Balkrishna Industries Ltd Q3 FY2024 Concall Summary

Key Takeaways

• Volume-led quarter, freight clouds Q4: Volume grew 9% YoY on market share gains, but the Red Sea crisis is expected to make Q4 volumes flattish YoY and pressure margins in the near term.
• Europe is stabilising, not yet recovering: Europe’s share of sales returned to 49% and demand is described as stable with an improving trend, though management is cautious about calling a durable recovery.
• Raw material tailwind is cancelled out: Any benefit from softer crude is being offset by rising natural rubber prices, so the net raw material cost outlook is neutral.
• Freight cost pass-through will lag: Management is trying to pass on higher freight costs but warns it will not be immediate; if the disruption persists, full pass-through could take up to two quarters from when they start.
• What to watch next quarter: Whether the Red Sea disruption proves short-term as management hopes, the pace of freight cost pass-through, and any volume recovery signal for FY25.

Volume & Demand Environment

• Q3 volume driver: The 9% YoY volume growth came from market share gains rather than a broad demand recovery.
• Q4 volume headwind: Volumes are expected to be flattish YoY because the Red Sea crisis and resulting freight issues, which began in late December/early January, are causing delivery schedule delays.
• Demand trajectory: Demand was picking up towards the end of the calendar year and that trend continues; management characterises the outlook as stable to gradually improving.
• Recovery caution: Any improvement depends on how the Red Sea and shipping situation evolves. Management declined to forecast whether FY25 will follow the historical pattern of a strong recovery after a volume-decline year, citing the backdrop of two ongoing wars and geopolitical tension.

Poddar: "It's too early to say. Please remember, we are sitting on the backdrop of two ongoing wars with a lot of geopolitical tension. And also, we don't know how that will play out."

Freight Disruption & Margin Impact

• The Red Sea shock: Freight issues starting in late December/early January are creating delivery delays that will make Q4 volumes flattish YoY and produce a short-term margin impact.
• Pass-through mechanics: The company is trying to pass on freight cost increases to customers, but the process will not be immediate. If the situation continues, management intends to pass on the whole increase, though that will take time.
• Pass-through timeline: If the disruption plays out longer, full pass-through could take up to two quarters from the point they begin passing it on.
• Magnitude undisclosed: Management declined to quantify the freight rate increase when asked whether rates had gone to 2x, 3x or 4x, and said they are still evaluating the exact margin impact.
• Duration assumption: Management’s working assumption, based on what they are hearing, is that the disruption will be short-term, though they acknowledged they cannot predict how geopolitical scenarios will play out.

Poddar: "We are trying to pass it on. It will not be passed on immediately. We are also waiting and watching, so we are passing on some. We are trying to pass on some bits over the period. And if this situation continues, we will end up passing the whole thing, but that will take time."

Margins & Costs

• Q3 margin: EBITDA margin came in at 25.4%, a marginal improvement driven by operating leverage from higher volumes and cost rationalisation efforts.
• Operating leverage: Enhanced production volumes led to operating efficiencies that supported margins.
• Cost rationalisation: Operating costs came down due to multiple factors including cost rationalisation and lower freight costs, though the latter benefit is now reversing.
• Raw material outlook neutral: No net benefit is expected from crude price softening because natural rubber prices are increasing, which will offset any decrease in crude-linked inputs.
• Interest cost spike: The increase in interest cost was partly related to negative mark-to-market on long-term euro borrowings, reflecting the comparison between September and December exchange rate levels.
• Marketing spend steady: Marketing expenses are expected to continue at current levels.

Regional & Segment Mix

• Europe: Share of sales returned to 49% in Q3. Demand is stable with a trend towards improving, and the company says it is geared to capture the European market as and when it starts returning.
• India: India now accounts for close to 30% of sales. Management expects good growth rates to continue, though India’s share may stabilise at current levels as other markets pick up.
• OTR segment: Management sees good potential in the OTR (off-the-road) tyre segment and is focusing on picking up this market, though no timeline was given.
• Brazil: No intention to set up a manufacturing plant in Brazil; the market is being serviced through the existing distribution network.
• Competitive intensity: Management characterised competitive intensity in both European and Indian markets as having only marginal differences, with nothing major to call out.

Strategic Projects & Capex

• Capex status: All previously announced capex is completed apart from the mould manufacturing facility and the advanced carbon black project, both of which are progressing on schedule.
• Mould manufacturing facility: On schedule and will have no revenue impact. The benefit is purely qualitative: better access to make moulds and keep designs intact, which improves quality control.
• Advanced carbon black (30,000 MTP): On track for the previously stated completion date. Once operational, carbon black’s revenue share is expected to rise from the current 7.5% to 8-9% next year.
• Market share ambition: The company is working towards its target of 10% global market share, up from the current 5-6%, and believes this should be possible in the next few years.

Poddar: "So, our market share, as I mentioned, was about -- just over 5% globally. And yes, we are -- it's between 5% and 6%. And we are working towards hitting our target of 10% and should be possible in the next few years."

Guidance & Commitments

Key Metrics