The other worry is the trade war. This is impacting demand from other (non-agri) sectors given uncertain tariff structures and currency volatility in countries (that are in the midst of the trade tussle). The company, however, indicated that demand in other sectors could improve if the currency situation stabilises.
The worry for the Street, given the lower volumes, is the impact on profitability. Margins for the quarter were down 430 basis points year-on-year to 27.7 per cent. Higher crude oil prices were expected to make synthetic rubber and other crude oil derivatives expensive. Synthetic and natural rubber account for 65 per cent of raw material costs.
The rise in promotional expenses is also expected to weigh on profitability, which may worsen as the company may not be able to pass on the entire pricing pressure to customers. However despite the challenges, the company has stuck to its FY19 margin band of 28-30 per cent.
Finally, a Rs 20 billion modernisation and expansion plan across locations is expected to weigh on returns ratios, especially till FY21, given the ramp-up and shifting of production from old to new plants. The near term, could thus be tough for Balkrishna on the volume growth, profitability, and expansion fronts.