Balkrishna Industries Limited (BALKRISIND.NS) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Balkrishna Industries Limited Q1 FY '26 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 of the date of this call. These statements are not guarantees of the 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 over the conference to Mr. Rajiv Poddar, Joint Managing Director. Thank you, and over to you, sir.

Thank you, Mrs. Hooda. Good morning to everyone, and thank you for joining us today. Along with me, I have Mr. Bajaj, Senior President, Commercial and CFO; Mr. Satish Sharma, Senior President, Strategy and Business Development; Mr. Ravi Joshi, Deputy CFO; Mr. Sushil Mishra, Head Accounts; and SGA, our IR advisers. Let me begin with performance updates. Q1 financial year '26 was a volatile quarter on account of tariff-related disruptions. With the tariff announcements, we witnessed a volatile ordering cycle in April. However, since the 90-day pause announcement on tariffs, there was gradual return to normalcy. Pre-tariff announcements, we were subject to nominal tariff charge, which has now increased to a little over 10%. We don't expect any significant challenges on this new tariff structure. However, we do believe that the complete normalcy in ordering cycle will take shape once there is permanent tariff structure in place. In other geographies, we witnessed a stable quarter. Americas witnessed a slight degrowth on account of macro situation, while the rest of the geographies...

Mr. Rajiv? We can't hear you, Mr. Rajiv.

Sorry, there was some disruption at our end. Let me rebegin with the performance updates.

Sure, sir.

The geopolitical environment and the broader macroeconomic scenario continue to present significant challenges across our key export markets. Amidst ongoing conflicts, trade tensions and economic uncertainties continue to influence cautious sentiments among customers. In addition to these external headwinds, continued tariff uncertainty has further compounded to the situation. Despite these testing conditions, we managed to achieve a sales volume of 80,664 metric tons during the current quarter. While this reflects a marginal decline compared to Q1 of financial year '25, this performance demonstrates a degree of resilience, given the prevailing global headwinds. India business continues to be strong and for the quarter contributed to approximately 35% to our sales volumes and approximately 14.4% in growth on a year-on-year basis. This growth momentum is a testimony of our brand acceptance and will further accelerate our efforts, as we launch in the PCR and CV segments. As I was mentioning earlier, in the U.S., the current tariff is 10%, which is shared by our customers and us. And in the near future, the resolution of the ongoing tariff uncertainties, we are hopeful for a better trade environment and improved business conditions. Given the magnitude of challenges and uncertainties in international markets, we have delivered a strong performance and outperformed the industry. As we return to stable demand environment, we expect to further outperform and improve our market share all over. On the CapEx front, the earlier announced CapEx of OTR, along with newly announced CapEx for Carbon Black, PCR and CVR are expected to operationalize as per schedule. With this, I now move on to operational highlights. For the quarter, our volume stood at 80,664 metric tons, marginally lower as compared to the same period last year. Our stand-alone revenue for the quarter stood at INR 2,759 crores, including realized loss on ForEx pertaining to sales of INR 1 crore. The gross profit margin in Q1 was lower on account of product mix impact as well as 35% of the overall sales volume were contributed from India. The stand-alone EBITDA for the quarter was at INR 655 crores with a margin of 23.8%. In addition to higher India contribution, EBITDA margin was -- the EBITDA margin impact was on account of partial absorption of tariffs for U.S. geography and lower absorption for fixed cost due to lower sales volume. Profit after tax stood for the quarter at INR 287 crores, which was approximately down 40%. This was primarily on account of M2M loss to the tune of INR 154 crores. The Board of Directors has declared a first interim dividend of INR 4 per equity share. With this, I now conclude my opening remarks and leave the floor open for Q&A.

[Operator Instructions] The first question is from the line of Raghunandhan from Nuvama Research.

Sir, firstly, on Europe, Europe has seen a decline Y-o-Y at 20%. And Europe farmer sentiments seem to be weak on higher input cost impact of EU regulation. Can you talk a bit about how you are seeing the customer sentiments in the replacement market? And how do you see the recovery in this market going forward?

So the current sentiments in Europe is weak, and this is reflected in the numbers. Overall economic environment was also weak in Europe. So that is the reason for this continued numbers.

So given that now we are 4 months into the year, how do you see the FY '26 outlook, given all the uncertainties? But going ahead, next 2 quarters, we also have a favorable base. Would you expect to be on the positive side for the full year?

So too early to give a number and comment on that.

Got it, sir. And to Mr. Bajaj, sir, if you can indicate the euro-INR realization and the hedge rate for FY '26?

So for the current quarter, it was INR 93.60. And for the remaining year, it is closer to the market.

Got it, sir. And just a last question before I fall back to the queue. Can you please share the freight cost as a percentage of revenue that you usually used to share? Would it be lower Q-o-Q given that there has been some fall in the global freight prices?

It was marginally lower.

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

Sir, I just want to understand if there has been any correction in the inventory this quarter, particularly in Europe where there was almost 20% down. And in Q4, we saw 8% growth. So has there any inventory adjustment this quarter in Europe? And overall, sir, globally, how is the inventory situation now, sir?

So nothing specific on the inventory correction. It is just the overall market sentiment.

Got it, sir. And sir, possible to quantify what was the U.S. tariff impact in this quarter, sir?

Currently, the tariff is 10%. Out of that 60% is customer bearing and 40% we are sharing.

40% is your sharing? And that continues for Q2 also, right, sir, as of now?

Yes.

Got it, sir. And sir, this quarter, other expenses were up 24% Y-o-Y and Q-on-Q. Any reason for the increase in the other expenses, sir? And what should be the run rate ahead, sir?

It is the duty impact and some marketing impact.

Okay. So the U.S. duty impact has come in other expenses, what you're saying?

Yes.

Got it. And the marketing being higher...

Marginally.

Okay. So the run rate should continue as of -- at least for Q2 because the duty would continue that, right, sir?

Yes.

Got it, sir. And sir, in this quarter for the RM, sir, what kind of a reduction we saw in Q1? And what kind of benefit further we expect going ahead, sir?

So it was very nominal price reduction as compared to last quarter. And the coming quarter, we see the similar type of the prices because rubber is going up and other basket is down.

Flattish for the Q2, right sir?

The next question is from the line of Aditya Jhawar from Investec.

Sir, you mentioned that 50% of the tariff impact was absorbed by customers. So if you can give some sense that out of the total demand in the U.S. market, what percentage would be domestically procured? And what is the competitor -- how competitors have behaved in terms of tariff impact, if they are also importing from outside U.S...

Sorry, just to continue...

On the competitive dynamics.

Just to correct you on that, which is 40%, not 50%.

Sorry, could you repeat, sir?

We are bearing 40%. So we are bearing 40%, not 50%...

You are bearing 40%. 60% is -- okay. Sure, sure, sir. And sir, any sense on how competition has behaved in this environment, sir, in terms of pricing or impact of tariffs? Hello?

So no, we -- everybody is in the same boat. I mean we are not sure of how they have done the cost sharing. But the tariff has impacted everybody, even if there's a local manufacturer, his raw materials are coming from Asia, so they would have got impacted and -- with the tariffs.

Okay. So the pricing gap between us and the competition, even after the increase in tariff is largely of similar magnitude?

Yes, yes. It should be.

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

Sir, first question, again, on this U.S. tariffs. I understand the tariffs came sometime during the quarter and not for the entire quarter. So will it be possible to share like of the total U.S. revenues for us in Q1? What percentage has got impacted by the tariffs?

It came on 9th April, if we are not wrong. So that's practically the whole quarter, no? But you're right, it did not come for the whole quarter, but 9 days into the quarter. So it has impacted the whole quarter only practically.

Okay. Okay. Because U.S. volumes have seen a good jump in the quarter. So this is despite the entire quarter being under tariff. And despite that, we have seen a good pickup in the U.S. volumes. Is it the right way to look at it?

So -- I mean, if you look at it this way, it was originally pre 9th April. It was 26%, which came down. So that -- as I mentioned in my commentary that there was some normalcy, which has come in. So they have been buying because of this revised tariff. Now we are waiting for the final note what happens once the governments agree on some tariff rate. We will come to know what the long-term normalcy will be. It's too early to comment before that.

But sir, generally, what is the thought process like -- because we understand that it may go up even further. So you plan to sort of pass on the entire cost or you probably want to continue with the current scenario of 60%?

So what we have seen is we were quick to come to a cost-sharing basis, which has impacted in this. So we will take a call once we have final numbers in front of us. We don't want to comment anything until the final numbers are there, what is the tariff basis? Is it this level higher, lower? We don't know anything. So without knowing anything, it's very difficult to comment.

Got it, sir. Sir, lastly, on the CapEx side, would you have any further color like INR 3,500 crores we had highlighted will be the next 3 years. Any possible breakup into what can go into TBR, PCR? And how should we understand the ramp-up to be in the next 2, 3 years, if you have some thoughts there?

No, we are not sharing the breakup of that. We've announced an overall CapEx, which we will be doing in the next 3 years -- which will come in line in the next 3 years.

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

Sir, my first question is on the realized ForEx losses. So you highlighted that our hedge rate was INR 93.6 for the quarter, Euro-INR, but the full year average -- full quarter average was around INR 97. So why is our losses lesser for the quarter? Can you just explain that math on how it works? How do we hedge -- like what is our hedging policy? Do we hedge 100% of our first year exposure? Or is it like 50%, 60%, 70%?

Rishi, so it will not be prudent to compare the normal average with what hedge rate was mentioned. It also accounts for the timing differences, wherein the PCFC was taken earlier, then there was a realization or repayment against that as well as the sales was booked at a different rate in the books. And then the debtor realization happens at a different rate. So it will not be prudent and probably you will not be end up to doing the right math that taking an average of a quarter and then comparing it with what we realized.

The second quarter will be more reflective of this quarter's spot rate...

It all depends on what rate prevails at that point in time, at what rate we have booked the sales in our books.

And also just to add on to that is the custom rates are daily -- it's a daily parameter. So we are booking and hedging against our sales and all. But when the actual sales gets transacted, what is the custom duty rate on that date. And that is how the gain or losses -- gain or loss is calculated.

Understood. And our hedging policy would be like 1 year revenue expectation, everything we would be hedging or it's lesser than that?

Yes, we keep on rolling basis and that too very conservative. We only hedge 80% of net receivable, which end up probably 30%, 35% of gross euro revenue. We don't hedge anything on dollars.

Understood. I'm assuming dollar would be naturally hedged because commodity...

Naturally hedged, yes.

Understood. And my second question is pertaining to full year margin guidance given where we are in terms of commodity tariff pricing. Like any broader guidelines you could share at least in terms of margins or any headwinds, tailwinds you see going into the financial -- into the subsequent quarters?

So we have already given the margin guidance in the -- even last quarter. It will be around 24%, 25%.

The next question is from the line of Abhishek Kumar Jain from AlfAccurate.

Sir, you have imposed several rounds of the sanctions on the Russia, trade restrictions on the machinery and the Russian oils as well. So how do you see direct and indirect impact on your business?

Sorry, your voice was very unaudible, Mr. Abhishek.

Are you able to hear me now?

Yes.