Europe casts a shadow on the prospects of Balkrishna

During the September quarter (Q2FY23), Balkrishna Industries Ltd saw revenue growth that far exceeded analyst estimates. In addition, with the reduction in input costs, visibility into margins is improving for the remainder of the financial year. Given the current situation, though, the road ahead is likely to be bumpy for investors in this stock.

One serious downside risk the company continues to face is demand uncertainty in Europe’s largest market. On a post-earnings call, management said demand dynamics across Europe were slowing due to geopolitical issues. Dealers and distributors continue to discharge and are expected to reduce inventories to two months, from about three months now. In the US, fears of a recession have hit growth to a certain extent, management added. While the business in India is doing relatively better, management has withdrawn its guidance on the previous fiscal year 2023 volume.

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“The stock is likely to continue to come under pressure in the near-term as nearly 70 percent of its target market is either in a recession or facing a recession,” said Varun Baxi, an analyst at Nirmal Bang Institutional Equities. demand uncertainty”.

Baxi said that while Balkrishna is better positioned than its European peers in the alternative market due to price differentials, demand constraints have dampened the company’s 2024 earnings outlook. this. By region, Europe contributes half of the company’s total volume, followed by the US and India, with 20% each.

Higher NR prices, higher transportation costs and adverse currency changes impacted profits in Q2FY23. Management says the recent adjustment in raw materials and freight costs will help boost margins from the start of Q4 2023. In Q2 FY23, the company increased prices by 5% , but management said it would be difficult to raise prices further.

“The expected margin improvement in the second half of fiscal 2023 should support the company’s 2023 earnings outlook. However, we have lowered our earnings estimate for 2024-25 by 4-6% due to weak demand in the US and Europe,” said Aniket Mhatre, institutional analyst at HDFC Securities Ltd.

So far in 2023, shares of Balkrishna Industries are down 7.65%. By comparison, the Nifty Auto industry index was up 21.07%. The resurgence in equity performance largely depends on the improvement of global macroeconomic conditions.

The only bullish trigger for equities is a change in demand scenario in Europe and the US, Mhatre said. Unless that happens, the stock is likely to weaken at current levels. “Also, at a price-to-earnings price of nearly 23 times in 2024, we find this stock expensive,” he said.

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