Balkrishna Industries Ltd
NSE:BALKRISIND
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Balkrishna Industries Ltd
Earnings Call Analysis
Q2-2025 Analysis
Balkrishna Industries Ltd
Balkrishna Industries Limited recently reported its earnings for Q2 and H1 FY '25, during which the company acknowledged the macroeconomic challenges they are facing. These include recessionary fears in the U.S., geopolitical tensions, and rising raw material costs, which have contributed to a weakened demand environment across most of their major markets, except in India, where demand has remained stable.
Despite these obstacles, Balkrishna Industries remains optimistic about achieving a minor sales volume growth for FY '25, consistent with their previous guidance. In Q2, the company's sales volume reached 73,298 metric tonnes, a 4% year-on-year growth, while the H1 volumes stood at 156,867 metric tonnes, reflecting a significant 14% increase year-over-year.
Balkrishna's stand-alone revenue for Q2 was INR 2,465 crores, representing a 10% year-on-year growth, while H1 revenue reached INR 5,207 crores, marking a 19% increase. A notable aspect of this revenue was the contribution from foreign exchange, which added INR 29 crores in Q2 and INR 18 crores in H1. The company reported an EBITDA of INR 619 crores in Q2, a 13% increase, leading to a margin of 25.11%, while the H1 EBITDA was INR 1,333 crores, with a margin of 25.6%.
During this earnings call, the management disclosed the completion of a notable capital expenditure project for advanced carbon materials. A new plant was commissioned in September, contributing to the production of non-tire grade carbon black for various industries. The company also outlined their ongoing CapEx initiatives, particularly in the tire segment, with expectations to complete Phase 1 of their OTR range tires by the first half of FY '26.
Geographically, Balkrishna reported that 44% of their sales came from Europe, followed by 29% from India and 16% from the Americas. Importantly, their sales channels included a 73% contribution from replacements, highlighting a robust demand in the agricultural sector (59%) and OTR industrial construction (37%). However, management expects weak demand to persist into the remainder of the fiscal year.
The profit after tax for Q2 reached INR 350 crores, a 4% growth year-on-year. Looking ahead, the management highlighted that they took a marginal price hike in Q2, expected to translate to a 1%-2% impact for Q3. Additionally, they anticipate gross margins to sustain around the 25% mark for the full fiscal year, aligning with previous expectations.
At the end of Q2, the company's gross debt stood at INR 3,062 crores, while cash and cash equivalents were INR 2,994 crores, resulting in a net debt of approximately INR 68 crores. In a move to reward shareholders, the Board announced an interim dividend of INR 4 per share, totaling INR 8 per share for the fiscal year taking into account previous dividends.
As for the outlook on raw materials, it was noted that while there was a 3%-4% rise in raw material costs in Q2, the net benefit on sales prices would be reflected gradually with a potential easing in pressures expected by Q4. Despite concerns regarding freight costs, management hinted at a possible minor reduction moving from Q2 to Q3. Overall, the management expressed a wait-and-see approach regarding demand recovery, especially in weaker markets like North America and Europe.
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Ladies and gentlemen, good day, and welcome to the Balkrishna Industries Limited Q2 and H1 FY '25 Earnings Conference Call.
This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded.
I now hand the conference over to Mr. Rajiv Poddar, Joint Managing Director. Thank you, and over to you, sir.
Thank you. Good morning, everyone, and thank you for joining us today. Along with me, I have Mr. Bajaj, Senior President, Commercial and CFO; Mr. Ravi Joshi, Deputy CFO; Mr. Sushil Mishra, Head, Accounts; and SGA, our Investor Relations Advisors.
Let me begin with performance updates. The second quarter panned out as per our expectations. We are all witnessing macro challenges accentuated by recessionary fears in U.S.A., geopolitical tensions and inflationary raw material scenario, coupled with high sea freight costs. This has resulted in a weak demand scenario across our major markets, bearing India, where we continue to witness stable demand environment.
We expect this weakness in international markets to continue for the remainder of the year. In spite of these challenges, we believe we will be able to achieve a minor sales volume growth in the financial year '25, as guided in our previous earnings calls.
We have completed the CapEx for 30,000 metric tonne per annum of high value of advanced carbon materials and commissioned this plant in September. This is for the non-tire grade carbon black, which will be used in plastics, inks, paints and other special industries.
During the last Board meeting, we had also announced the tire CapEx. We have now begun the implementation of the first phase of this CapEx, which is towards the OTR range of tires. We expect this completion of Phase 1 in the first half of financial year '26.
With this, I now move on to operational highlights. For the quarter, our volume stood at 73,298 metric tonne, a growth of 4% year-on-year. For H1, volumes stood at 156,867 metric tonne, a volume growth of 14% year-on-year. Our stand-alone revenue for the second quarter stood at INR 2,465 crores, registering a growth of 10% year-on-year. This includes realized gain on foreign exchange pertaining to sales of INR 29 crores.
For the first half of this year, stand-alone revenue stood at INR 5,207 crores, registering a growth of 19% year-on-year. This includes realized gain on foreign exchange pertaining to sales of INR 18 crores. For the first half of this year, 44% of sales came from Europe, 29% from India, 16% from Americas and the balance from rest of the world.
In terms of channel contribution, 73% was contributed from replacement, while OEM contributed to 25% and the balance coming from offtake. In terms of category, agricultural segment contributed to 59%, while OTR industrial construction contributed to 37% and the balance came from other segments.
The stand-alone EBITDA for the quarter was INR 619 crores, registering a growth of 13% year-on-year. The margin came at 25.11%. For the first half of this year, the stand-alone EBITDA came at INR 1,333 crores, registering a growth of 29% year-on-year. The margin for the first half was at 25.6%. Other income stood at INR 105 crores, while for the first half of this year, it was INR 187 crores.
Profit after tax stood for the quarter at INR 350 crores, registering a growth of 4%. While for the first half of this year, we have recorded INR 827 crores of profit, registering a growth of 28%. Our CapEx spend for the first half of this year were INR 540 crores. Our gross debt stood at INR 3,062 crores for the -- at the end of 30th September '24.
Our cash and cash equivalents were INR 2,994 crores. Accordingly, we have a net debt of approximately INR 68 crores. The Board of Directors had declared an interim -- second interim dividend of INR 4 per share. This brings the dividends to INR 8 per share, including the first interim dividends.
Before I conclude and leave the floor open for opening questions, I would like to wish all of you a very happy advance Diwali. Thank you.
[Operator Instructions] Our first question is from the line of Jinesh Gandhi from AMBIT Capital.
Quickly, 2 questions. One is in previous call, we had talked about increase in RM cost, increase in freight cost and in turn margins in that context should have come substantially lower, but it seems that you've done an exceptionally good job on margin management. So any price hikes taken and if you can quantify the impact of RM cost in this quarter and the upcoming quarter?
We have taken the price hike in Q2, not in the last quarter.
Yes, what would be the price hike in 2Q?
So the impact would be -- so it will come in -- the impact of that will come in Q3, and it will be to the -- I mean, very marginal, maybe about 1% to 2%.
Okay. Okay. And RM impact in 2Q, can you quantify that, how much impact we saw?
In Q2 to Q3, RM impact may be similar, whatever increase we have given.
In 2Q, it was how much? On the commodity basket, what kind of increase we saw?
3% to 4% on the raw material. And if -- on the sales price, it will be half approximately.
Right, right. Got it. Got it. And last question is on demand outlook, you talked about business continuing in second half as well. Now this is the impact which you are seeing on the retail demand or is this still inventory correction which is taking place? I believe inventory correction is largely done, but if retails are weak, then is there further inventory correction which we have seen?
At the moment, it is mainly demand outlook.
Okay. Got it. So inventory is comfortable?
Yes.
Our next question is from the line of Mumuksh Mandlesha from Anand Rathi Institutional Equities.
Happy Diwali. Sir, there has been increase in production stops for European players. Is it due to weak demand or they are losing market share? And also we're seeing a lot of M&A activities in this space in Europe market. So how do you see that playing in terms of pricing and market share, sir?
Yes. So I think on the other players in Europe for that we can't comment. And on M&A, we -- I mean there is no impact, as we have mentioned. We are also waiting and watching.
Got it, sir. Sir, in terms of OEM demand, which was very weaker this quarter, any improvement of traction there you see in the Q3 quarter, sir?
We are working towards it, but not seeing in the immediate future.
Got it, sir. Sir, in terms of EUDR regulation, how is the preparation for the -- supply for the regulation? I just want to check the date of implementation for the regulation, sir. Is there any change there?
So there is a change in the EUDR regulation. European Union is postponing it for 1 year, but it has to be passed in the parliament, which is likely to happen in November. So all said and done, it is likely to be postponed for earlier. But we are ready with the EUDR production. We can do any time when -- as and when it is implemented.
Got it, sir. And sir, lastly, what was the euro-INR rate for Q2? And what do you expect for H2 and FY '26, sir?
So last quarter, it was 91. And next quarter, we are expecting -- rest of the year, we are expecting 92.
Our next question is from the line of Raghunandhan N. L. from Nuvama Research.
And the performance has been very good considering the challenging circumstances. Sir, firstly, on the demand side, can you speak about the distributor inventory levels? Is it higher than normal levels? And specifically, if you can comment about how you're seeing the agri demand in replacement for Europe and North America?
So the demand -- I mean, at the inventory level, we are seeing it to be at normal levels. But as I mentioned, the demand is slowing down, so that is what the challenge is which we are working towards.
Got it, sir. And anything specific on the agri side, where you are seeing any kind of -- or by when do you hope things could improve on the demand side?
It's a little early to comment on that. We are watching and being actively present in the market. So we are keeping an eye for that.
Understood, sir. On Carbon Black revenue, how was it in the current quarter? And how do you expect it to increase going ahead with the new capacity being operational?
So new capacities for the speciality carbon, so this has come only in the September. So in the coming quarter, you will see the impact of this one. And currently, we are selling approximately 50% of our carbon produce in the market.
Got it, sir. And how much would that be in revenue?
It is less than 10%. Still it is less than 10%.
Got it, sir. And lastly, before I fall back to the queue, given that you have a better euro realization for H2 and you also have the benefit of a 1% to 2% price hike, which will come in Q3, how do you see the margin range broadly for the full year? Would you expect, given that first half you have done 25.5%, how do you see the full year range?
We expect similar -- around 25%, as we told in the last call also. So it will be around 25%.
Our next question is from the line of Siddhartha Bera from Nomura.
Sir, first question is on this demand side again. I mean if you look at OE or replacement, where do you see bigger challenge in terms of recovery? And what will probably drive that, if you have some color for the next year, what things we should look forward to?
Sorry, can you repeat the question? We could not pick it up.
So I was sort of asking about like where is the bigger challenge in terms of demand, OE replacement, where do you see bigger stress? And what will drive that recovery, if you have some insight, what should we look forward to for the recovery to play out?
So at the moment, demand is weak all over. It's not a replacement OE. Overall in Europe and North America, it's a little weak. And I think we are also waiting and watching. It's very difficult to pin one point and pin point to one thing and say, this is what will drive the recovery or something. There are a lot of factors currently affecting, geopolitical situations, tensions and also we are waiting and watching.
Got it. Have you seen any sort of pickup in exports or market share gain for Indian players in U.S. compared to China? Have we sort of seen any sort of trend like that?
No, no. no.
Okay. Okay. Sir, on the cost side then, if you can highlight, freight cost of late seems to have come down a bit. So shall we expect normalization in freight cost in the second half from where we are in Q2? Or do you think this will take longer?
No, we are expecting it to -- freight to hold at these levels for a while, but let's see. At this moment, we are not seeing any reduction, further reduction.
Okay. Okay. And sir, lastly on this other expense this quarter, there has been a decline on a Y-o-Y basis. So is it that some cost have not come in quarter or if you can throw some color on why it is down?
Yes, it is because of a decrease in promotional expenses. Last quarter, there was a major expenditure in IPL. So this quarter, there was no such expenses. And apart from this, there was also reduction in production also.
Okay. So this should normalize as and when you start this promotional expenditure. That is what we should assume?
Yes.
Okay. Lastly, on the CapEx side, first half, we did about INR 500 crores. So you have guided earlier for INR 700 crores to INR 800 crores for the year. So what is the updated guidance if you have for the year?
So between INR 800 crores and INR 1,000 crores.
Our next question is from the line of Abhinav Ganeshan from SBI Pension Funds.
Wish you a very happy Diwali and congrats on a great set of numbers. I just had 2 questions. First one is regarding our volume. So we have done 1.56 lakh tonnes. So can we estimate that we will be able to match our FY '23 high volume of 3.20 lakh tonnes?
As I mentioned in my opening remarks that we believe we will be able to achieve a minor sales volume growth over the financial year '25. So this is what we are holding to.
So if you can -- so it would be like a low single-digit number? That would be fair to assume?
I cannot comment on that. I can give you what this guidance is. You can pick up -- I mean, you can put the number whatever you feel. But our volume guidance is in that line.
Yes, sir, that was useful. And one more question is with raw material cost that is natural rubber and even crude oil being a little lower in the current quarter. So can we see some of that benefits flow through for us in Q3 and Q4, if you could give some thoughts?
There may not be any immediate relief for this price going down because we are the importer so our raw materials are in -- already in pipelines. This impact, if petrol prices are getting reduce, will be in the fourth quarter.
Our next question is from the line of Basudeb Banerjee from CLSA.
Mr. Banerjee, we can't hear you. Maybe we'll take you back again later.
So we'll move on to the next question, which is from the line of Jinesh Gandhi from AMBIT Capital.
Yes, sir. Two follow-ups. One is you said -- you don't expect freight cost to further reduce. However, we have seen a sequential increase in freight costs. So from the second quarter level, should there be reduction in freight costs in second half? Or that 7.4% of sales is what -- where it should sustain based on the current visibility?
There will be marginal reduction from the second quarter to third quarter.
Okay. Okay. And secondly, on the tax rate. So we have seen a reduction in tax rate on Q-o-Q basis and seems to be quite low. Is there any one-off in that? Any tax write-backs, which is for the prior period? And otherwise, how should we look at tax rate from a full year perspective?
Tax rate includes so many things like there are a lower tax income also like in investment. And apart from this, there are other -- you can take it like unrealized exchange gain/loss that we can add or less in the tax calculation. So that's the reason.
Okay. So about 23%, 24% is where it should be overall tax rate?
Yes.
[Operator Instructions] Our next question is from the line of Sriram R, who is an Individual Investor.
Sir, with this India-China border dispute being resolved. So do we get to see some investments from Chinese players into our sector? Or are we open to forming JVs with them? What is your sense?
No, we don't see any such investment, and we don't know. If an opportunity comes, we will evaluate it at that time. But currently, we don't have any particular opportunity to evaluate.
But are you open to forming JVs with them or if you can just elaborate on this, it will be...
We can't comment on that. If an opportunity comes, we will evaluate it and then take a call. But we cannot comment before and after -- we cannot speculate on that.
Our next question is from the line of Ajox Frederick from Sundram Mutual Fund.
Sir, sequentially, the realization has gone up, and you mentioned that you have not taken price hike during the quarter. So is it due to the mix -- improved mix, we are seeing increased realization?
Yes, it's a product mix and hedge rates, both.
[Operator Instructions] As there are no further questions from the participants, I now hand the conference over to Mr. Rajiv Poddar for closing comments.
Thank you once again to all the participants, and we look forward to seeing you next quarter. And once again, wishing you a very, very happy Diwali. Thank you.
On behalf of Balkrishna Industries Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.