BKT announced a net profit of Rs. 306 crores in Q1 FY23.

In June 2022, net sales were Rs 2,619.43 crore, up 45.29% from Rs 1,802.87 crore in June 2021, and consolidated total income was Rs 2483.58 crore, up 15.04% from the previous quarter. The net profit was at Rs. 306.96 crores in June 2022, down 7.14% from Rs. 330.56 crores in June 2021. The company’s reported earnings before interest, taxes, depreciation, and amortisation (Ebitda) margins were down 550 basis points (bps) quarter-on-quarter (QoQ) and 910 bps year-on-year (YoY) to 20.1 percent.

BKT tyres are experiencing a sustained increase in demand.

Raw materials prices have remained at elevated levels during the current quarter. The raw material costs have come to 46.6% of sales in Q1FY23 as against 42.8% in Q1FY22 and 45.3% in Q4FY22. The management expects the ease in raw material prices to be visible from Q4FY23 onwards. It also expects relief in logistics towards the end of Q3 or early Q4. There is a continued and sustained uptick in demand for tires. However, in Q2, it is expected to have sluggish demand given macro challenges in Europe coupled with heat waves and inflationary trends in the USA. However, the management retained its sales volume guidance of 3.2-3.3 lakh tonnes for FY23.

Balkrishna Industries’ margin performance was the real constraint. Gross margin erosion was sharp at 150 bps QoQ, while other expenses (driven by higher freight costs) were up 210 bps QoQ. The management commentary suggests Q2FY23 will be weak amidst sluggish demand prospects in Europe and the US. BKT’s key product range comprises specialty tires, commonly known as “Off-Highway Tires” or OHT, that cater to agriculture, industrial, construction, earthmoving, mining, port, lawn and garden, and all-terrain vehicle tires. Besides, the company’s carbon black product is used captively and the balance is sold in the markets.

Tires are a highly technical and capital-intensive segment, also known as the “large variety, low volume segment.” The credible players are required to maintain a large number of stock-keeping units to meet the diverse needs of their customers globally and also provide prepared-and-sale customer service.

While agriculture is regarded as non-cyclical, the other sub-segment is considered cyclical. Their performance is closely tied to the global economic outlook. Europe, America, Australia, and India are the primary markets for the company’s tyre lines.

Valuations:

Balkrishna Ind EPS has decreased to Rs. 15.88 in June 2022 from Rs. 17.10 in June 2021. The stock P/E is valued at 29x, while the five-year P/E is at 24.9x. The return on capital employed is at 23.8% and the return on equity is at 21.9%. The EBITDA stood at 18.1x. The interest coverage ratio is at 201 and the return on assets is at 14.8%. The scrip was trading at Rs.2,122, up by 0.19% on Tuesday.