Why Balkrishna Industries stock price is falling?

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Reasons behind the recent downward rally in Balkrishna Industries stock price

Introduction

Stock price of Balkrishna Industries plummeted by 10% on 9th February’21 despite posting a strong set of quarterly results. The stock had recently touched an all-time high level of ₹1,875 on 8th February’21. Let us take a look at the reasons behind this fall in stock price despite posting good quarterly results

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Why Balkrishna Industries stock price is falling?

Stock Price Movement

BKT price movement since Mar'20
Stock price movement since Mar’20

New Capex Plans

  • Company’s management has announced their plans to incur a fresh capex to the tune of ₹1900 crore to cater to the increasing demand.
  • This capex will be employed as follows:
    • Increase tire capacity of Brownfield Project at Bhuj. Company is planning to invest ₹800 crore in this project to increase their capacity from 3 lakh MTPA to 3.5 lakh MTPA.
    • Further, company wants to increase its carbon black capacity from 1.15 lakh MTPA to 2 lakh MTPA including advancing carbon and black power plant at Bhuj. For this project, it will invest ₹650 crore.
    • Rest ₹450 crore will be utilized for Modernization, Automation and Technology upgradation.
  • Company’s board has directed that the payback period of this capex ranges between five to six years.
  • The board has also decided to shelve their US capex plan for greenfield expansion with an estimated outlay of $100 Mn
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Possible changes in Capital structure due to new capex plans

  • Although the new capex is planned to meet the increasing future demand, the company seems to have planned it too soon as its earlier capex cycle has recently ended.
  • Balkrishna over the period of time has worked with policy of low debt as shown below –
BKT D/E
Balkrishna Industries D/E over the years
  • However, company’s recent plans to fund the capex using debt did not bode well with institutional investors.
  • Also, the new capex’s long payback period will weigh on company’s free cash-flow generation in short term.
  • Institutional investors are also wary of company investing in expanding capacity of its non-core business i.e carbon black. Although majority of carbon black will be used for captive consumption, company plans to sell some of it to third party buyers.

Conclusion

Thus, the company’s stock price fell 10% in a day mainly due to concerns over the new capex and changing capital structure. There was also some profit booking as the stock price had zoomed more than 150% from its March’20 lows. However, there are no significant changes in fundamentals of the company.





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