Commodity boom to help Balkrishna stay in fast lane | Economic Times

ET Intelligence Group: The stock of Balkrishna Industries, a tyre producer with significant exposure to off-the-road (OTR) tyres used in agriculture and mining sectors, has gained 32 per cent over the past six months compared with a 22 per cent gain on average for conventional tyre makers.The company has emerged as a proxy for the improving pace of economic activities in the US and Europe given that exports to these and other developed countries account for two-thirds of Balkrishna’s sales volumes.Despite a challenging year due to the pandemic, Balkrishna posted a double-digit volume growth of 12.6 per cent in FY21 aided by a pick up in agriculture and mining activities. For the March quarter, the volume increased by 17 per cent to 68,002 tonnes.The agriculture segment, which accounts for 64 per cent of the total volume, grew by 16 per cent in the March quarter following higher farm income in the developed countries due to buoyant prices of agricultural produce. For instance, prices of corn and soybean are at eight-year high levels.This also augurs well for the replacement demand, which forms around two-third of the company’s sales volume.Rising metal prices is another positive factor since it has kickstarted the investment cycle among the global mining companies to expand capacities after a lull of about 10 years.This should support Balkrishna’s volume growth in the medium term. The OTR segment contributes nearly 30 per cent to the total volume of the company and is expected to increase to 45-50 per cent over the next few years.The company has guided for volumes of 2.5-2.65 lakh tonnes during the current fiscal year, which implies a year-on-year growth of 10-17 per cent. Its global peers in the OTR category expect volume growth of 8-12 per cent for 2021. Increasing retail presence and competitive pricing may help Balkrishna in delivering better growth than peers. 82781934The company’s operating margin before depreciation and amortisation (Ebitda margin) improved by 260 bps year-on-year to 31.9 per cent in the March quarter helped by higher volume growth and improved realisation due to better foreign exchange hedging rates.While this neutralised the impact of higher raw material costs in the quarter, headwinds from cost inflation are likely to remain elevated for a few months. As a result, the company has guided for a margin of 28-30 per cent in the medium term.At Wednesday’s closing price of Rs 2,145.6, the stock was traded at 30 times one-year forward earnings, which is at a 17 per cent premium to the average valuation in the past year.The stock is expected to retain the premium valuation given better prospects.