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Balkrishna may keep premium valuation on improved margins

The measures undertaken by the company have helped it protect margins whenever demand has not been good.

, ET Bureau|
Last Updated: Feb 18, 2020, 08.03 AM IST
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Tyre
Besides, it is the only Indian company to manufacturer 49-inch tyres, which are gaining significant traction.
ET Intelligence Group: Improved profitability and recovery in sales volume in the December quarter is likely to help Balkrishna Industries, India’s largest off-highway tyremaker, to maintain premium valuation. After gaining nearly 73 per cent in the past six months, the stock trades at nearly 50 per cent premium to the conventional tyremakers. It gained nearly 10 per cent on Monday after beating analysts’ expectation by a wide margin.

The demand recovery for agriculture equipment and scope for higher share in overseas markets will drive earnings growth in the medium term. The company sells its product under the BKT brand and generates nearly 80 per cent of revenue from overseas markets by supplying tyres used in agricultural and mining operations.

The measures undertaken by the company have helped it protect margins whenever demand has not been good.

In the December quarter, operating margin before depreciation (Ebitda margin) expanded by 588 basis points to 31.2 per cent year-on-year even though realisation per kg fell by 2.3 per cent since the company passed on the lower raw material cost to consumers. This was on account of lower raw material costs, which fell to 42.3 per cent of sales from 47.7 per cent a year ago. The consensus Ebitda margin for FY20 and FY21 is at 26.3 per cent and 27.2 per cent, respectively, according to Bloomberg. This may be revised upwards given the robust improvement in the December quarter.

The volume picture shows gradual signs of pickup with better yield for agriculture products in Europe and favourable weather conditions. Nearly half of the company’s revenue is derived from the European region and replacement sales account for the bulk of its revenue.

Besides, it is the only Indian company to manufacturer 49-inch tyres, which are gaining significant traction. The company has started expanding capacity to manufacture higher-inch tyres. In addition, the coronavirus epidemic will result in China exporting less to Europe . The region imports one out of every five agri tyres from China. This may result in windfall gains to Indian exporters including Balkrishna.
tyre-graph

The company expects volume growth to increase in the second half of the fiscal though the overall trend may remain muted. The company’s volume grew by 1 per cent in the December quarter after falling by 12 per cent in the first half of FY20. At Monday’s closing price of Rs 1,276.6, the stock was traded at 27 times the projected earnings in the next twelve months.

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