Balkrishna Industries, India’s largest maker of off-highway tyres, as its international customers are shying away from new purchases.
The revenue from tyres used in agricultural equipment accounted for about 60 per cent of the total income of the Mumbai-headquartered company, followed by 35 per cent from off-the-road (OTR) tyres used in mining activities. The company derives 80 per cent income from overseas markets dependent on agricultural and mining activities. This makes its earnings susceptible to the price movement of crops and commodities.
The volume in the December quarter fell by 6 per cent to 46,780 metric tonne (MT), the lowest in the past 12 quarters due to 12 per cent drop in the volume from the agricultural segment. The OTR volume grew by 7 per cent in the December quarter from 16 per cent in the past nine months.
The company’s management has maintained the volume guidance of 210,000-220,000 MT for the current fiscal year. At the lower end of the guidance, the volume growth will be flat in the fourth quarter of FY19.
The price trend in global agricultural prices such as soyabean and sugar in January and February remained weak and the trend is likely to continue. Lower metal prices would impact the capital expenditure of mining companies. Consequently, the annualised volume growth between FY19 and FY21is likely to be 6-7 per cent compared with the earlier estimate of 10-11 per cent growth.
The lower volume growth may affect the utilisation benefit as fixed cost per unite would increase. The capacity utilisation may fall to 80 per cent in FY21 from an earlier expectation of 88 per cent.
The company has retained the annual EBITDA margin (operating margin before depreciation) guidance of 28-30 per cent for FY19 and for the medium term. However, maintaining the margin profile amid slowing demand would be challenging.
Brokerage Nomura has cut its EBITDA margin forecast by 110-140 basis points for FY19-21 due to weaker operating leverage.
Given these factors, the company’s stock may not be able to maintain the premium valuation it used to enjoy historically. Its valuation premium over the peers has fallen gradually.
At Wednesday’s price of Rs 896.9, the stock was traded at 16.9 times the twelve-month projected earnings. This is 21 per cent higher than the average valuation of the three conventional tyres makers such as MRF, Apollo Tyres and CEAT. The premium was 39 per cent based on three-year average.