Balkrishna Industries Ltd

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. As a reminder, all participant lines will be in the listen-only mode and there will be an opportunity for you to ask questions after the presentation concludes. Should you need assistance during the conference call, please signal an operator by pressing star then zero on your touchtone phone. 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, reflected in our sales volume growth of 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.

On ESG front, we have continued to extend our power requirements through renewable energy.

We have 5 megawatt of wind power and 7 megawatt 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 mould manufacturing plant at Bhuj.

Please note this plant will provide us mould for our internal consumption and help better our quality levels.

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.

With this, I now move to operational highlights.

For the quarter, our volume stood at 83,570 metric tons a growth of 24% year-on-year. Our standalone revenue for the quarter stood at INR2,741 crores registering a growth of 30% year- on-year. This includes realized gain of foreign exchange pertaining to the sales of INR52 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 60% while OTR industrial construction contributed to 36% and the balance came from other segments.

The standalone EBITDA for the quarter was INR714 crores registering a growth of 47% year- on-year. The margin came at 26.04%. Other income for the quarter stood at INR83 crores.

Profit after tax for the quarter was recorded at INR477 crores registering a growth of 53%. Our capex spends for the quarter 1 of this year were INR200 crores.

Our gross debt stood at INR2,771 crores at the end of 30th June '24. Our cash and cash equivalents were INR2,946 crores. Accordingly, we have a net cash of approximately INR175 crores.

The Board of Directors has declared an interim dividend of INR4 per equity share.

With this, I conclude my opening remarks and leave the floor open for questions and answers.

Thank you very much. We will now begin the question-and-answer session. The first question is from the line of Siddhartha Bera from Nomura. Please go ahead.

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?

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, by the remainder of the year, we will only be able to get a minor growth.

Got it, 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...

Commodity prices are also going up. So raw material, approximately 2% to 3%, will increase the raw material cost.

Got it. Sir, have we taken any price hikes to 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. 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 INR800 crores to INR900 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.

Okay sir. Thanks I will come back in the queue.

Thank you. The next question is from the line of Raghu Nandhan from Nuvama Wealth Management. Please go ahead.

Thank you, sir, for the opportunity and 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 INR92 euro and next hedging is around 92.5 we can say 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 weaknesses 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 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 6.4% 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 INR200 crores approximately. And for full year, sir?

Full year would be between INR600 crores to INR700 crores.

Thank you. The next question is from the line of Mumuksh Mandlesha from Anand Rathi Institutional Equities. Please go ahead.

Thank you sir for the opportunity and 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.

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 our price hike planning, sir?

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

Got it, sir. on the OTR capex, any broadly, what kind of a timeline 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 carbon On the carbon product sir.

Okay. And that would be around 6% to 7%, sir? Approximately 8% of our sales. Thank you so much for the opportunity.

Thank you. The next question is from the line of Ashutosh Tiwari from Equirus Securities. Please go ahead.

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

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

So is there a case that probably because of red sea issues, 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 being 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 especially because 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 is been mainly for mining segment. So that itself indicates that our products are doing well, and 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. And lastly, on this rest of the world is doing well, like especially last quarter, this is like CIS countries? Mainly India.

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

Sir any particular reason which is doing well for us? No, all over so all over that.

Okay. Thanks. Thanks. That’s all from my side.

Thank you. The next question is from the line of Jinesh Gandhi from Ambit Capital. Please go ahead.

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. 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 20% to 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. Got it. And secondly, while we talked about 24% plus growth in our wholesale volumes, any sense of how retail volumes are trending on the ground? Are they flattish? Or we are seeing some growth there? Or they are still declining?

No, 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. 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 moulds requirement. Is that correct understanding? Yes.

Thank you. The next question is from the line of Pramod Amthe from InCred Equities. Please 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 itself, 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 difference from a 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 coming down...

It will be wrong to comment on wrong numbers.

Okay, sure. Let me correct that. But you are still not commenting on the timeline 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. 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 ton is on what base you currently have.

That is the reason. 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 INR52 crores, which is we have disclosed in our presentation. On other expenses, it is about INR11 crores. Okay sure. Thanks and all the best.

Thank you. The next question is from the line of Arjun Khanna from Kotak Mahindra Asset Management. Please go ahead.

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 utility infra. 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. I already announced 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 the previous years?

So, for EPR whatever the obligation is applicable so that we provided in this quarter. That is around roughly INR4 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 INR4 crores. Correct.

Sure. Thank you so much and wishing you all the best.

Thank you. The next question is from the line of Rishi Vora from Kotak Securities. Please go ahead.

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 give 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. Understood okay. Thank you so much.

Thank you. The next question is from the line of Rohit Jain from Tara Capital Partners. Please 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... as I said, it will be with a minor growth. At the end of the year, we are confident of achieving a minor growth.

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.

Thank you. The next question is from the line of Basudeb Banerjee from ICICI Securities. Please We have lost the connection of the current participant. We will move on to the next participant.The next follow up question is from the line of Ashutosh Tiwari from Equirus Securities. Please go ahead.

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 you 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 what would really comply?

Yes, system is already in place it is 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, by maybe approximately $300 per metric ton. On a base of roughly how much? 1,800 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 on all, only for the European Union.

All the sales should be using that rubber only? Only for the European Union, not all.

Yes. But any, let's say, like do the command some pricing premium 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 to everyone.

Thank you. The next follow-up question is from the line of Jinesh Gandhi from Ambit Capital. Please go ahead.

Just quick question on the EPR part. You mentioned there have been some reversals in 1Q of the prior period and net EPR provisioning is INR4 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 negotiated with the vendor, and we purchased 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 INR3 crores to INR4 crores.

The net EPR impact is INR3 crores to INR4 crores in 1Q and reversal again would be similar or higher than that? sushil Mishra:

Nominal amount it is INR1.5 crores or INR2 crores.

Thank you. The next follow-up question is from the line of Mumuksh Mandlesha from Anand Rathi Institutional Equities. Please go ahead.

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? Pre buying.

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 material 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 so much for this.

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.