Target: ₹2,093

CMP: ₹2,071.75

While Balkrishna Industries enjoys a sustainable competitive advantage over global peers in the OHT segment, the global OHT demand outlook remains uncertain, given the erratic weather conditions in Europe and recessionary trends in the US and Europe.

Further, Balkrishna Industries' margin has declined to a multi-quarter low of 20 per cent due to (1) high input costs; (2) a sharp increase in freight costs; and (3) adverse currency movement. We assume its margin would normalise gradually to 27.5 per cent by FY25 as these cost headwinds normalise.

While offtake is likely to remain weak in Q2, management expects the same to pick up from Q3. While we expect Balkrishna to continue to outperform industry growth and post 11 per cent volume CAGR over FY22-25, our volume assumptions may face downside risks if industry demand worsens more than expected.

Significantly high capex trends in the last five years have hurt Balkrishna Industries’ returns and remains a key cause of concern. Capex is likely to remain elevated in the near term as (1) Balkrishna Industries recently temporarily deferred ₹400 crore of capex for plant refurbishment and (2) it is expected to hit 90 per cent utilisation level in FY23.

At 23x FY24 PER, Balkrishna Industries stock appears expensive. Initiate with a Reduce rating and a target price of ₹2,093.