Investment In Advanced Carbon Materials And OTR Tires To Boost Revenue Growth And Market Share

Key Takeaways

• New plant operations in advanced carbon materials could diversify revenue streams, impacting non-tire industries like plastics and paints.
  
• Potential resilience shown by passing price hikes and strategic adjustments to EU regulation delays might stabilize margins and support future growth.
  
• Macroeconomic challenges and rising costs threaten Balkrishna Industries' revenue and margins, amplified by geopolitical tensions and regulatory uncertainties.

Catalysts

Manufactures and sells tires in India, Europe, North America, and internationally.

• Balkrishna Industries has completed the CapEx for a new plant producing high-value advanced carbon materials, which is expected to impact future revenue growth by diversifying products used in non-tire industries like plastics, inks, and paints.
  
• The implementation of Phase 1 of CapEx for the OTR tire range, expected to complete in the first half of FY '26, could drive future revenue growth and market share increase in the industrial and construction tire segments.
  
• The ability to pass on a 1-2% price hike taken in Q2 to consumers in Q3, amidst rising raw material costs, indicates potential resilience in protecting net margins in upcoming quarters.
  
• The potential postponement of European Union regulations (EUDR) by a year provides Balkrishna Industries additional time for strategic adjustments, possibly supporting stable revenues and margins amidst changing regulations.
  
• With the new carbon black plant becoming operational and expectations of price stability in the carbon black market, there might be an incremental earnings impact as this segment contributes less than 10% of current revenues.

Balkrishna Industries Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming Balkrishna Industries's revenue will grow by 11.2% annually over the next 3 years.
• Analysts assume that profit margins will increase from 16.1% today to 17.8% in 3 years time.
• Analysts expect earnings to reach ₹24.8 billion (and earnings per share of ₹119.27) by about December 2027, up from ₹16.3 billion today. However, there is some disagreement amongst the analysts with the more bearish ones expecting earnings as low as ₹19.6 billion.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 35.9x on those 2027 earnings, up from 33.6x today. This future PE is greater than the current PE for the IN Auto Components industry at 18.6x.
• Analysts expect the number of shares outstanding to grow by 2.43% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 13.7%, as per the Simply Wall St company report.

Balkrishna Industries Future Earnings Per Share Growth

Risks

• The company is facing macroeconomic challenges such as recessionary fears in the USA, geopolitical tensions, and high inflationary costs, which are affecting demand in its major international markets. This could lead to decreased revenue and earnings.
  
• Increased raw material costs and high sea freight costs are impacting margins. Although a marginal price hike has been implemented, it may not fully offset these cost pressures, potentially affecting net margins.
  
• Demand weakness in key international markets, primarily Europe and North America, may persist due to geopolitical and economic factors, presenting a risk to future revenue growth.
  
• Uncertainties around the timing and impact of regulatory changes, such as the EUDR regulation in Europe, could introduce additional compliance costs or affect market access, potentially impacting revenues and margins.
  
• Rising production costs, such as those associated with energy and raw materials, might not be fully passed on to consumers, squeezing margins and impacting profitability.

Valuation

• The analysts have a consensus price target of ₹2923.43 for Balkrishna Industries based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹3500.0, and the most bearish reporting a price target of just ₹2159.0.
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2027, revenues will be ₹138.8 billion, earnings will come to ₹24.8 billion, and it would be trading on a PE ratio of 35.9x, assuming you use a discount rate of 13.7%.
• Given the current share price of ₹2829.35, the analyst's price target of ₹2923.43 is 3.2% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.