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Informist, Tuesday, Sep 3, 2024

MUMBAI – Nirmal Bang Equities Pvt Ltd said it has resumed coverage on Balkrishna Industries Ltd with a "sell" rating and a target price of 2,418 rupees, a 16% discount to the current market price of around 2,900 rupees. Nirmal Bang cited subdued global demand for off-highway tyres, increasing competition in the global off-highway tyre market, and a narrowing price gap between Balkrishna Industries and its multinational competitors for the "sell" rating. 

Nirmal Bang said it valued the company at 24 times the estimated earnings per share for the June quarter of 2025-26 (Apr-Mar), a 15% discount to the 5-year mean multiple. Currently, the share trades at 29 times the EPS for the said period.

The brokerage said it expects low sales volume growth for the company due to low demand from the European Union, which is its main foreign market. Europe contributed 45% of the total foreign revenue in 2022-23, according to the company's annual report. The company is yet to publish its annual report for 2023-24.

Nirmal Bang said it expects Balkrishna to report a 6.5% compound annual volume growth over the next three years and a 10% compound annual revenue growth between 2023-24 and 2026-27.

The company is expected to report a net profit of 16 bln rupees on revenues of 101 bln rupees in 2024-25. Nirmal Bang said the company is expected to report a net profit of 19 bln rupees on revenues of 112 bln rupees in 2025-26. 

According to the brokerage firm, the price difference between Balkrishna Industries and its multinational competitors has narrowed to 10% from 20-25%. It will be challenging for the company to gain market share now as past market share gains were driven purely by the price difference, the brokerage said. Increasing competition in the global off-highway tyre market due to the active entry of several low-cost off-highway manufacturers from India could also hurt the company.  

Higher natural rubber prices, regulatory pressures in the EU, and a sharp increase in freight costs could weigh on the company's margins, Nirmal Bang said. The working capital days for the company are expected to rise to 90 days from 70 days due to increasing cost pressures. Nirmal Bang said the environmental regulations in the EU will increase natural rubber prices by 16-17%. The prices of natural rubber is expected to remain elevated for another 2–3 quarters, the brokerage said. It, however, expects the company's margins to normalise gradually to 26.0% by the end of 2026-27 from 24.3% in 2023-24. 

The company manufactures off-highway tyres for multiple sectors. In terms of the product mix, the agriculture segment contributes 61% to its revenue while 36% comes from the off-road segment. The off-road segment contributes 65-70% of the revenue, the brokerage house said. Nirmal Bang expects subdued demand in the replacement segment in the European Union due to irregular weather conditions and a weak outlook for crop yields. Conveyor Equipment Manufacturers Association has indicated deep recessionary trends for the agricultural machinery industry in the EU. 

Balkrishna Industries' reported a net profit of 4.8 bln rupees for the June quarter on revenues of 26.9 bln rupees. At 1206 IST, shares of Balkrishna Industries traded 0.2% higher at 2,901.15 rupees on the National Stock Exchange. End

IST, or Indian Standard Time, is five-and-a-half hours ahead of GMT

Reported by Aman Aryan

Edited by Deepshikha Bhardwaj

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