to reduce stocks by a third) started aggressive destocking. We believe, against a normative demand of ~74-75kt a quarter, BIL’s sales volumes were inflated by ~15kt in Q4FY21-Q2FY23 period. This was followed by an ~8kt inventory cleansing in Q3FY23, resulting in brisk mean reversion in BIL’s share of India’s OHT exports to 40% from 60% within a quarter. We expect volumes at sub-70kt in Q4FY23E too, resulting in ~3% growth in BIL’s FY23E volume. We expect BIL’s revenue share within India OHT exports to return to ~50% levels in a couple of quarters, post full reversing of the inventory situation at distributor-end to steady-state

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