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Demand recovery in 2HFY24; EBITDA margin target of 26-28%

We visited Balkrishna Industries’s (BIL) Bhuj plant, which is the largest single location off-highway tyre plant in the world. Built on over 450 acres of land, the plant has 200k ton capacity (of BIL’s total 360k ton), along with 200k-ton carbon black capacity and captive power generation. It has scope to further expand the capacity by another 100k-150k ton and to be the key driver in helping BIL gain 10% global market share in the next 3-4 years. While near-term demand challenges persist, the management expects recovery in 2HFY24. It has maintained the long-term EBITDA margin target of 26-28%. Here are the key takeaways from the plant visit and the management meet:

* Outlook: The end markets remain challenging, and there are liquidityrelated issues. However, retail demand is holding up so far. Inventory has reduced to 70 days and may decline further (normal level of 45-60 days). While 1HFY24 would have base effect, the management is hopeful of recovery in 2HFY24. 

* Vision of 10% market share globally in 3-4 years: BIL aims to gain a 10% share of the global off-highway tyre industry in the next 3-4 years (vs. 5%-6% currently) by expanding its geographical footprint and product range. This aspiration is based on expectations of 3-5% market growth for the underlying market. It sees good scope to increase market share in the OTR segment (non-agri) and in markets like the US, Eastern EU, etc. BIL is also targeting new products like rubber tracks (under validation) used in farm equipment. It will continue to invest in building brand across markets through sponsorship for sports.

* OTR – targets 50% revenue: For BIL, the agri tyre business is much bigger than OTR as it started with the agri segment. However, the OTR market is bigger than Agri in terms of volume and value. BIL expects to increase OTR’s revenue share to 50% (from 34% in FY23). The OTR market is broad-based across the US, East EU, LatAm, Africa, Asia and Australia.

* Scope to add 100k-150k ton capacity at Bhuj: BIL’s Bhuj plant has scope to add 100k-150k ton capacity based on the existing land as well as some addition. It also has some upstream equipment available. The next 100-150k ton capacity expansion would be only through the brownfield route. BIL is waiting for markets to recover before embarking on the next phase of capacity expansion. It takes 12-15 months to construct a brownfield plant. It is not looking to put any plants in the off-shore location and plans to serve customer there through distributors.

* EBITDA margin target of 26-28% in the long term: The management expects long-term sustainable EBITDA margins at 26-28% (vs. 19.6% in FY23). It expects the OTR segment’s margin to be higher than the agri segment’s margin by 1-2pp, though it will have to invest in the ramp-up. Also, the ramp-up in OEMs is not expected to be dilutive as margins are similar. The management expects margins to recover in 2HFY24 and realizations to stabilize at ~INR300/Kg vs. INR334/kg in FY23), as it would pass on some of the commodity cost reduction. 1,800 2,100 2,400 2,700 3,000 Jul-22 Sep-22 Nov-22 Jan-23 Mar-23 May-23 Jul-23 Balkrishna Inds Nifty - Rebased 9 July 2023 Company Update | Sector: Automobiles Balkrishna Industries Motilal Oswal values your support in the Asiamoney Brokers Poll 2023 for India Research, Sales, Corporate Access and Trading team. We request your ballot. 10 July 2023 9

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