Balkrishna Industries Limited (502355) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Balkrishna Industries Limited Q3 and 9 Months FY '24 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 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.

Good morning. Thank you, Rico. 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 relationships advisor. Let me begin with performance updates. In October earnings call, we communicated of a better Q3 and H2. Q3 financial year '24 fared on expected lines. BKT garnered market share and, thereby, increased sales, leading to a volume growth of 9% year-on-year for Q3 FY '24. With this, I now move on to the operational highlights. For the quarter, our volumes stood at 72,749 metric tons, a growth of 9% year-on-year. For 9 months financial year '24, volume stood at 210,543 metric tons. Our stand-alone revenue for the quarter stood at INR 2,316 crores, registering a growth of 5% year-on-year. This includes realized gain on foreign exchange pertaining to sales of INR 36 crores. For 9 months of the financial year, the revenue stood at INR 6,678 crores. This includes realized loss on foreign exchange pertaining to sales of INR 53 crores. For 9 months financial year, 46% of the sales came from Europe, 28% from India, 17% from Americas and balance from rest of the world. In terms of channel contribution, 72% was contributed from the Replacement segment, while OEM contributed 27%, with the balance coming from offtake. In terms of category, Agricultural segment contributed to 59%, while OTR Industrial & Construction contributed to 38% and the balance came from other segments. The stand-alone EBITDA for the quarter was at INR 588 crores, registering a growth of 40% year-on-year. The margin came at 25.4%. The marginal improvement was on account of operating leverage on account of volume increase and cost realization efforts. For 9 months of the financial year, the EBITDA was at INR 1,622 crores, registering a growth of 6% year-on-year. The 9-month margin stood at 24.3%. Other income for the quarter stood at INR 70 crores; while 9 months, it was INR 187 crores. Profit after tax stood for the quarter at INR 309 crores, registering a growth of 210%. For 9 months of the financial year, PAT came at INR 957 crores with a growth of 16% year-on-year. Our gross debt stood at INR 2,881 crores at the end of 31st December '23, of which about 65% is related to working capital debt. Our cash and cash equivalents were at INR 2,552 crores. Accordingly, our net debt is at INR 330 crores. The Board of Directors have declared a third interim dividend of INR 4 per share. This is in addition to the 2 earlier interim dividends of INR 4 per share each paid over the year. Going into Q4, with the geopolitical situation, coupled with the freight situation, which started in January end, early -- sorry, which started in December end, early January, there may be flattish sales for the Q4 on back of anticipated delays in delivery schedules. Further, this may have an impact on margins in the short term. With this, I conclude my opening remarks and leave the floor open for question and answer. Thank you.

[Operator Instructions] The first question is from the line of Jinesh Gandhi from Ambit Capital.

A quick question on the outlook that you mentioned. So you're expecting the...

Sorry to interrupt, sir. May I request you to use your handset, sir? Your audio is muffled, sir.

Yes. Is it better?

Yes, sir, please go ahead. Mr. Jinesh Gandhi has left the queue. May I request that we move to the next participant. The next question is from the line of Siddhartha Bera from Nomura.

Sir, my question is on the volume growth. So just to clarify, you expect Q4 volumes to be flat compared to the last year, is that what you mentioned?

Yes.

Okay. Because, sir, generally, we have seen a -- generally, Q4 has been one of the strongest quarters in a year, and we sort of had expected about 290 for this year. So that probably then will have some risk in the near term?

So current geopolitical scenario and the shipping issues, which are going on, are there. So we are not very sure at this stage where we will end up. But as I indicated, it will be flattish.

Okay. But sir, in general, apart from the Red Sea issues and all, how are you looking at the end-level demand from, say, agri and OTR markets? Is there any signs of pickup in the end markets of U.S. or Europe? Or how is the scenario there?

Yes, it's going -- I mean the demand is -- it was picking up towards the end of the year, which continues. So that is not a very big issue.

Okay. And going ahead, do you expect the growth momentum to recover at some point given the outlook you have or the demand you said you have from the dealers? Or do you think that recovery may take longer depending on your expectations?

No, we see it to improve depending on the issues of the Red Sea and shipping issues.

Okay. Got it. Lastly, sir, on the cost side, you mentioned that there will be some margin pressures. But generally, if you look at the freight costs, how was it behaving for you in the quarter? And is there -- we will probably be able to pass it on to the end consumer? Or should we expect that also to take some time to get passed on?

So we are trying to pass it on. It will not be passed on immediately. It will be -- we are also waiting and watching, so passing on some -- trying to pass on some bits over the period. And if this situation continues, we will end up passing the whole thing, but that will take time. That's why I said, in the short term, it will have an impact on our margin.

Our next question is from the line of Jinesh Gandhi from Ambit Capital.

My question pertains to your outlook for fourth quarter. You're indicating it to be flat on Q-o-Q basis or you're expecting some growth and seasonally strong fourth quarter?

So Q3 this time and year-on-year Q4 numbers are quite similar. So we're expecting it to be flat in that range.

Okay, okay. Secondly, when we talk about retail demand being -- or doing okay in the sense, are you referring to -- it to be stable and not declining? Or you're seeing growth in the end markets as well?

Stable to gradual improvement.

Stable to gradual improvement, okay. And lastly, can you talk about the pricing action in which we may have taken in 3Q as well as 4Q in the end markets along with euro and INR rate?

No, no price increase in the quarter so far.

Okay. So no reduction as well?

No, no.

Okay. What was the euro, INR realization?

INR 89 to INR 90.

INR 89 to INR 90, okay. Great, sir.

Our next question is from the line of Ankit Kanodia from Smart Sync Services.

My first question is related to our Indian market. So in the last 6, 7 years, we have ramped up our Indian operations really fast when I'm seeing operations with the sales in India. So do we -- now that we have close to 30% of sales from India, do we see the growth rate in the Indian market sustain this high level of volumes?

Yes. India has -- I mean the potential in India is already there, and it is continuing to grow. So as India -- everybody is projecting India to be growing faster. Even we expect our growth rates to be good over here.

Great. So my follow-up to this question would be, sir, then it would be fair to assume that maybe 3 to 4 years down the line, India would be either at par with Europe or maybe even more than Europe. So how will I -- if you can share more color on the margin front, on the type of products which we -- or the product mix here and what is the competitive intensity compared to Europe? If you can just share some more color and compare the Indian market with European market, that would be very helpful, sir.

So basically, the overall volume will also increase. If you -- earlier what we had said that overall, when the volumes also pick up, the growth will come in the similar ratio. So Europe also will kick in. And also overall, the share may stabilize, but our growth will continue. So India's share may stabilize at these numbers as the other markets pick up.

Okay. And on the competitive intensity and the kind of product mix, if you would like to share more...

I mean we have the entire range, and we are growing that. As we have said earlier also, we are enhancing our basket every time. On the contrary, we have enhanced our basket substantially. So that is being done. It's an ongoing process. And we are growing -- I mean we are in the marketplace working with that.

No, my question, sir, was related to, do we have any change in product mix when we are serving Indian customers? Or we have the same kind of products for both European and Indian market?

So we have a special product for Indian market. But for international also, the product is there. So they are all separate -- we're treating every market separately, and we're building products based on that.

Margin profile, I would -- I mean European market would be better than Indian market, right?

Similar. I mean marginally better, but not a big impact.

One last on competitive intensity in European market versus the Indian market, what would be your view there?

So both have their own unique situations, and we have marginal difference, as I said, so nothing major. So there's no -- nothing major on that.

Our next question is from the line of Raghunandhan N.L. from Nuvama Research.

Congratulations on a good number in Q3. Sir, on the near term, I understand that there are temporary issues. But as you rightly said that the recovery is likely in other geographies as well. And we have seen that in this quarter where the share of Europe has come back to 49%. So just trying to understand, how would you look at the outlook for Europe going forward, which is the major market for us? And also, mainly the agri segment, how do you expect to see an improvement given that 2023 was a more challenging year for agri compared to that 2024? At least the initial thoughts are it should be better. So over a 1- to 2-year period, how you are looking at Europe and the agri segment?

Too many questions bundled. I'll try and answer them, so -- one by one. So overall, Europe, we are seeing the demand to be stable, but on the trend towards improving. That's how we see it. We are geared up to capture that market as and when it starts coming back. So we are all geared up for that.

Got it. And in terms of the near term, there are -- because of the Red Sea crisis, there are delays in shipments. Also, there is some increase in the freight cost. Any initial thoughts or what could be the cost impact in the very near term?

I mean as I mentioned earlier, there will be some impact on the margin. The exact impact, we will -- we are evaluating and we will see how it goes.

Got it. And lastly, on the carbon black sales for 9 months FY '24, either as a percentage of revenue or if you have an absolute number, if you can share here, what has been the revenue? And how do you see the new capacity-led growth for next year?

So carbon revenue is 7.5% of the total revenue currently. And next year, we further expect it may go 8% to 9%.

Our next question is from the line of Mumuksh Mandlesha from Anand Rathi.

Congratulations on a good set of results. Sir, you talked about the market share gain, which led to growth during the quarter. Can you indicate where are we in terms of market share and how we are progressing toward the 10% market share target, which we had? Should it be achievable in the next few years? And can you indicate what would be the major driving factors for the improvement in market share?

So our market share, as I mentioned, was about just over 5% globally. And yes, we are -- it's between 5% and 6%. And I guess we are on course to hit -- I mean we are working towards hitting our target of 10% and should be possible in the next few years. So that's what we are working towards.

And sir, it would be led by industry consolidation, sir?

No, there is ample demand, and we are working towards that. And -- but there would be some market share gains also as we go along.

Got it, sir. Sir, other expense as a percentage of revenue has come down versus the previous quarter. So -- I mean it's supported by the better volumes. So how do you see the particular marketing expenses over the medium term?

So operating income has come down because of multiple things. As I said, operating -- cost rationalization has come in, freight costs have come down. So all those things have had an impact.

And how do you see the marketing expenses for this year and over the medium term, sir?

We will continue at the same levels that it has been doing -- that we've been doing.

Got it, sir. Sir, how do you see the RM cost ahead as the crude prices have softened? So do you see the benefit in coming quarters?

No, we don't see any benefit because the crude price is coming down, so other raw material will go down, but natural rubber is increasing. So it will almost end the cost -- it will offset that decrease or increase.

Our next question is from the line of Pramod Amthe from InCred Capital.

Sir, I wanted to check, considering you talked about supply chain issues, what is your inventory levels at the dealers in Europe and U.S.?

As I mentioned, in the last quarter, it has started coming down. And it is at the reduced level, so there's no impact on that.

So in that direction, if the supplies further get constrained with the shipment, do you think them to go below the comfortable levels this quarter?

Yes, may do. It depends on how the shipping scenario plays out. But if it has a concern, it will definitely go below comfort level.

And usually, they are, what, 4 to 6 weeks at the dealers? So how do you -- when you say comfortable last quarter...

Yes, about 45 days. So we are in that range, 30 to 45 days, in that range. So they will be towards the closer part of 30 than towards 45.

Okay. Second one is with regard to the freight cost, which you again alluded to saying of disturbance. Where does the freight cost stand in first 9 months? And considering the disturbance, where you expect it to go? And looking at the past experience where such disruptions happen, how much time it takes usually for you to pass it on to the end market?

So for the first 9 months, our shipping costs are in the range of 3% to 4%, where it has normally been. Q4, we are yet evaluating. So we don't have the numbers to share for Q4. But first 9 months was 3% to 4%.

And based on historical experience, sir, how much time it takes for you to pass on? Because you had some contracts which you pass on easily and some are not and take time. So do you still feel it's a short-term disturbance? Or is this the last prolonged supply chain for challenges?

So we can't comment on that because -- I mean we don't know how the geopolitical scenarios play out. But on the face of it, we hope it is short term. We -- what we are hearing that it is going to be short term. So that is there. If it plays out into a longer play, we will start passing on, and it will take us up to 2 quarters from when we start passing on to pass on the thing.

Sure. Sir, last one is with regard to interest cost. It seems to have spiked up pretty drastically versus your net debt, which has come down. So what has really happened there? And is it a more sustainable trend, almost INR 35 crores per quarter?

Yes, part of it is related to the negative MTM on the long-term borrowing, which is in euro. So if you compare the levels at the end of September vis-à-vis the end of December, part of it has been categorized in the finance cost.

Our next question is from the line of [ Abhishek Singhal ] from Naredi Investments Private Limited.

Sir, I have only one question. How much percentage should be used to recycle rubber according to EPR policy? And how much...

Your voice is very muffled. Can you be a little louder, please?

Sir, may we request you to use your handset, Mr. Singhal?

Am I audible?

Yes, sir. Please go ahead.

How much percentage should be used to recycle rubber according to EPR policy? And how much percentage are you using now? And if you do not fulfill this compliance, then what effect will it have on the company's financials?

We can't share those details because they are confidential towards our technical designing. So whatever is the compliance, we are within that, but I can't talk about those numbers.

[Operator Instructions] Our next question is from the line of Abhishek from Dolat Capital.

Sir, because of the disruption in Red Sea, there will be RM supply issue to European peers as well. So production cut is expected. So how do you see benefit in terms of the inventory clearance and dispatches?

So what you're telling is right. They are importing from Asia the natural rubber, some synthetic rubber, some chemicals, where we will be getting affected on account of that. We may get the additional order. From the raw material point of view, we will not have any shortcomings, sir. So let us see and wait -- let us wait and see, rather.

So can we expect that dispatches and order intakes will accelerate in the coming quarter because of -- if this issue get longer?

If issue get escalated and if their factories are closed, we may get. We may get.

Okay. And sir, many Indian companies is setting plant in Brazil. You have also forayed into that market. So how do you see potential going forward?

Sorry?

So many Indian companies is setting plant in Brazil. You have also forayed into this market. So how do you see potential of this market, Brazil market?

No, we can't comment about other people setting up. We don't intend to set up over there. About potentially the market is good, we are servicing that through our distribution network. So we are quite covered through our partners over there.

Okay, sir. And you have a deep plan for the OTR segment and looking to -- for capacity addition. So how do you see growth in this segment for the next 2, 3 years?

We feel we have a good potential, and this is a market we need to pick up and we are focusing on that.

Our next question is from the line of Sabyasachi Mukerji from Bajaj Finserv AMC.

My first question is, do you want to put any volume guidance for the next year, FY '25?

No, no.

Sir, where am I coming from is that historically, wherever in our history -- in BKT's history, whenever we have seen a volume decline, the following year has been actually really good, be it FY '16, where we saw volume decline, or FY '20 as well. Do you foresee similar kind of a thing in FY '25 playing out?

It's too early to say. Please remember, we are sitting on the backdrop of 2 wars, which are ongoing, and a lot of geopolitical tension. And also we don't know how that will play out. We are also waiting and watching to see how it is getting done. So it's too early to comment on that.

Okay. Second question is...

Also on that, we are capacity-wise ready to serve the market as and when the demand comes back.

Okay. Okay. That's good to hear. Second question is on this ongoing Red Sea situation. What has been your experience in late December or early January in terms of the -- both the freight rates and also the container availability? How much increase you have seen in the rates or in the container cost?

So there has been a substantial increase in the rates. We're not seeing any issue on supply of containers, but it is a rate which has gone up substantially.

Any number you want to put? Has it gone to 2x, 3x, 4x...

No, I can't put a number. I can't put a number.

Our next question is from the line of Viraj from SIMPL.

Just one question. If you can just broadly give some color in terms of our demand environment both in agri and OTR across different markets. So what are the kind of consumption and consumption growth we are seeing? And how is the inventory kind of in different markets? So the 30 to 45 days, which markets you would see -- still see a higher level of inventory and where we are seeing a much more leaner inventory? Any more color you can give on that?

So as I mentioned, there are 2 issues. I'll reclarify. Demand is one aspect where we are seeing stabilization and moving towards improvement. The other constraint there is there is sea supply because of the supply issues, which are there in the shipping lines and the Red Sea and the whole political scenario being played there. So if we keep those 2 separate, the demand is yet stable and looking towards improvement as of now. So that should answer that question. Second question was on the 35 days to 40 days, which geographies, it is -- I mean overall average of the whole global scenario that our distributors are carrying now. It's difficult for us to point to a particular guidance or regional services, the level here and there. But by and large, everybody is within this range of 30 to 45 days at the moment.

Sir, the reason again asking on inventory is what we understand in agri, especially, say, U.S. or Europe or even LatAm, the season has not been that great. So just trying to understand, do you see any further risk in other inventory further building up? Or any perspective you may have?

No, we don't have a negative view on that. So as I mentioned, the demand, we are seeing stable to -- and moving towards improvement. So that's the line that we -- that's our view, basically.

[Operator Instructions] Our next question is from the line of Tej Patel from Niveshaay.

So I have a couple of questions. The first one, what is the current carbon black prices? And is there any oversupply situation in both Indian and global markets?

Current prices are hovering around INR 100. And in India, yes, there is excess supply because everyone has extended the capacity. But globally, it is almost balanced because Russia, which used to supply to Europe and U.S.A., that supply is not coming to those countries now.

Okay, okay. And one more question is like I've seen that there are a lot of players who are making this carbon black, also providing carbon black to the lithium-ion batteries. So are we making those grades of carbon black? Or do we plan to enter to those space also?

No, we have not yet planned for that one. That required another technology, so we have not yet thought of it.

Our next question is from the line of [ Prakhar Soni ] from Value Research.

I just wanted to ask, how is the CapEx plan that you had placed for the year? Has that been completed? And how is the status of the mold manufacturing facility going on?

Going on schedule.

Okay. And the rest of the CapEx have been completed, except the mold manufacturing? Or do we have any further CapEx for the year?

Whatever we had announced is all completed apart from these 2, and they are going on as per schedule.

Okay. Can you throw some light how -- what impact will the mold manufacturing facility have on the revenue and like PAT in the future?

No. As we had mentioned when we were setting it up also, it will have no impact on revenue. It is only to give us better access to make our own molds and keep our designs and all intact so that the quality impact will be there. No revenue impact.

[Operator Instructions] Our next question is from the line of Saif Sohrab Gujar from ICICI Prudential AMC.

First question is on the hedge rate. So what was it for the last quarter? And how much it is for FY '25?

Last quarter was INR 89 to INR 90. And for the next year, it is INR 91, INR 92.

Okay. And second is just a follow-up from the previous question, which was asked on carbon black. Regarding this advanced carbon black of 30,000 MTPA, what is status on that...

As I mentioned, it is going on schedule. And we will update when there is a completion or any milestone. But as of now, we are on schedule to what we had earlier mentioned for date of completion.

Okay. And from the existing capacity, we have around 2 lakh metric ton. How much of it is utilized? What is the utilization level currently?

Our existing capacity is 170,000. Post this expansion of advanced carbon, we'll take it to 200,000.

And current utilization is around 85% to 90%.

85% to 90%.

Of 170,000.

Of 170,000.

Of 170,000. That's it.

Our next question is from the line of [ Disha Sheth ], who's an investor.

Sir, I just wanted to check any volume -- if I missed any volume guidance for FY '24 and '25.

No, you have not missed. We've not given a guidance. It's too early to give any guidance.

Sir, depending on your order book, how is the scenario? Do we -- because after so many quarters, we saw year-on-year volume growth. So according to you, depending on the order book, what do you think about the volumes? Is it improving?

We can't comment on this quarter, ma'am.

No -- okay, okay. And sir, and what utilization are we working on, capacity utilization?

Around 75%, 80%.

Okay. And sir, as volume picks up as we saw in this quarter, do we -- what do you -- do we get the operating leverage benefit that other expenses are currently very high because of the low volume scenario? So what's the...

As I mentioned in my commentary that the enhanced production has led to operating efficiencies, and that has given us an impact on our margins.

Okay. And sir, like in your view, is the worst over in terms of demand? And can we see a volume pickup from your -- like the trend of 72,000, should it maintain?

Yes. As I mentioned, our expectation going forward is a flattish quarter. So you should see it maintained.

Ladies and gentlemen, that was the last question. As there are no further questions from the participants, I now hand the conference over to the management for closing comments.

Thank you to everybody for coming on the call, and we'll see you next quarter. Thank you.

Thank you. On behalf of Balkrishna Industries Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.