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Sequential improvement in overall performance

Capex guidance at INR9b for FY24 (vs. INR6b earlier) 

* Balkrishna Industries (BIL)’s 2QFY24 operating performance beat our estimates, as it saw a healthy sequential recovery in overall business, mainly in India. Export markets remain uncertain, but 2H is expected to better than 1H. FY24 volumes are likely to decline.

* We raise our FY24E/FY25E EPS by 3%/2% to factor in favorable FX and better realization. Maintain Neutral with a TP of INR2,500 (premised on ~22x Dec’25E EPS).

Realization improvement due to better mix and hedge rate

* BIL’s 2QFY24 revenue/EBITDA/PAT declined 20%/3%/17% YoY to INR22.5b/INR5.5b/INR3.35b. 1HFY24 revenue/EBITDA/adj. PAT fell 21%/7%/11% YoY.

* Volumes declined 10.5% YoY (up 5% QoQ) to 70.6k tons (in line). The sequential volume improvement was partly led by inventory created in Jun’23, which could not be shipped due to Biparjoy disruptions.

* Realization declined 10.5% YoY (flat QoQ) to INR318.3k/unit (est. INR311.5k), led by a better mix and hedge rate.

* Revenue was down 20% YoY at INR22.5b (est. INR21.6b).

* Gross margins expanded 70bp YoY/20bp QoQ to 51.9% (in line). The RM cycle normalized in 2Q, leading to margin improvement.

* EBIDTA margin rose 430bp YoY to 24.4% due to low RM costs and low other expenses, including freight costs (-5pp YoY as % of sales).

* Despite FX gains and higher-than-expected other income, adj. PAT declined 17% YoY to INR3.35b (est. INR3b).

* The board has declared the second interim dividend of INR4/share for FY24 (total dividend of INR8/share so far in FY24).

* FCFF for 1HFY24 stood at INR6.3b (vs. outflow of INR4.4b in 1HFY23), led by improved operating cash flows of INR12.2b (vs. INR4.5b in 1HFY23) and lower capex of INR5.9b (vs. INR8.9b for 1HFY23).

Highlights from the management commentary

* Outlook: BIL expects to sustain a stable trajectory, with 2HFY24 to be better. However it expects a slight decline in volumes in FY24.

* EBITDA margin guidance remains unchanged at 26-28% (vs. ~24.4% in 2Q). With an uptick in natural rubber/oil prices, RM costs may rise.

* Capex guidance of INR9b in FY24 (vs. INR6b earlier): BIL plans to set up a brownfield mould manufacturing facility at its Bhuj plant, given growth prospects there. It presently makes moulds at Dombivali. Mould capacity will be utilized for SKUs of large tyres for agri/OTR purposes. It may do some small brownfield expansions at the Bhuj plant, but it is yet to be finalized. BIL has spent ~INR6b of its INR9b capex in 1HFY24. Maintenance capex would be INR2.5-3b in FY24. 

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