Post weak Q3, will Balkrishna Industries stock continue to outperform peers?


The stock of tyre manufacturer Balkrishna Industries Ltd has beaten competitors in the last one year by a wide margin. Its shares have risen by 31% in the said time span, while peers Apollo Tyres Ltd, MRF Ltd and Ceat Ltd have fallen by 8-34%.

By now, the pressure of severe cost inflation that the industry is facing is well known. In Q3, companies have seen margin compression on elevated cost of raw materials such as natural rubber, synthetic rubber and carbon black, among others. Although companies have raised prices, analysts say the quantum is not sufficient to absorb the cost inflation suffered so far.

Little wonder then that on a year-to-date basis, all the aforementioned stocks are under pressure with negative returns.

Even in the case of Balkrishna, operating performance in the December quarter was subdued. It’s goss margin shrunk by 620 basis points (bps) year-on-year and 190bps sequentially to 53.5%, despite a 2-3% price increase during the quarter. One basis point is one hundredth of a percentage point.

Yet, analysts feel, given the robust demand outlook, this stock is better placed than peers.

According to analysts at Motilal Oswal Financial Services Ltd, the company’s outperformance to the specialty tyre industry is likely to continue, driven by expansion of its product portfolio and ramp-up in the off-the-road segment.

“Balkrishna Industries ranks highest among domestic peers in terms of cost competitiveness and financial strength. In terms of valuation, it trades at a substantial premium to its mainstream peers, analysts at Motilal Oswal Financial Services Ltd said in a report on 15 February.

Analysts at ICICI Securities Ltd note that as against 3-4% industry growth, the company is looking to reach 7-8% global market share from present 5% after fresh capacity comes on-stream. “Timely capacity expansion and improving utilisation along with stability in input costs post the recent inflation are likely to drive free cash flow generation of around Rs2,700 crore in FY23E-FY24E,” it said in a report on 16 February.

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