Why Balkrishna Industries stock price is falling?

Reasons behind the recent downward rally in Balkrishna Industries stock price

Introduction

The Balkrishna Industries share price 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

Why Balkrishna Industries’ share price is falling?

Stock Price Movement

New Capex Plans

• Balkrishna Industries ltd.’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. The company is planning to invest ₹800 crores in this project to increase its capacity from 3 lakh MTPA to 3.5 lakh MTPA.
  • Further, the company wants to increase its carbon black capacity from 1.15 lakh MTPA to 2 lakh MTPA including advancing the carbon and black power plant at Bhuj. For this project, it will invest ₹650 crores.

• Rest ₹450 crores will be utilized for Modernization, Automation and Technology upgradation.

• Balkrishna Industries’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

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 Industries over the period of time has worked with the policy of low debt as shown below
• However, the 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 the company’s free-cash-flow generation in short term.
• The company’s investment in expanding its carbon black capacity is also viewed with caution by institutional investors. The company plans to sell some carbon black to third parties, even though the majority is for captive consumption.

Conclusion

Thus, the company’s stock price fell 10% in a day mainly due to concerns over the new CAPEX and changing capital structure. Moreover, some profit booking was evident which was caused by the stock price soaring more than 150% from its March’20 lows. However, the company’s fundamentals have not changed significantly.