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Operationally better Q2; Demand headwinds to persist

Increased capex guidance to INR8-10b for FY25 from INR6-7b earlier

* Balkrishna Industries (BIL)’s 2QFY25 was operationally better than expected with EBITDA of INR6.2b (+13% YoY, est. INR5.9b), led by better ASP and lower promotional expenses. However, Adj. PAT was in line. Weak demand in its key markets (ex India) remains the key cause of concern going forward even as margins are likely to stabilize at current levels for H2.

* Our earnings estimate remains unchanged. Most of the positives seem priced in at current valuations. We maintain our Neutral rating with a TP of INR2,890, based on ~24x Sep’26E EPS.

Demand-related challenges to sustain globally except in India

* BIL’s standalone 2QFY25 revenue/EBITDA/PAT grew 10%/13%/4% YoY to INR24.65b/INR6.2b/INR3.5b (est. INR24.6b/INR5.9b/INR3.65b). 1HFY25 revenues /EBITDA/adj. PAT grew 19%/29%/28% YoY. For 2HFY25, we expect the same to grow 4%/1%/-1% YoY.

* Volumes grew 4% YoY to 73.3k tons (in-line). Realizations grew 6% YoY at INR336.3k/unit (est. INR329k), led by a favorable product mix and hedge rates.

* Gross margins expanded 60bp YoY (-60 QoQ) to 52.5% (est.52.6%). Impact of increase in RM costs by 3-4% impact in 2QFY25 was more than offset by improved mix and better hedge rate.

* EBIDTA margin expanded 70 bp YoY to 25.1% (est.23.9%). Lower other expenses (w/o freight costs) aided margin expansion. Other expenses were down QoQ as IPL-related promotional expenses were included in Q1.

* Further, unrealized FX loss, combined with higher than est. interest costs, was offset by higher other income, which led to adj. PAT growth of 4% YoY to INR3.5b (est. INR3.65b).

* 1HFY25 FCF halved to INR3.2b from 1HFY24 levels. This was mainly due to the weaker operating cash flow of INR8.6b (INR12.2b in 1HFY24). Capex stood at INR5.4b, similar to previous year levels.

* Gross debt as of Sep’24 stood at INR30.6b with cash and cash equivalents of INR29.94b, resulting in a net debt of INR0.68b.

* The Board declared a second interim dividend of INR4 per share, bringing the cumulative 1H dividend to INR8 per share.

Highlights from the management commentary

* Demand outlook: Expect minor volume growth in FY25. Persistent headwinds, including recessionary pressures in the US, elevated sea freight, and geopolitical challenges, continue to impact operational performance. Demand in international markets remain weak, while the same in India is healthy.

* EBITDA margin for H2 is expected to be ~25%, close to 2QFY25 level. RM costs had a 3-4% impact in 2QFY25. While they have not taken any price hike in Q2, they took a 1-2% price increase in Q3. this is expected to help offset the RM cost pressure in 3Q.

* Freight costs: Freight costs in 3Q are likely to slightly decline QoQ.

* Increased capex guidance: The company has increased its capex guidance to INR8-10b for FY25 vs. INR6-7b earlier. For 1HFY25, the company spent INR5.4b.

Valuation and view

* The retail demand in key global markets is currently weak and likely to remain uncertain due to ongoing geopolitical challenges. As a result, despite strong growth in 1QFY25, the management has guided for flat volume growth for FY25. Further, rising cost pressures are likely to cap margin upside – management expects margins to remain stable in the coming quarters.

* At a P/E multiple of 34x/26x FY25E/FY26E EPS, most of the positives seem priced in. We value BIL at 24x Sep’26E EPS (vs ~22x, 10-year LPA) to arrive at our TP of INR2,890. We reiterate our Neutral stance on the stock.

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