The stock of Balkrishna Industries has gained over 37 per cent in the last two months, on strong June quarter results and expectations of an uptick in global demand for off-the-road tyres.
Brokerages have re-rated the stock after the quarterly results, given they expect robust volume growth and low-cost operations to reflect both on revenue and earnings trajectory over the next two years. The firm's net profit, for example, is expected to grow upwards of 30 per cent annually from FY18-20.
The key trigger, recently, has been the 36-per-cent year-on-year growth in revenues, led by 23 per cent growth in volumes in the June quarter. The performance of the company at the operating profit level has been even better, with growth of 67 per cent. The better operational performance was on the back of a favourable product mix and lower input cost. Margins, too, saw an impressive 500 basis points jump to 29.1 per cent. A weaker Indian currency also aided the gains.
The company's backward integration will help improve profitability. Given the volume growth, it is building a carbon black manufacturing facility, with capacity of 140,000 tonnes. Analysts at Anand Rathi say the backward integration will improve the company's profitability over the next 3-4 years. Analysts also estimate gains of about 1.5 per cent annually at the operating profit level, once utilisation levels peak.
At the current level, the stock is trading at 28 times its FY19 earnings estimates. Investors can look at the stock on dips.