Why Balkrishna Industries Share Price is Falling

Editor's note: After experiencing a remarkable 20% rally in the past three months (from 27 March 2023 to 27 May 2023), Balkrishna Industries, a leading off-highway tyre maker, has encountered a setback.

On Monday, 29 May 2023, the company's stock plummeted by over 7%.

This decline can be attributed to the dismal performance of the company in the March 2023 quarter, driven by fears of a global recession. As a result, the company's performance in various international markets has been negatively impacted.

For the March 2023 quarter, the company reported a 2.4% YoY fall in revenue to Rs 23.2 bn on the back of a 6% decline in sales volume due to subdued international demand and challenges in the channel inventory.

This was against the revenue of Rs 23.7 bn reported in the same quarter last year.

Net profit for the quarter declined by 30.7% YoY to RRs 2.6 bn against Rs 3.7 bn in the corresponding quarter last year.

Earlier this year, in February 2023, a similar movement was seen in the share price of Balkrishna Industries. Back then, we covered a detailed editorial explaining the reasons why its share price was falling and what lies ahead.

A lot has changed since then. Continue reading to know more...

Why Balkrishna Industries Shares is Falling

Share price of Balkrishna Industries, one of the leading off-highway tyre manufacturers, is reeling under pressure these days.

The Adani stocks selloff has not spared even the fundamentally strong stocks as Balkrishna Industries, a leading player in its industry, has witnessed a decent correction.

On Monday this week, the stock slumped 11% in a single day, hitting its nine-week lows.

Note that the tyre stock was on a roll in calendar year 2022, when its shares gained 20%.

This was due to softening prices of natural rubber and crude derivatives, improving the sector's margin prospects.

This uptrend gained further momentum in January 2023 after prices of crude oil and rubber, both key raw material components for tyre companies, fell to a multi-year low. Crude oil prices slipped 10%, while natural rubber prices have fallen 24%.

However, Balkrishna Industries share price has hit a roadblock.

Let's find out why.

Muted Q3 earnings

For the December 2022 quarter, the company reported a 6% YoY (year-on-year) rise in revenue at Rs 21.6 billion (bn). It had clocked a revenue of Rs 20.4 bn in the same quarter last year.

However, the major concern that dampened the market sentiment today was the company's net profit. The off-highway tyre maker logged a 68% YoY fall in net profit to Rs 1.1 bn on the back of elevated interest costs and unrealized forex loss.

The company had reported a profit of Rs 3.3 bn profit a year back.

Also, with Balkrishna experiencing channel inventory clearance in its end market, its volumes declined 5.5% YoY and 16% sequentially to 66,480 tons.

The total expense also jumped 20% YoY to Rs 20.4 bn in the quarter. Raw material cost stood at Rs 10.8 bn, up 8.81% YoY, while finance cost was Rs 136 m, up 659.8% YoY during the period under review.

Another disappointment was its muted operating performance. EBITDA (Earnings Before Interest, Taxes, Depreciation, and Amortization) fell 17% YoY to Rs 4.2 bn.

The EBITDA margin of the company also slipped to 19.1% against 24.4% a year back.

Over the last few months, the correction in freight cost has led to an improvement in margins, which now stand lower at around 9% of sales in the quarter.

But even after the correction in freight cost, one aspect which impacted margins negatively and almost negated the impact of freight costs was raw material costs.

While raw material prices have corrected, Balkrishna Industries was not able to fully enjoy the benefits due to the high-cost raw material inventory in the system.

What next?

The company is planning to spend Rs 14.5 bn on expanding its tyre manufacturing capacity, carbon black capacity, and modernizing and automating its older plants. This expansion will fuel the future growth of the company.

The commercialization of all plants will begin during the upcoming year 2024.

Also, lower raw material and freight costs, better hedge rate, and better end market situation are likely to benefit the company's margins in financial year 2024.

In addition to these falling costs, the company also has a competitive advantage over its peers in terms of cost that would further aid the margins.

The company's manufacturing base in India provides a significant cost advantage over its international peers, as employee costs are 6-7% of its revenue, whereas, for others, they are 26-28% of revenue.

As per Commerce Ministry data, the company is also consistently outperforming industry exports on a YoY basis and has finally breached 60% market share in the first two quarters of the financial year 2023, up from an average of 50% share over the past three years.

Furthermore, the industry outlook stands strong with rising growth in demand.

Besides, a huge export opportunity is knocking at the doors of the Indian tyre industry. Several factors are at play in its favor.

The faster recovery from the pandemic, stringent anti-dumping duties, and China plus one market policy of many countries are prominent among them.

How shares of Balkrishna Industries have performed recently

Balkrishna Industries share price is down 9.5% in the past five days, while over the past one month, the stock is trading down by 8%.

Over the year gone by, shares of the company have declined by 2%.

Balkrishna Industries touched its 52-week high of Rs 2,450 on 8 February 2022 and its 52-week low of Rs 1,690 on 7 March 2023.

It is currently trading at a PE (Price to Earnings) multiple of 36.7x, with the industry PE ratio being 5.8x.

About Balkrishna Industries

Balkrishna Industries is engaged in the business of manufacturing and selling of Off-Highway Tyres (OHT) in the specialist segments such as agricultural industrial and construction, earthmovers & port mining forestry, lawn and garden, and All-Terrain Vehicles (ATV).

The company has a worldwide distribution network ensuring extensive reach and penetration. The company derives majority of its revenue from exports.

Balkrishna Industries has five state-of-the-art production sites in Aurangabad, Bhiwadi, Chopanki, Dombivali, and Bhuj.

The company sells its products in 130 countries worldwide through a network of national distributors.

For more details about the company, you can have a look at Balkrishna Industries factsheet and quarterly results on our website.

You can also compare Balkrishna Industries with its peers.

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And to know what's moving the Indian stock markets today, check out the most recent share market updates here.

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