Balkrishna Industries Limited (502355) Earnings Call Transcript

Ladies and gentlemen, good day, and welcome to Q1 FY '22 Earnings Conference Call of Balkrishna Industries hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. This conference call may contain forward-looking statements about the company, which are based on the beliefs, opinions and expectation of the company as on date of this call. These statements are not guarantees of future performance and involve risks and uncertainties that are difficult to predict. I would now like to hand the conference over to Mr. Jinesh Gandhi from Motilal Oswal Financial Services. Thank you, and over to you, sir.

Thank you, Janice. Good morning, everyone. On behalf of Motilal Oswal Financial Services, I would like to welcome you all to 1Q FY '22 post results conference call of Balkrishna Industries. Balkrishna Industries is represented by Mr. Rajiv Poddar, Managing Director, and the senior management team of Balkrishna Industries. We'd like to thank the management for taking time out for this call. I will now hand over the call to Mr. Poddar for his opening remarks. Over to you, sir.

Thank you, Jinesh. Good morning, everyone. I welcome you all to the Q1 FY '22 earnings call of Balkrishna Industries Limited. Hope all of you, along with your near and dear ones, are safe and healthy. Along with me, I have Mr. Bajaj, President, Commercial and CFO; and SGA, our Investor Relationship Advisor. Let me begin with performance updates. We continue to witness strong demands across geographies and segments. This is visible in our sales volume numbers where we have clocked 68,608 metric ton for the quarter 1 of the financial year '22. This is our highest quarterly sales volumes. We expect this momentum to continue as economic activity is in an upward trend and the government's worldwide are creating infrastructure. Further, end prices of commodities and agricultural produce continues to be robust, thereby giving strong support to our sector. While on the demand front, we remain positive, the raw material scenario is very challenging. All raw material prices are on an upward trend, and this will impact our margin profile for the next few months. Further, the logistic costs have gone up significantly across all routes, and we believe it could continue to be at similar levels throughout the financial year. In view of these cost pressures, we have been taking price increase of our products in the end markets on a quarterly basis. We are confident that we will be able to maintain a 28% to 30% annual EBITDA margin on a long-term sustainable basis. At BKT, we continue to serve the society during these challenging times. We have, during the second wave, vaccinated over 12,000 people in addition to supporting lives through various other initiatives through our WE CARE foundation. Let me now give you an update on our ongoing and new CapEx program, greenfield tire plant at Waluj. As mentioned in the previous quarter call, the greenfield tire project is expected to be completed by 30th September '21. All the new CapEx announced recently is progressing as per schedule. We envisage the entire new CapEx of INR 1,900 crores to be funded by internal accruals and some debt, if needed, in the financial year '22 and '23. With this, I now move to the operational highlights. Our sales volume for the quarter was 68,608 metric tons, a growth of 80% year-on-year. Our stand-alone revenue for the quarter stood at INR 1,828 crores, which includes realized gain on foreign exchange pertaining to sales of INR 15 crores. For the quarter 1 of this financial year, 53% of the sales came from Europe, 19% from India, 16% from Americas and the balance from the rest of the world. In terms of channel contribution, 72% was contributed from replacement segment, while OEM contributed to 26%, with the balance coming from offtake. In terms of category, agricultural segment contributed to 66%, while OTR contributed to 31%. The balance came from other segments. The stand-alone EBITDA for the quarter was at INR 535 crores with a margin of 29.2%. Other income for the quarter stood at INR 40 crores, while unrealized gain stood at INR 17 crores. Coming to the net ForEx items. For the quarter, we incurred a net ForEx gain of INR 38 crores. This includes realized gains of INR 22 crores and unrealized gains of INR 17 crores. Profit after tax stood for the quarter at INR 331 crores, with a margin of 18.1%. The contingent liability as of 31st March '21 was INR 65.4 crores as disclosed in our annual report. In the first quarter of this financial year, certain tax assessment has been completed and the liability has been crystallized at INR 35.7 crores, which has been included in the tax expenses. In quarter 1 of financial year '22, as income tax of earlier years, the balance amount will get crystallized in coming quarters and will be accordingly included in tax expenses. Our gross debt stood at INR 1,076 crores. Our cash and cash equivalents were INR 1,557 crores, implying a net cash position. For Q1 of this financial year, we incurred a total CapEx of INR 366 crores. Of this, approximately INR 200 crores has been spent on the new CapEx program of INR 1,900 crores. For the first quarter of financial year '22, the euro hedge rate was INR 87.53, and the forward hedge rate currently stands at around INR 90. The Board of Directors has recommended an interim dividend of INR 4 per equity share. As mentioned in my last quarter, we remain optimistic for the financial year '22. And accordingly, have been guiding for 250,000 to 265,000 metric tons of sales volume. We are confident of improving the brand equity of BKT in the end market. With this, I conclude my opening remarks and leave the floor open for questions and answers. Thank you.

[Operator Instructions] We take the first question from the line of Ashutosh Tiwari from Equirus Securities.

Congrats on the strong performance. Firstly in terms of R&D costs and ocean freight costs, how do you see things moving in this quarter versus Q1? Will the ocean freight cost will also increase in Q1 -- Q2 versus Q1?

So the ocean cost has already started to go up, and we see this will be continuing for the rest of the financial year.

So -- but will we see a further increase in Q2? Or will it remains under Q1 levels?

No, we see some marginal increase in Q2.

Okay. And RM cost?

RM cost, we believe that we have reached the highs, and it should sustain at these levels, the new levels that we are talking about.

Okay. And how much price you have taken in July?

2% to 3%.

Okay. So I mean, if the only ocean freight cost will increase quarter-on-quarter, RM [ relatively ] also will. That means that margins are low in Q2 versus Q1.

No. So we believe that it will sustain itself between the guidance that we are talking about, between 28% and 30%, and we are quite confident of hitting those numbers.

And sir, secondly, on this Waluj expansion. So after that [ plant ] comes in, will we still operate the old plant as required in the demand or we cannot do that?

We'll see once the ramp-up and the production is shifted what is the condition we'll do on assessment, and then we will take a call on what to do with the old one -- old plant.

The next question is from the line of Siddharth Bera from Nomura.

Sir, my first question is on the demand side. I mean, clearly, we are seeing a very strong commodity and cycle -- crop cycle, and I mean, based on your achievement this will be probably the second year when we are seeing such a strong demand for us. So in terms of the outlook, can you indicate how to look at FY '23. Can we again grow? Because ultimately, these generally follow a cyclical pattern. So any thoughts on how to look at 23% growth over the strong growth this year. And second is on the [ finance ] also, I mean continue to guide about [ 265,000 ] which implies only [ 65 ] per quarter in the next 2 quarters. But given the strong demand, I think it can be higher. So some thoughts on that, why are we being so conservative.

So as we said last quarter also and now also, we are repeating that the times -- current times are unprecedented, and there is a lot of uncertainty around the world. Whether the new wave hits, the new variants get mutated. So that's why we are saying that we are confident of hitting these numbers. The demand is strong as of now. But looking at the uncertainty around us, we cannot predict what will be the exact number. We will review it in the end of next quarter in that call, then by that time, we will have more visibility towards the last 2 quarters. So we can look at those numbers more accurately at that time.

Okay. And sir, on the outlook for next year, if you have any visibility on that, how do you look at this cycle sustaining?

So it's too early to give a number for next year. But overall, if you can see that with the CapEx coming up and the expansion program that we have lined up, we see that the demand should remain strong and sustain itself or in the coming years. So that's why we are taking ahead this program of expansion. So it should -- it looks good. But difficult to give you exact number for the next year or the period for -- exact numbers for the next year, what will be there, what will not be there.

Okay. And on the CapEx side, sir, I mean, what is the maximum capacity of production we can do in next 2 quarters? And will there be possible to prepone the second phase of [ good ] plant if the demand is strong?

So we are working strongly towards the new project, which is there. And as I mentioned in my opening remarks that the progress is already there and is going on in schedule. So we are looking to see how best we can do. As far as the capacity that we are currently operating, it looks difficult to get numbers very significantly higher than what we have right now. So as we've said, our current capacity is at 285,000 metric tons, and that's the maximum we can do till the new project comes on board.

The next question is from the line of Pramod from InCred Capital.

Wanted to know any of the subsegments you feel are surprising you on the demand front or the demand side?

Sorry, can you repeat your question? Your voice is very inaudible.

Can you hear me now?

Yes, better.

Yes. So basically, I was saying within your subsegment, anywhere you see the demand being better than what you thought at the start of the year or 6 months back?

So in all the segments, we are seeing a good positive trend, whether it is in the agriculture side or industrial construction side. Everywhere, we are seeing some good uptake coming up and good tailwinds in all sectors. So it's very difficult to say one subsegment or the other. Overall, there is a good tailwind.

And in that context, where are your system inventories in the sense the stockyard inventories or the transit inventory, how they stand? Are they still at normal levels? Or you think they have substantially gone below, considering the demand is strong?

So the inventory, it's a part of the cycle. So it's going on. We are managing that well and looking to sustain those -- keeping in mind the existing levels of sales which are there.

You don't feel they are understocked or any of that?

No, no, no.

And sir, are they -- considering the commodity prices have been pretty strong, are there any strong wins in that segment or in the U.S. market for you to reach your medium-term goals in both these segments or market share? Have you seen that traction coming in the recent quarters because of the demand?

So yes, you can see, during my opening remarks, Americas, the sales percentage has gone up marginally. So that indicates that we are pushing on those sectors. Even if you see in the channel contribution of segment contribution of agri of the OTR that has also gone up to 31%. So that -- those things are continuously being monitored and being pushed towards, and that growth is coming up.

The next question is from the line of Ankit Kanodia from Smart Sync Services.

If you take a long-term view in the -- if you see the trajectory in which if you compare our tires and prices of our competitors in the other geographies, so there was a huge gap earlier, somewhere in 2005, '06, '07, then the gap is slowly narrowing down over the years. So right now, if I'm correct, it is somewhere between 15% to 20%, right?

Correct. Yes.

And if we take a, say, 5- to 7-year view from here, it may further reduce. So how do we stay relevant? And main one question is towards the brand initiatives, as to how much that will come into play, or we still be focused more on becoming a lowest cost player. If you can throw some color there.

So I think -- yes, so I think if you see the initiatives, keeping in mind that we would like to bridge the gap to the top level, we have already started initiatives a few years back. And if you see our sponsorship program, brand building awareness programs have been going on across all geographies. And we are spending quite a significant amount of money towards that. So that is what we see. Of course, we will reach a point where we will be closer to the top, but we will not be at the top, we will not be at the top competitor level. But there will always be some gap, but the gap will continue to narrow for the time being.

And so if we again look at the last cycle when the whole travel -- the OTR market was basically stagnant during the period of, say, 2013 to 2018, '19. So we experienced really good volume growth even in that period. Now when we see all around the world, the demand coming back, which is also reflecting in our quarterly volume numbers also. So is it fair to assume that over a long-term period, say to 5 years, we will have a higher growth directly in terms of volumes?

So as of today, the demand looks positive. We see some strong tailwinds behind us, whereby we should be able to achieve the short-term vision that we have set up then the guidance that we're giving you for a year, we should be able to do that. And it's a process that we are building for the long term with the new capacities coming up and new plants coming on board. So that will give us additional weapon in our armory to go out in the marketplace and compete.

And anything about the competitive scenario over here, as in how do we look at the competition, specifically in India when we are now getting inroads in the Indian market?

So I don't see any change in the competitive scenario across the globe, and we continue to be where we were. So we are looking at it on a macro level and micro-monitoring it. So we should continue doing that.

We take your next question from the line of Arjun K from Kotak Mutual Fund.

Congratulations for a good set of numbers. My first question is just a clarification, sir. In inventory levels, you stated inventory levels have normalized. Are we talking of our inventory levels or at the dealer level or at the OEM levels?

At the dealer levels.

Sure. Because earlier we referred to then be slightly lower than normal in terms of inventory. So you believe that with this volumes, inventories have now normalized?

Yes. For the moment, they are normalized. But they get on the lower side of where they were, but they are much better than earlier. So that's why we say they are normalized.

Sure. Just in terms of number of days or in terms of quantity, how would that be different from what probably we have seen as a base level across our dealerships?

So normally, we used to have about -- maybe about 40 days, 40, 45 days, which is now close to 35, 40 days, which had gone down to about 20, 25 days. Now it's up to about 35, 40 days approximately.

No, this is helpful. Secondly, sir, you talked about taking price hikes across on a quarterly basis. So while we have given a long-term guidance of 28% to 30%, does this cost increase accounts for the increase in freight expenses or you believe that since it being transient that is not something probably we'll be able to pass on, given that our competitors are more local-based versus raw material which impacts even equally?

So I mean, the last price increase which we have done in July should offset some of the operational cost of logistics, which are there. So we -- that's why I say that we should be able to sustain these numbers. So that's why the guidance is a volume of 28% to 30%, and we should sustain at those levels.

Sure. Fair enough. Lastly, in terms of just the product profile by side. So we hear a lot of incremental environmental-conscious company shifting maybe towards EVs for mining operations. So do we have specific tires for the same? Is there a different compound used, maybe more silica versus carbon black? Maybe if you could just talk about that, our R&D efforts, et cetera. So while we have come with higher-range tires, if you could just talk about how R&D will evolve our future technology?

Yes. So if you see, we have been doing that in the past. And the reason I refer to past is because there is something in the works on this front. But it's too early to mention or disclose, so we will get back to you once we have more concrete details to share. But if you see historically, we have always been amongst the top players to bring out and be -- along with the curve on innovation. So even in the agri side, when you spoke about low soil compaction and all, BKT was amongst the top 4 companies across the globe to launch those -- launch in those segments. So we are working on these segments and these EV tires, et cetera, but too early to disclose anything.

Sure. Fair enough. Just as the last part of the first question. In terms of peak, so what is the peak inventory level that we have seen being with dealers? If you could just help me with that number?

Sorry, what is the...

So you mentioned the average is roughly 45 days in the bottom, we saw it going down to 20, 25 days. So in peak, what's the peak inventory that we are seeing with dealers?

The peak inventory should be around 45 days.

We take the next question from the line of from [ Ramdish Prasad ] from [indiscernible].

Okay. I just had one question. Like we reported the highest quarterly sales volume this quarter, but it didn't translate into higher like sales number. So what could be like the guidance going forward? And what was the main reason that you can translate to the revenue this quarter?

Sorry, your voice is very inaudible.

Can you hear me?

Yes.

Okay. My first question was that this quarter, we had the highest quarterly sales volume. It didn't translate into like higher revenue numbers and terms. So what was the reason behind it? And what could be like it could be looking forward in the next quarters ahead? Like will it be seeing the revenue numbers improving per se. And as you said that the sales volume will remain approximately the same versus [indiscernible], so expecting some comments on that.

So revenue was also the highest, no?

Like INR 18 crores, INR 28 crores, something like that.

Yes, so that is our highest revenue.

Okay. Fair enough.

So I'm -- that why I'm confused with your questions because the highest quarterly number and highest revenues are there.

The next question is from the line of an as from Nishant Vass from ICICI Securities.

Congratulations on the results. Sir, my first question is just to understand your 1Q -- basically 4Q to 1Q impact, can you quantify the raw material impact as well as the freight cost impact quarter-on-quarter?

So basically, if you see overall the expenses for the other expenses has gone up by about 90 basis points. And significantly, this is attributed from the logistics cost, which has gone up from June of '21.

So you're saying largely the 90 basis point is a function of...

Yes. Yes, yes. And the raw material costs have already been factored into the first half of this year, and we've taken those price increases to map those. And we believe the raw materials should now stabilize at these levels. And for the -- your logistics cost increase, which is where we are taking some price increase in July, which should offset partially the cost of those, which will take 2% to 3% in July.

Okay. Sir, just to understand how the contracts were, because obviously, freight costs have gone up since last December significantly globally. So just to understand, how does it -- how do we cover the FOB prices with our distributors? Is everything covered by us? Or is there a part contract which get covered by the buyers? How does that work?

So it's a mix and match, the different customers have different geographies, different customers have different understanding. So some of -- on CIF basis, some on FOB basis. So the CIF ones is where we take care of the freight and the rest is where the customer takes care of the freight. So wherever it was FOB, that gets factored in separately. But the CIF one is where we are seeing the cost increase, and that's why we are taking this price increase to match those.

So if I had to broadly ask you not an exact number, broadly, how much of your export revenue would be under CIF and FOB, any broad sense on that?

If -- I don't have the numbers handy with me at this moment.

No worries. So sir, my second question is on the E&P expenses. Obviously, we've been carrying on brand-building exercises for multiple years now. So how are you thinking about that this year as you're coming out of the pandemic? Are you looking at expenses in terms of in line with revenue growth or your thinking of percentage likely to remain same at 6%? How are you thinking around that?

Yes. So I think on an aggregate level, we are spending through the tune of INR 120 crores, and which we see will continue at these levels for the time being at least.

Okay. So this is just from pure marketing you mean, not commission terms? Okay.

This is in regards to promotion and marketing spend, marketing, basically brand-building activities, what I'm talking about. And...

And is there an incremental new program?

No, not at this stage. But as the business grows, we constantly review this and then continue to monitor whether it needs to be increased or go up or go down.

Okay. Okay. And sir, my last question, if you can help us. You mentioned about your euro hedge rate. What was the dollar pricing for this quarter, dollar hedge rate, whatever you realize?

Dollar, 78.

Sorry, sir.

78.

78, okay.

The next question is from the line of Sanjaya Satapathy from Ampersand.

Yes. So one question is that your revenue mix was 23% for India last year and it has come down to something like 18%, 19% this Q1. Was it because of some lockdown-related issues or your lost market shares?

No, it is -- if you see in the first couple of months of this year -- of this financial year, most of India was under lockdown, though we didn't have a central lockdown like last year. But at state levels, a lot of them were under lockdown. So we're seeing that effect come in.

So will that kind of -- is that improving now and we will see better numbers from India going forward?

We are hoping for that, yes.

And you are not seeing any signals yet?

No, I mean, basically, the demand is robust in India. India overall situation is good. So we expect it to come back to those levels.

Okay. And there is no seasonality or there is like same monsoon or some extra factors?