Shares of Balkrishna Industries fell sharply during Monday's intraday trade after the company's net profit dropped significantly in the third quarter of FY23. The company, which is a manufacturer of off-highway tyres reported a 68% drop in its consolidated net profit at ₹108 crore in Q3FY23 compared to a net profit of ₹339 crore in the same period last year.
Balkrishna Industries reported revenue from operations of Rs. 2,142 crore in the quarter that ended December 2022, up 5.51% from Rs. 2,030 crore in the year-ago quarter.
The company recorded net expenses of ₹1,885 crore in Q3FY23 compared to ₹1,587 crore in the year-ago quarter. The operating profit margin came in lower at ₹257 crore, a drop of 42%YoY. while the EBITDA margin fell to 12% in Q3 FY23 from 22% in Q3 FY22.
The stock tumbled in response to the weak Q3 performance, with the company's shares opening 10% lower at ₹2,081 apiece in today's trade as against the previous close of ₹2,308.25. The stock dropped further to reach an intraday low of ₹2,040.50, down by 11.60%, wiping out all the gains it had made in the past few months.
At current levels, the stock is trading at a nine-week low, and it also recorded its highest intraday fall since February 2021.
In its research note, domestic brokerage firm, Keynote Capitals initiated coverage on the stock with a target price of ₹2,499 apiece.
The brokerage said the company has established a robust brand identity through various marketing efforts across different regions. Over the years, BKT has spent 3-4% of its revenue on advertising and promotional activities.
In addition, the company has a competitive advantage over its peers in terms of cost. The company's manufacturing base in India provides a significant cost advantage over its international peers, as employee costs are 6-7% of its revenue, whereas, for Michelin, they are 26-28% of revenue, Keynote said.
This cost advantage acts as an economic moat for the company, allowing it to maintain higher profit margins than its competitors despite selling its products at a 10%–15% discount.
The company is spending Rs. 14.5 billion on expanding its tyre manufacturing capacity, carbon black (a critical raw material) capacity, and modernizing and automating its older plants. This will fuel the future growth of the company. It is expected that within the next year, all plants will be commercialized, it added.
Likewise, another brokerage firm, ICICI Securities, in its equity research report dated January 20, 2023, maintained a "buy" rating on the stock with a target price of ₹2,549 apiece.
As per Commerce Ministry data, BIL has been consistently outperforming industry exports on a YoY basis and has finally breached 60% market share in H1FY23, up from an average of 50% share over the past three years.
“This gives us confidence in the fact that, against a potential industry volume decline of 5–6% QoQ, if BIL gained further share QoQ, it would decline even less than 5% QoQ, thus reducing the scope for volume estimate cuts incrementally,” said ICICI Securites.
Balkrishna Industries is a Mid-cap stock with a market capitalization of ₹40,000 crore. The company is one of the world’s leading manufacturers of off-highway tyres (OHT). BKT has the widest product range with more than 3,200 stock-keeping units (SKUs) and acts like a "one-stop shop" for all the OHT solutions.
22 analysts polled by MintGenie on average have a 'hold' call on the stock.
Disclaimer: The views and recommendations made above are those of individual analysts or broking companies, and not of MintGenie.