Balkrishna Industries - Lower Volumes and EBITDA Margin; Result Update Q2FY15 :: Edelweiss

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Balkrishna Industries’ (BKT) Q2FY15 top line and EBITDA came below estimates by 8% and 16%, respectively. Key positives were: 1) 12.5% YoY growth in volumes; and 2) demand recovery in US (19% of sales) and pick up in India (12% of sales). Key negatives were: 1) 7% YoY decline in value; 2) lowering of volume guidance to 155-160K MT from 160K MT due to slowdown in Europe (53% of sales); 3) EBITDA growth of mere 3% YoY, margin of 23.5% (down 134bps QoQ and 40bps YoY); and 4) EBITDA margin guidance of ~23-24% versus ~25-26% earlier. We have pruned our earnings by 8% and 13% for FY15E and FY16E, respectively, factoring in lower volume guidance due to strain in Europe and impact of expenses with full capacity getting operational in Mar`15 with lower utilisation. However, with scope for further volume uptick (we have assumed ~62% utilisation in FY16), strong free cash flow generation (INR11bn) over FY15-16E versus negative cash flow in FY14 and no major capex in next 3 years.

Lower volumes and outlook

Sales volume at 39,202MT, up 12.5% YoY but down 5% QoQ alongside currency realisation down 7% YoY led to mere 5% YoY growth in sales. Following improvement in the US, but slowdown in Europe and other geographies (ex India), management lowered its FY15 volume guidance to ~155-160K MT (8-12% growth) from 160KMT.

Operating margin pressure

EBITDA margin at 23.5% fell by 40bps YoY and 134bps QoQ to 23.5% (240bps lower than estimated). Other expenses jumped 25% YoY due to increase in discounts. Going forward, management expects to stabilise operating margin at ~23-24% versus earlier guidance of ~25-26% for FY15 owing to higher expenses with full capacity at Bhuj getting operational and lower volume guidance. PAT fell by 17% YoY (lower than estimates by 24%) due to below-expected EBITDA margin.

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https://www.edelweiss.in/research/Balkrishna-Industries--Lower-Volumes-and-EBITDA-Margin;-Result-Update-Q2FY15/27606.html