Despite upcoming weak demand catalysts, brokerage ICICI Securities Ltd has maintained a 'buy' rating for Balkrishna Industries Ltd and sees a 20% upside for the stock. The brokerage has kept the target price unchanged at ₹2,378.
The brokerage anticipates that until June 2023, monthly Off Highway Tyres (OHT) exports will stay below US$140 million.
India's OHT exports decreased by almost 9% year-over-year (YoY) to US$134 million in January 2023 from US$152 million in December 2022, and US$141 million on average over the previous six months, according to the report.
While industrial exports fell 3% YoY, agri tyre exports fell 12% YoY.
"With retail demand commentary by major players being largely steady till date in both the segments, we believe the contraction in export volumes is due to inventory destocking and the nearly 6-8% cut in prices to pass on decline in container rates.
We believe, by Q1FY24-end the inventory levels would be back to normal and start to grow YoY with rise in retail demand. Thus, till Jun’23, we expect monthly OHT exports to remain sub-US$140mn," said the brokerage.
According to data from the commerce ministry, the company consistently outperformed industry exports on a year-over-year basis and, after three years of an average market share of 50%, eventually crossed the 60% threshold in H1FY23.
This suggests that the company's volume decline would be greater in the period between 3QFY23 and 1QFY24, in order to reduce excess inventory, compared to a possible industry volume decline of about 5-6% quarter-on-quarter (QoQ). As a consequence, India OHT exports would have a value share of less than 50% during this time.
As per the brokerage report, distributors stocked up on excess inventory between March and July 2022 as a result of worldwide container shortages and a nearly five-fold rise in container prices early in the calendar year (CY) 2022.
The destocking process began in August 2022, and the brokerage anticipate it to last through Q1FY24E, after which the amount of exports should stabilise at roughly US$140-145 million per month. India's monthly OHT export worth would be impacted by this.
"For Balkrishna Industries, we believe, post a subdued Q3FY23, volumes should remain at sub-70kte in Q4 too, with normalised 75kte quarterly volumes coming only from Q2FY24E onwards. We are building-in FY24E volume growth at nearly 8% YoY, with realisation/kg at nearly ₹310.
With raw material cost declining, EUR-INR turning favourable, container rates down nearly 70% from April-May 2022 highs, we believe there are enough margin triggers for the company to boost its earnings outlook despite negative demand catalysts ahead," added the brokerage.
