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Management has guided for flattish YoY tonnage in 4QFY24

-      Balkrishna Industries (BIL)’s 3QFY24 operating performance was operationally in line, while unrealized Fx loss of INR520m led to Adj PAT miss at INR3.1b (vs. est. INR3.5b). The management has guided for flattish tonnage growth YoY for 4QFY24, followed by an increase in freight cost, due to the ongoing supply chain crisis in Red sea.

-      To factor in for the same, we cut FY24E EPS by 5%, while we largely maintain FY25E EPS. We reiterate our Neutral rating with a TP of INR2,360 (premised on ~22x Dec’25E EPS).

Unrealized FX loss dents PAT

-      BIL’s 3QFY24 revenue/EBITDA/PAT declined 4.5%/39%/2.1x YoY to INR23.2b/INR5.9b/INR3.1b (vs. est. INR23.3b/INR5.7b/INR3.55b). 9MFY24 revenue declined 14% YoY, but EBITDA/adj.PAT grew 6%/16% YoY.

-      Volumes grew 9% YoY (3% QoQ) to 72.75k tons (in line) with end-markets stable and showing gradual improvement. Realizations declined 4.5% YoY at INR318.3k/unit (vs. est. INR319.1k).

-      Gross margins expanded 3.4pp YoY (up 10bp QoQ) to 52% (vs. est.51.8%). EBIDTA margin improved 6.2pp YoY to 25.3%, due to lower cost pressures.

-      An unrealized Fx loss of INR520m has significantly impacted the overall performance.

-      Further, despite higher interest costs, unrealized FX losses were partially offset by higher ‘other income’, which led to adj. PAT growing 2.1x YoY to INR3.1b (vs. est. INR3.55b).

-      The board has declared the third interim dividend of INR4/share for FY24 (Total FY24YTD dividend=INR12/share).

Highlights from the management commentary

-      Retail demand outlook improving: With the demand slowly picking up, the company did not undertake any price hikes. Both India and EU markets remained stable. While the Indian market continues to grow, the company does not expect the business share from India to surpass the current levels of 30%. This expectation is rooted in the belief that as the overall market picks up, economies across the board would perform well, thereby maintaining a similar contribution from various regions.

-      Ongoing geopolitical tension to dent performance in the near term: Due to the red sea crisis and geopolitical issues, 4Q volumes would be flat on a YoY/QoQ basis. This would have an adverse impact on the margins in the near term. Retail demand at the end markets remain stable and show gradual improvement.

-      RM prices to remain stable: Softness in crude oil prices was offset by pickup in natural rubber prices, and hence, do not expect any major effect on the gross margins.

-      Carbon black sales: 9MFY24 carbon black sales were 7.5% of the total revenues. This is expected to scale up to 8-9% in FY25. The current BIL capacity for carbon black stands at 170k tons, which is expected to reach 200k tons. Capacity utilization stands at `~85-90%.

Valuation and view

-      Retail demand in key global markets is currently on an upswing, and the demand in India continues to remain positive. However, ongoing geopolitical tensions have again disrupted the sea route supply chain. While this is currently at an initial stage, any escalation could potentially further delay the recovery for BIL. Despite these challenges, we expect BIL’s outperformance to the Specialty Tyre industry to persist. This is driven by the expansion of its product portfolio and the ramp-up in the OTR segment, providing opportunities to strengthen its competitive positioning.

-      Current valuations fairly reflect its industry-leading margin, FCF, and capital efficiencies. It currently trades at a P/E multiple of 37.2x/27.5x FY24E/FY25E EPS. We reiterate our Neutral stance on the stock.

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