Balkrishna Industries Ltd Q3 FY2023 Concall Summary

Key Takeaways

• Destocking hit volumes, but end-demand intact: Q3 volumes of 66,480 metric tons were depressed by channel inventory clearance, not by weakening retail demand; management says dealers are still selling what they were selling before.
• Freight tailwind largely offset by RM headwind: Freight costs fell to ~9% of sales from ~14% in Q2, but high-cost raw material inventory almost negated the benefit, leaving margins flat.
• At least 300 bps EBITDA gain promised for FY24: Management committed to a meaningful margin recovery next year, driven by lower RM and freight costs and better hedge rates.
• Capacity expansion on track, with more being evaluated: The advanced Carbon Black project and Waluj brownfield expansion will lift achievable capacity back to 360,000 MTPA by H1 FY24; land acquisitions near Bhuj are being evaluated for further growth.
• What to watch next quarter: Whether the month-on-month easing of destocking translates into a volume uptick, the pace of RM inventory normalization toward April, and any firm decision on the next phase of capacity expansion.

Volume & Channel Dynamics

• Destocking, not demand destruction: The 66,480-ton quarter was driven by dealers drawing down inventory built up during COVID, when they held extra stock to hedge against supply disruption and rising raw material prices. Lower RM prices and improved container availability have since shortened reorder cycles.
• Overstocking inflated prior quarters: In the March, June and September quarters, roughly 5% to 10% of volumes were inflated by dealer overstocking, per management.
• Intensity is receding: The destocking pressure is easing month-to-month, though challenges persist into Q4.
• Dealer inventory normalized: Dealer inventory has come down to roughly 2.5 months from elevated COVID-era levels, partly because dealers lacked space to hold extra tyres and were anticipating raw material price declines.
• End-market demand holding: Management's read from dealers is that retail sell-through remains steady; the volume decline is a channel phenomenon, not a consumption one.

Bajaj: "So what we understand from our dealers is, they are able to sell what they were selling earlier. So that is why we are telling end-to-end market demand is intact."

Regional & Segment Performance

• Market share stable: Management stated the company has not lost market share, and the discount versus larger peers narrowed to 11% to 13% from the typical 12% to 15% in recent quarters.
• No Chinese import threat yet: No trend seen of Chinese tyres returning to the European replacement market post-China reopening. Management believes it can retain gains made when Russian and Chinese supply was absent and European competitors faced higher energy costs.

Margins: Freight Help, RM Hurt

• Freight cost correction: Freight costs fell to ~9% of sales in Q3 from ~14% in Q2. Further benefit is expected in Q4, with the full impact landing in Q1 FY24. The freight surcharge to end customers was withdrawn from 1st January for most regions, now at zero, and the ASP decline is entirely attributable to this surcharge reduction, not product mix changes.
• RM cost headwind: Raw material costs negatively impacted margins and almost negated the freight benefit. While RM prices have corrected, the benefit could not flow through because of high-cost RM sitting in inventory at 60 to 65 days versus an ideal 45 days.
• Fixed cost absorption: Lower volumes led to weaker absorption of fixed costs relative to expectations built in at the start of the fiscal year.
• Other expenses: Sequentially higher ex-freight other expenses included minor promotional activities and a net forex loss of INR 88 crores.
• Unrealized forex loss: A sharp ~10% rise in the euro during Q3 triggered an M2M unrealized loss of INR 166 crores on borrowings (working capital and long-term debt). If the euro stays at ₹88 over the next six months, the provision would not be written back.
• RM normalization timeline: RM inventory reduction is expected in the coming quarter, with normal pricing expected from April onwards.

Rajiv Poddar: "Lower raw materials and freight costs, better hedge rates, better end market situation give us ample hope of margin recovery in financial year '24."

Capacity & Capex

• Carbon Black + Power Plant: Completed; power achievable capacity now at 170,000 MTPA.
• Advanced Carbon Black project: 30,000 MTPA capacity, expected commissioning by end of Q4 FY23 or early Q1 FY24. Specialty Carbon Black markets identified; testing to be done, with ramp-up expected in about a year.
• Waluj brownfield: 25,000 MTPA addition commenced, expected completion in H1 FY24; post-completion, Waluj total capacity will be 55,000 MTPA.
• Achievable capacity: Set to return to 360,000 MTPA by end of H1 FY24.
• Next phase: Land acquisitions near Bhuj being evaluated for long-term capacity additions in tyres and Carbon Black; no firm decision yet.
• FY24 capex: Around INR 300 to 400 crores expected.
• Operating leverage in FY24: Management expects a double benefit: operating leverage if volumes recover, and no incremental rise in interest and depreciation.
• Bhuj plant automation: Full automation and modernization completed; customer feedback is positive because they are receiving a more consistent product.

Pricing & Competitive Positioning

• Surcharge eliminated: Freight surcharge on CIF contracts withdrawn from 1st January 2023, now at zero for most regions. The ASP decline in Q3 is entirely explained by this, with no change in product mix.
• No broader pricing pressure: Management sees no pricing pressure at the moment apart from the surcharge adjustments.
• Discount vs Tier 1 peers: The discount narrowed to 11% to 13% in recent quarters from the typical 12% to 15%. Management plans to take it back to the 12% to 15% range, reiterating that principal operating policies are not changing.
• Pricing vs western competitors: The gap versus Tier 1 competitors is being maintained because their costs, particularly power, have also risen.
• Market share aspiration: The company aims to grow from 5% to 6% market share to 10%, stating it is prepared and ready to reach those numbers.

Rajiv Poddar: "We have always indicated that we would be 12% to 15%. ... But again, I reiterate that our principal policies for operating the business are not changing. We would like to maintain all the same principles."

Treasury & Balance Sheet

• Treasury repositioning: Short-term parking investments are being slowly moved toward repayment and future capital expansion.
• Treasury policy: No-go zones include anything risky; focus remains on short-term paper, safe papers and government papers for good protection and good yield.
• Forex borrowings: The INR 166 crores unrealized forex loss is largely due to borrowings in the system, not working capital receivables or payables.

Guidance & Commitments

Key Metrics