Balkrishna Industries Limited (502355) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Balkrishna Industries Limited Q1 FY '25 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 guarantee 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.

Thank you, Sejal. Good morning, and thank you, everyone, 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 Relations Advisors. Let me begin with performance updates. In Q1 of the financial year '25, the demand trends were healthy, reflecting in our sales volume growth of 25% -- 24% year-on-year. Please note that the growth percentage has a positive impact due to lower sales in the same quarter last year on account of cyclonic issues in Western India in June '23. Despite the strong performance in Q1, we are witnessing macro challenges accentuated by recessionary fears in USA. Geopolitical sanctions and inflationary raw material scenario, coupled with high freight costs are there. This will result in a tepid demand environment for the remainder of the year. However, we believe we will be able to achieve a minor sales volume growth in this financial year. On ESG front, we have continued to extend our power requirements through renewable energy. We have 5 megawatt of wind power and 7 megawatts of solar power operational across our plants as of today. Let me now share some thoughts on the European Union Deforestation Regulation. As you may be aware, with effect from 30th December '24, tire deliveries to EU need to be in adherence with the EUDR or the European Union Deforestation Regulation. This regulation requires that the natural rubber used in the EU supplies does not come from the land deforested after 31st December 2020 as well as in adherence to local laws. We will provide further details in due course. Further, in order to promote sustainable practices beyond our manufacturing units, BKT recently announced its membership to the Global Platform for Sustainable Natural Rubber or the GPSNR. With this, BKT is taking a step forward in promoting long-term sustainable practices, culminating in a more environmentally conscious and friendly production in line with the principles defined by GPSNR. As a member of GPSNR, we will have access to a platform that aims to standardize manufacturers' sustainability reporting and digital platforms for compliance with the requirements of the EUDR. Coming to the ongoing CapEx. We are working on advanced carbon black project with a capacity of 30,000 metric tons. This project is progressing well and is as per schedule. Further, we have commenced the operations of our new mold manufacturing plant at Bhuj. Please note, this plant will provide us mold for our internal consumption and will help bettering the quality levels that we have. Now let me share with you a new CapEx that the Board has approved. We have seen good acceptance and success of our OTR range of tires. This has given us confidence to add capacity. Accordingly, we are embarking on a new CapEx spends of up to INR 1,300 crores for 35,000 metric tons per annum at Bhuj. This will, however, be executed in various phases. With this, I now move to operational highlights. For the quarter, our volume stood at 83,570 metric tons, a growth of 25% -- 24% year-on-year. Our stand-alone revenue for the quarter stood at INR 2,741 crores, registering a growth of 30% year-on-year. This includes realized gain of foreign exchange pertaining to the sales of INR 52 crores. For the quarter 1 of financial year '25, 47% of our sales came from Europe, 29% came from India, 14% came from Americas, and the balance from the rest of the world. In terms of channel distribution, 74% contributed from replacement, while OEM contributed for 25%, with the balance coming from offtake. In terms of category, agriculture contributed to 30% -- 60%, while OTR industrial construction contributed to 36%, and the balance came from other segments. The stand-alone EBITDA for the quarter was INR 714 crores, registering a growth of 47% year-on-year. The margin came at 26.04%. Other income for the quarter stood at INR 83 crores. Profit after tax for the quarter was recorded at INR 477 crores, registering a growth of 53%. Our CapEx spends for the quarter 1 of this year were INR 200 crores. Our gross debt stood at INR 2,771 crores at the end of 30th June '24. Our cash and cash equivalents were INR 2,946 crores. Accordingly, we have a net cash of approximately INR 175 crores. The Board of Directors has declared an interim dividend of INR 4 per equity share. With this, I conclude my opening remarks and leave the floor open for questions and answers.

[Operator Instructions] The first question is from the line of Siddhartha Bera from Nomura.

Congrats, sir, on a great set of numbers. Sir, first, on the demand side, generally, we have seen Q4 being the strongest quarter in terms of year. And this time, Q1 numbers have also been ahead. So clearly, volumes have been quite good. So for the year, would you like to give out any guidance which you usually give, like how much volume growth you are expecting if you look at the entire year?

So as I said in my opening speech, we are anticipating minor growth from last year.

Okay. Okay. So sir, basically, I think what we understand is near term, the numbers or demand has slowed down a bit. Are you sort of getting similar signs? And how do you expect the recovery to play out going ahead?

Yes, we are seeing demand slowing down, and that's why we are saying that despite this quarter, the -- by the remainder of the year, we will only be able to get a minor growth.

Got it, sir. Sir, second question is on the freight costs. So if we look at this quarter, it has come down compared to last quarter despite freight rates and all going up. So can you throw some more color about how do we think about the costs, both on the commodity as well as freight, in the coming quarter?

So freight rates were already negotiated. That is why the freight cost was lesser in the last quarter. But in the coming quarters, the freight rate has gone up, so you will see the impact in the coming quarters.

And sir, what about commodity? How much can we expect to...

Prices are also going up. So raw material, approximately 2% to 3%, there will be increase in the raw metal cost.

Got it. And sir, any price hikes have we taken to sort of pass on some of these freight and raw material costs till now?

No, till now, we have not been able to take any price hike. Going forward, the market demand is a little weak. Hence, we are trying to see what we can do and what we can pass on. But so far, we have not taken anything.

Got it, sir. Sir, last question is on probably the CapEx side. Last time when we expanded Bhuj capacity by 50,000, the CapEx was much lower at about INR 800 crores to INR 900 crores, I think. Now with only 35,000 expansion, the spend seems a bit higher. So any thoughts why the spend is much higher? And how much CapEx do we plan to do probably for this year?

So you're right that the values are different because this is more towards the mining tires. And also for this capacity, some utilities and all also need to be added, which will also be taking care of some future requirements. So that is all being done in the current cycle.

The next question is from the line of Raghunandhan from Nuvama Wealth Management.

Congratulations on a strong set of results. Sir, firstly, on the USD -- euro rate for the quarter, how much was it? And how is the hedge rate for the full year?

So this quarter was INR 92 euro, and next hedging is around [ 92.5 ] for next quarter.

Got it, sir. And the last 2 quarters have seen better growth in agri, especially in the Europe region. But going forward, you're saying a tepid growth. So can you talk a bit about how is the on-ground sentiment? What are your thoughts about it?

So, we are yet seeing a market weakness come in this, also there are geopolitical scenarios with the backdrop of everything that's happening across various regions of Europe and Middle East, and also U.S. recession fears are there. So, all of that put together, we are seeing -- we are noticing a weak demand at the end user space.

Understood, sir. And lastly, on the freight cost, you said there would be an increase in the coming quarter. How much would be the increase? What is the range you would expect? Currently, we are at around 6% plus of -- 6.4% of revenue in Q1. What should we build for Q2?

It should be 8% to 9% approximately.

And just, CapEx number I missed for FY '25. How much was that?

Our CapEx in this quarter is INR 200 crores approximately.

And for full year, sir?

Full year would be between INR 600 crores to INR 700 crores.

The next question is from the line of Mumuksh Mandlesha from Anand Rathi Institutional Equities.

Congratulations on good results, sir. Sir, as you mentioned, I mean, demand has softened in recent time. What could be our channel inventory, sir?

It is increasing. Channel inventory is increasing, and OEMs demand is softer also.

And sir, on the freight cost would partly -- the freight surcharge has been passed on, sir, to the customers?

Sorry, your...

On the freight cost, sir, has any -- partially the surcharge has been passed on to the customers?

Yes.

Okay. So that's why we're seeing a smaller impact going ahead also. Sir, even the increase in the surcharge, I mean, the freight surcharge has delayed the -- our price hike planning, sir?

Yes, that is also impacted. You're right.

Got it, sir. Sir, on the OTR CapEx, any, broadly, what kind of a time line would be the implementation of this CapEx?

We'll come back to you in the coming quarters.

Got it, sir. And just lastly, what could be the carbon black revenue share to third party, sir?

50%, sir.

50% of the...

On the carbon cell -- carbon production.

Okay. And that would be around 6% to 7%, sir?

Approximately 8% of our sales.

The next question is from the line of Ashutosh Tiwari from Equirus Securities.

Congrats on good numbers. Firstly, you mentioned that channel inventory is increasing. Is it like meaningfully, sir, or only normal increase?

Yes. So it is -- in the Q1, which numbers we have -- you've seen has helped them increase it. And now we are seeing a softening, thereby, we are saying that the demand is -- we are seeing tepid demand for the remaining of the period.

So is there a case that probably because of restrictions, our transit time has gone up that's why probably because of supply chain disruptions, the distributors have stocked up a bit more during the last quarter?

Yes, one of the reasons. That is also one of the reasons.

And you talked about this OTR CapEx. Will it be -- a large thing would be your 48-inch plus tires? Or how should one look at it?

No, it's the whole mix of mining tires.

Whole mix. And [indiscernible] we had entered 5 to 6 years back in this ultra-large mining tires, and that was one of the growth areas that we had targeted. So how is the progress in that? And probably if you can share maybe around roughly what percent of overall volumes today is coming from that 48-inch plus?

So there is a good acceptance. And that's why when this new product mix expansion that we are looking has been only for -- mainly for mining segment. So that itself indicates that our products are doing well, and that is -- I don't have the breakup of what is the exact figures of 47 inch and above.

And it would be a mix of bias and radial both, or only radial?

Only radials.

Okay. Okay. And lastly, on this rest of the world is doing well, like especially last quarter, this is like CIS countries?

Mainly India.

No, no, the rest of the world is, apart from Americas, Europe and India, everything else, so it's Asia, Middle East, Africa...

Sir, any particular -- like any particular reason which is doing well for us?

No, all over. So, all over that is well.

The next question is from the line of Jinesh Gandhi from AMBIT Capital.

First question on the cost inflation expected in 2Q. So we are expecting 2% to 3% increase in RM basket and a similar increase on the freight side. So -- and currently, we don't have visibility of price hike. So do we expect a substantial pressure on margins in 2Q? I mean against 26%, you expect it to go back to 23%, 24%?

Last year, full year, our EBITDA margin was around 24.8%, and we will be striving for the same range for the whole of the year.

Okay. Okay. Got it. And secondly, while we talked about 24% plus growth in our wholesale volumes, any sense on how retail volumes are trending on the ground? Are they flattish? Or we are seeing some growth there? Or they are still declining?

No, there is -- we are seeing it to be weak. That is why the channel buildup that I mentioned earlier has taken place.

Okay. So it's still declining. Got it. Got it. And lastly, with respect to the OTR CapEx, which we're doing. So I mean a very basic question. Would intensity of SKUs be higher in OTR or [ agri has ] higher number of SKUs?

Yes, they will be higher.

Higher in OTR?

Yes.

And hence, CapEx also be slightly higher because of higher molds requirement. Is that correct understanding?

Yes.

The next question is from the line of Pramod Amthe from InCred Equities.

So when you're talking about the slowdown, is it related to industrials or agri or both? Where are you seeing specifically?

Both.

Okay. And if I had to look at your industrial for this quarter, it's down almost around 18%, 20%. So in that context, do you see any sense to go for a capacity addition now or you can delay it?

Sorry, I don't know which number you are referring to because...

The tonnage which you have given for Y-o-Y, if I had to look at, compared versus last year.

On the industrial construction mining OTR tires, we have a 19.3% Y-o-Y growth. Across all the segments, whether it's agri, OTR, there is a higher double-digit growth. So there is no [indiscernible] Y-o-Y perspective...

Nearly 20%, so that's why I'm confused which number are you referring to, sir.

Maybe my base numbers are different and hence, I see that come down...

It will be wrong to comment on wrong numbers, so.

Okay, sure. Let me correct. But you feel what -- you are still not commenting on the time line when you want to implement this, right? Or usually, the...

We have got the approval. We will work it out and announce it in the coming quarters.

Okay, sir. And if I had to look at the ASP trend for OTR versus agri, it's substantially different if I look at ASP per ton or per KG and since you're doing a more CapEx, that's one. Second, in the current capacity, what is the split you have versus agri versus OTR?

So ASP for the supergiant is higher, but the rest is similar. Marginally -- there's a marginal difference. So this whole mining project will be scattered across the entire range. So we expect it to be not a very different ASP. And the other question that you have, we'll come back to you later. I don't have those details.

Because I want to get a relevance of what this 35,000 tonne is, on what base you currently have. That is the reason. And the last one is -- and the last one is, this time, you haven't given the ForEx sheet. So in that context, what is the ForEx impact on expenses? Sales you have given.

On sales, it is INR 52 crores, which is right. This is what we have disclosed in our presentation. On other expenses, it is about INR 11 crores.

The next question is from the line of Arjun Khanna from Kotak Mahindra Asset Management.

The first question is while you talk of this slowdown, sir, are we seeing any market share impact? Obviously, sales have been robust in the first quarter. But over the year, do you see an impact to our market share? Are we losing share? Or do you think we are largely maintaining or gaining share?

No, we will be maintaining.

Sure. Sir, the second question is in terms of the CapEx announced, you've mentioned it for augmenting capacity and also utilities infra. Could you -- is it possible to give a breakup of this amount?

No, we'll come back to you in the coming quarters.

Sure. Sir, in terms of specialty carbon black, we had mentioned in the earlier call that we are on track for the first half of this fiscal year. Are we on track for the sales, so we should see commissioning in the first half?

Yes. Yes. I already noted in my opening remarks also that it's progressing well, and we'll be commencing in as per schedule. So we had announced it in the first half of this year, and we will be on course for that.

Great. My final question is on the EPR. We have previously mentioned it's difficult to find out the exact liability. Have we crystallized that amount now? And have we provided for it for the previous years?

So we have -- one second.

So, for EPR, whatever the obligation is applicable, so that we provided in this quarter. That is around roughly INR 4 crores for this quarter.

Sure. And for previous years, are they fully provided?

Yes, it was already provided. And in that, we are gaining something that we had already reversed in this quarter.

So the net impact for this quarter, you said was INR 4 crores.

Correct.

The next question is from the line of Rishi Vora from Kotak Securities.

Congratulations on good results. Sir, can you just elaborate on this EU Deforestation Regulation? Like currently, where we are sourcing our natural rubber from? And what would be the implication, if any? Will our cost go up? Or it's just a regulatory thing which we need to comply to?

So firstly, the coverage was about that we need to make sure that the rubber what we are procuring has not caused deforestation after December 2020. And at the same point in time, it is sourced from a land wherein all the local laws while cultivating is being adhered to. As far as cost is concerned, it will have obviously some marginal impact on the cost for the rubber piece.

So that would happen from -- any quantification today would you like to go or maybe at a later point?

We'll keep you posted over a period of time.

And currently, where would be sourcing our NR from? It would be a combination of India and Southeast Asian countries?

Yes. From all Thailand, Indonesia, Malaysia as well as African countries, Vietnam. So wherever we get the best deal, we buy from there.

The next question is from the line of Rohit Jain from Tara Capital Partners.

I just had a clarification question. Did you say that the volume is going to be flat Y-o-Y for the entire year? Or is it going to be flat Y-o-Y for the remaining 3 quarters?

Entire year.

For the entire year, it is going to be flat Y-o-Y. Understood. And...

Final growth -- as I said, it will be with a minor growth. At the end of the year, we may -- we are confident of achieving a minor growth.

Got it. Got it. Fair enough. And this freight increase that you mentioned, is this going to be passed on to the consumers with a lag? Or is there going to be an initial bigger hit and then gradually, we'll be able to pass it on?

So, we are working and trying to see how we can pass it on, but we will get back to you in due course on that.

The next question is from the line of Basudeb Banerjee from ICICI Securities.

Most of the questions...

Sorry to interrupt you, sir. May I request you to please use your handset? Sir, we are not able to hear you. We have lost the connection of the current participant. We will move on to the next participant. The next question is from the line of Ashutosh Tiwari from Equirus Securities.

Yes, sir. On this India growth, obviously, we are doing pretty well over the year. This is coming from both agri or OTR? Or maybe agri is growing faster than this?

Both the product mix are growing fast.

And I mean, what kind of market share we probably would have in India agri, if you have some idea on that?

Very difficult to give you an exact number, but between 6% to 7%.

Okay. And roughly, what we break up in India, like say, between the OTR and agri?

So that we don't have -- we can take it up later offline.

Okay. And this EUDR regulation that you talked about, I mean, is there already some mechanism in place that you can really find out that where this rubber is sourced from? I mean, all the [ modalities ] are there globally or how -- what would really comply?

Yes, system is already in place, yet to be evaluated or it could be really procured, but we have already tied up with the manufacturers to supply that type of rubber.

And any idea, like, I'm sure that some of the companies will be sourcing even today that kind of rubber. How is that price versus normal natural rubber price?

It will be costlier than that, but maybe approximately $300 per metric ton.

On a base of -- roughly how much?

1,300 on the base of natural rubber...

And you have to comply, like completely whatever export happens or there should be that this rubber only?

Not all [indiscernible] European Union.

All the sales should be using that rubber only?

Only for the European Union, not all.

Yes, yes, yes. Yes. But any, let's say, like do the command some pricing team as well as the tires made from that kind of rubber or there is no difference...

Everyone has to use that one. So definitely, there has to be some pricing, whether it is manufactured in the Europe or in India or anywhere, everyone has to use that type of rubber that will have the extra cost. So time will tell on this how they are able to pass every one.

The next follow-up question is from the line of Jinesh Gandhi from AMBIT Capital.

Just quick question on the PR part. You mentioned there have been some reversals in 1Q of the prior period and net EPR provisioning is INR 4 crores. What would be the quantum of reversals and what could be a normalized EPR provisioning for 1Q?

Actually, in last year, we have provided on the basis of some assumption based on the market rate. But after that, we negotiate with the vendor and we purchase at lower rate. So we reversed some amount. That is a minor amount. And after that, we point this quarter, we have provided the exact amount, so the net impact is around INR 3 crores to INR 4 crores.

The net EPR impact is INR 3 crores to INR 4 crores in 1Q and reversal would be -- again would be similar or higher than that?

Amount is INR 1.5 crores or INR 2 crores.

[Operator Instructions] The next follow-up question is from the line of Mumuksh Mandlesha from Anand Rathi Institutional Equities.

Sir, any outlook for the Indian market, sir?

Sorry to interrupt you, sir. May I request you to please use your handset?

Yes. Sir, any outlook for Indian market, sir?

Sorry, your voice was...

Is it better, sir, now? Is it better now, sir?

Yes.

Yes. Sir, any outlook for the Indian market, sir?

It continues to remain positive for us, and we look to expand our way in Indian market.

Okay. And sir, because of the EUDR, sir, and the price hike, would there could be some any pre-buying on account of that factor, sir?

[indiscernible]

Any pre-buying could happen because of the regulation norms, sir, where there could be a pre-buying, sir, because of price hikes, sir?

Pre-buying before December because whatever machine goes after 31st December, it has to go the EUDR complied rubber only. So we have contracted, but it will come in the fourth quarter only.

Thank you. As there are no further questions, I would now like to hand the conference over to the management for closing comments.

So thank you, everyone, for taking the time out, and looking forward to meeting you all in the next quarter. Thank you.

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