Balkrishna Industries Ltd (BALKRISIND) Q2 FY23 Earnings Concall Transcript

Balkrishna Industries Ltd (NSE:BALKRISIND) Q2 FY23 Earnings Concall dated Nov. 15, 2022

Corporate Participants:

Rajiv Poddar — Joint Managing Director

Madhusudan Bajaj — President, Commercial and Chief Financial Officer

Analysts:

Siddhartha Bera — Nomura — Analyst

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Ashutosh Tiwari — Equirus Securities — Analyst

Pramod Amthe — InCred Capital — Analyst

Sonal Gupta — L&T Mutual Fund — Analyst

Chirag Shah — Nuvama — Analyst

Basudeb Banerjee — ICICI Securities — Analyst

Nishit Jalan — Axis Capital — Analyst

Ankit Kanodia — Smart Sync Services — Analyst

Abhishek Jain — Dolat Capital — Analyst

Garvit Goyal — Invest Research — Analyst

Disha Sheth — Anvil — Analyst

Amar Kant Gaur — PhillipCapital India Private Limited — Analyst

Presentation:

Operator

Good morning, ladies and gentlemen. Welcome to the Q2 FY ’23 Earnings Conference Call of Balkrishna Industries Limited hosted by PhillipCapital India Private Limited.

This conference call may contain forward-looking statements about the company, which are based on beliefs, opinions and expectations of the company as on the date of this call. These statements are not the guarantees of future performance and involve risks and uncertainties that are difficult to predict. [Operator Instructions] Please note that this conference is being recorded.

I now hand the conference over to Mr. Amar Kant Gaur from PhillipCapital India Private Limited. Thank you, and over to you, sir.

Amar Kant Gaur — PhillipCapital India Private Limited — Analyst

Thanks, Lisan. Good day, everyone. On behalf of PhillipCapital India Private Limited, I welcome you to Q2 FY ’23 earnings conference call of Balkrishna Industries. I would also like to thank the management for taking out time for this call. Balkrishna Industries is represented by Mr. Rajiv Poddar, Joint Managing Director, and the senior management team.

As usual, we will start with a review of the quarter by Mr. Poddar, and then follow it up with Q&A. Over to you, Mr. Poddar.

Rajiv Poddar — Joint Managing Director

Hi. Thank you, Amar. Good morning, everyone, and thank you for joining us today. Along with me, I have Mr. Bajaj, Senior President, Commercial and CFO; and also SGA, our Investor Relations adviser.

Let me begin with performance updates. Looking at the current geopolitical challenges across the globe, especially in Europe, which is also our biggest market, there are strong headwinds. Despite these challenges during the quarter, the company could deliver good performance and registered a sales volume of 78,872 metric tons during the quarter. The current situation in Europe continues to be challenging and thereby may have an effect on our performance in the second half of this financial year.

The demand pattern has been relatively better in Northern America. However, recession fears may also have an impact on the growth rates over there. India continues to be stable, supported by better economic environment backed by good monsoons. The global economic weakening, coupled with sharp uptick in interest rates, has also led to a reduction in order placements by dealers and distributors. During this challenging macro environment, we are unable to guide for annual sales volume for this financial year. The recent price correction in raw materials, and logistics costs bode well for our profit margin. However, as guided, the benefits are expected to kick in from early Q4.

Let me update you on the Waluj plant. The Board had earlier intended to replace the old plant by a newly commissioned greenfield plant. But given the subsequent business outlook, it was decided to continue operations at both the plants, along with modernization of the old plant. The Board has now decided to revert to its earlier decision of seizing operations at the old plant. The earlier approved capex of INR350 crores for modernization of the old plant will now be utilized at the new plant site to bring in economies of scale. This will be done as a brownfield project. It is expected to be completed in the first half of the next financial year.

The Waluj location will accordingly have an overall capacity of 55,000 tons per annum at a single site. Accordingly, the current achievable capacity will stand reduced to 335,000 metric tons per annum and will increase back to the original number of 360,000 metric tons by the end of first half of second — of the next financial year, post commissioning of the Waluj brownfield project.

We have also completed the modernization, automation and technology upgradation capex at our Rajasthan and Bhuj plants. We expect better productivity to kick in gradually, resulting in margin uptick. The capex for Carbon Black continues to be on track and we expect the commissioning of the 55,000 metric ton per annum Carbon Black project along with power plant during December. The Advanced Carbon Black project of 30,000 metric tons will be commissioned during the Q4 of this financial year.

With this, I now move on to the operational highlights. Our sales volume for the quarter was 78,872 metric tons, a growth of 8% year-on-year. For the first half, sales volume stood at 162,025 metric tons, a growth of 15% year-on-year. Our stand-alone revenue for the quarter stood at INR2,806 crores, which includes realized gain on foreign exchange pertaining to sales of INR102 crores. For first half of the year, revenue stood at INR5,533 crores, which includes realized gain on foreign exchange pertaining to the sales of INR182 crores.

For the first half of this year — financial year, 49.6% of the sales came from Europe, 19.9% came from India and 20.3% came from Americas, whilst the balance came from the rest of the world. In terms of channel contribution, 69.8% was contributed from the replacement segment, while OEM contributed to 27.6% with the balance coming from uptake. In terms of category, agricultural segment contributed to 64%, while OTR, industrial and construction contributed to 32.9%, and the balance came from other segments.

The stand-alone EBITDA for the quarter was at INR564 crores with a margin of 20.1%, while for the first half of this year, it was recorded at INR1,111 crores, translating to a margin of 20.1%. The EBITDA for the quarter has been impacted by the higher raw material costs. Other income for the quarter stood at INR58 crores, while unrealized gains stood at INR49 crores. The other income loss on M2M basis suffered in Q1 on the investment book reversed in Q2. Other income for H1 stood at INR43 crores, while unrealized gains stood at INR75 crores.

Coming to the net forex items. For the quarter, we had a net forex gain of INR168 crores, which includes a realized gain of INR120 crores and unrealized gain of INR49 crores. For the first half of this year, we had a net foreign exchange gain of INR286 crores, which includes realized gain of INR211 crores and an unrealized gain of INR75 crores.

Profit after tax stood for the quarter at INR404 crores versus — while for the first half of the financial year, it stood at INR724 crores. Our gross debt stood at INR3,090 crores at the end of September 30, ’22, of which about INR2,253 crores is relating to working capital debt. Our cash and cash equivalent were INR2,078 crores.

All the capex programs bearing Carbon Black are over. For the quarter two of the financial year, the euro hedge rate was 85. Forward hedge rate currently stands at around 85 level for the rest of the financial year. The Board of Directors have declared a second interim dividend of INR4 per share. This is in addition to an earlier interim dividend of INR4 per share also for the Q1.

With this, I conclude my opening remarks and leave the floor open for question and answer.

Questions and Answers:

 

Operator

Thank you. [Operator Instructions] The first question is from the line of Siddhartha Bera from Nomura. Please go ahead.

Siddhartha Bera — Nomura — Analyst

Hi, sir. Thanks for the opportunity. Sir, my first question is slightly delving deeper into your volume outlook on the year. Some of the challenges which you have indicated, like Europe peak demand and inflationary pressures in North America. I look at largely similar to what you have guided probably a couple of months back also. So, what changed so much, and despite that, we have seen a very decent volume in the current quarter as well in Q2. So just wanted to slightly understand more in the three months, what has changed so much that we are now not sort of indicating the volume outlook for the year? Is it something more in terms of the near-term maintenance which you are seeing or you believe that the issues may prolong slightly longer than what you are expecting, so slightly more clarity here.

Rajiv Poddar — Joint Managing Director

Thank you for the question. So basically the geopolitical scenario has gone on for longer than expected in Europe. I mean, there is no visible end or way out. So that is one. Also, a lot of it is also dependent on the weather, how severe it is in Europe because of the geopolitical scenario, they may — if the weather is — if they have a severe winter, it may have a different impact on the overall financial of Europe, whereas the winter is milder, it may safeguard some of the financial stress in Europe. So, those things are not giving a lot of confidence at the end user level. So everybody is waiting and watching. So that’s why we are unable to give guidance in the near future what is happening. The geopolitical scenario needs to really be played out before we can comment on volumes.

Siddhartha Bera — Nomura — Analyst

And in the last quarter also, we have highlighted that there has been some bit of channel restocking by dealers and distributors. So on that perspective, in the current quarter, you have seen further sort of destocking and where are the channel levels, if you can broadly indicate as well?

Rajiv Poddar — Joint Managing Director

So we have seen further destocking. So, all these things coming together is what is making us unable to comment on the outlook for the guidance.

Siddhartha Bera — Nomura — Analyst

Okay. And lastly, sir, if you can comment on the price increase. If you see the ASPs, they have gone up very sharply by about 9% quarter-on-quarter. And what I recollect last time, we said there has been no significant price hikes in the quarter. So, if you can just highlight what led to the sharp jump in the ASPs?

Rajiv Poddar — Joint Managing Director

Yeah. So, yeah, you rightly pointed that out. So there are three main factors which have contributed to this. One is the overall product mix has been better. So over the period, we have been upgrading our equipment, and we have been saying that we are moving to higher technology tires. So that has contributed to the ASP. Also the dollar movement, which has gone up sharply, has impacted in the ASP and also the higher contribution from Northern America sales. So these three factors have contributed to the ASP.

Siddhartha Bera — Nomura — Analyst

Got it. Okay, sir. I’ll come back.

Operator

Thank you. The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services. Please go ahead.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Hi, sir. Just continuing on the ASP part. So you indicated there is some contribution from North America. So, the higher ASP in North America is just because of higher share of OTR versus agri. Is that the reason ASPs are better there?

Rajiv Poddar — Joint Managing Director

Yes. And also they use a larger diameter tire, which contributes to a better product mix.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Okay. Okay. Got it. Second question pertains to the European market. So, any sense on what percentage of Europe demand is met through local production and based on that, do we expect some bit of further market share gains because of cost inflation seen in Europe?

Rajiv Poddar — Joint Managing Director

No, we don’t have those numbers with us.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Okay, okay. And lastly, if you can talk about how did the RM cost increase in this quarter and based on the current prices, what kind of savings do we expect both on RM and logistic cost, rate cost.

Madhusudan Bajaj — President, Commercial and Chief Financial Officer

So both are coming — softening. Raw material cost is also coming down and see freight is also coming down. So in the coming quarters, you will see the impact of those.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Okay. And what kind of impact was there of RM cost?

Madhusudan Bajaj — President, Commercial and Chief Financial Officer

Sorry?

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

In second quarter, what was the impact of RM costs? Indicated there was impact of RM cost, any sense on the magnitude?

Madhusudan Bajaj — President, Commercial and Chief Financial Officer

So, 200 points increase because of the dollar price. And in the coming quarters, we will see that it is softening, so it should come down.

Jinesh Gandhi — Motilal Oswal Financial Services — Analyst

Got it. Thanks. I’ll fall back in queue.

Operator

Thank you. The next question is from the line of Ashutosh Tiwari from Equirus Securities. Please go ahead.

Ashutosh Tiwari — Equirus Securities — Analyst

Yeah. Hi, sir. Sir, firstly, how are the inventories with the dealers and all?

Operator

Sorry to interrupt, Mr. Tiwari. Sir, we can not hear you clearly. Can you use the handset mode while speaking?

Ashutosh Tiwari — Equirus Securities — Analyst

Am I audible now?

Operator

Sir, your audio is very muffled.

Ashutosh Tiwari — Equirus Securities — Analyst

Is it better?

Operator

Much better. Thank you.

Ashutosh Tiwari — Equirus Securities — Analyst

Yeah. So, sir, firstly, what kind of inventory levels are there with dealer distributors right now and how it compares with normal?

Rajiv Poddar — Joint Managing Director

We can’t hear you. Sir, your question is very muffled. Hello?

Operator

Mr. Tiwari, we are unable to hear you.

Ashutosh Tiwari — Equirus Securities — Analyst

Hello. Is it better now?

Operator

Sir, please proceed.

Ashutosh Tiwari — Equirus Securities — Analyst

Yeah. My question is that like you said that inventory levels — the dealers are basically deferring the purchase and all. So, how is the inventory levels with dealers right now and how that compares to normal inventory?

Rajiv Poddar — Joint Managing Director

So, they are slowly steadily destocking, and we are seeing that impact come in.

Ashutosh Tiwari — Equirus Securities — Analyst

Okay. But how is the level, I think, normal was three to four months? Is it in line with that right now?

Rajiv Poddar — Joint Managing Director

So, currently — I mean, eventually, they will reduce it to two months as the target is to get there to two months.

Ashutosh Tiwari — Equirus Securities — Analyst

And currently they are around how much?

Rajiv Poddar — Joint Managing Director

Maybe around three months.

Ashutosh Tiwari — Equirus Securities — Analyst

Okay. And this is across Europe and US or this is more like a Europe situation?

Rajiv Poddar — Joint Managing Director

Europe and — all over, Europe and US both.

Ashutosh Tiwari — Equirus Securities — Analyst

Okay. Okay. Okay. And at retail level, we all — like we’ve already seen the demand impact in Europe or this is just an expectation that probably demand is all going ahead.

Rajiv Poddar — Joint Managing Director

Your voice is muffled. We can’t hear your question still.

Ashutosh Tiwari — Equirus Securities — Analyst

Sir, I’m saying that are we already seeing the demand impact at retail level in Europe or the expectation is that going ahead in second half demand will now taper off?

Rajiv Poddar — Joint Managing Director

We can’t comment on that, but we are seeing challenges, which way we feel may create headwinds for us.

Ashutosh Tiwari — Equirus Securities — Analyst

And lastly, sir, on the capex side, we already have done INR900 crore capex in the first half. So how do we see capex for full year and also next year as any guidance?

Rajiv Poddar — Joint Managing Director

Around another INR300 crores, INR400 crores on this point.

Ashutosh Tiwari — Equirus Securities — Analyst

And next year, any guidance?

Rajiv Poddar — Joint Managing Director

Not yet. We’ll come back to you in a bit.

Ashutosh Tiwari — Equirus Securities — Analyst

Okay. Sure, sure. Thank you.

Operator

Thank you. The next question is from the line of Pramod Amthe from InCred Capital. Please go ahead.

Pramod Amthe — InCred Capital — Analyst

Yeah, thanks for this opportunity. I wanted to know, based on your long experience in handling these export markets, how different is the macro environment now per se? And basically, what tools you feel you can use it from your end to handle the situation based on your experience of the past?

Rajiv Poddar — Joint Managing Director

So basically, if you go to see — these are unprecedented times, we’ve not had a situation in a lot of years when there is a backdrop of a war-like scenario in Europe. So that is having an impact. People have boycotted Russia and USSR. So that has an impact on their ability to save that their people by buying gas, etc. So, those scenarios are unprecedented and out of our control.

But what we are doing is, we are continuing to service the market better. We are going from our ability to do the product mix to service them better. We are doing that. We are going — following it up with our end users, with our distributors for promotion, we are not stopping anything. Also, the brand building exercise, which we have started, we are continuing all those things. So we are doing things which are under our control. And we are hoping that — I mean, we are quite hopeful that with these activities that we are doing in the long term, we will sustain and outgrow the market. Even under these challenging times, despite the challenges in Europe, we have outgrown a lot of the pace of the market.

Pramod Amthe — InCred Capital — Analyst

Sure. And related to that, sir, are there any smaller players who are struggling, you feel will go out to the marketplace? How is the response of other complicators, especially smaller ones, if there are?

Rajiv Poddar — Joint Managing Director

We never — we don’t comment on our competitors. We’ve never done it. We will stick to not commenting on them.

Pramod Amthe — InCred Capital — Analyst

Sure. And the last one is with regard to the last question on inventory. As you said, they have gone up to three months versus a comfort of two months. Is it more because of the demand collapse and the absolute numbers, which they are carrying is the same, but the base denominator of the demand has changed and hence that two months, three months variation is happening or what is the — are the over book or building in that sense?

Rajiv Poddar — Joint Managing Director

So there are two things. The demand has slightly tapered off because of the geopolitical scenario, so that is a contributor. Also, the shipping duration is eased of because of the availability of shipping. So, the shipping time is reduced. So these two factors put together is having a contribution towards getting them to have reduced their inventory.

Pramod Amthe — InCred Capital — Analyst

Sure. Thanks for detailed answers. All the best.

Rajiv Poddar — Joint Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Sonal Gupta from L&T Mutual Fund. Please go ahead.

Sonal Gupta — L&T Mutual Fund — Analyst

Yeah, hi. Good morning, and thanks for taking my question. Sir, just going back to Siddharth’s question in the beginning, trying to just understand, one, the ASP jump because — I mean, like what you’re saying that Europe, the higher contribution of North America, I mean, like quarter-on-quarter, there is no change. And even in the Agri OTR mix also, there’s no change on a quarter-on-quarter basis. So just trying to understand like is there some delayed impact of the price increases that you took in Q1 or something of that sort or…

Rajiv Poddar — Joint Managing Director

So there is no delay impact of the pricing. Basically, as I said, one is the dollar movement, which happened in this quarter, we were at about INR76-odd, it’s gone to about INR80, INR81. So that has had an impact. And in the US, as we said, it is a higher contributor. And within the product mix, we have been able to achieve a product mix of a higher value, large diameter sales within the — even within the agri sector or within the OTR sector. We have been able to get sales of higher value diameter tires. So the larger tires, more technology driven. And that has had an impact on the product mix positively. If you recollect my commentary from about a year back, we had said that we are actively pursuing to upgrade our equipment, which we’ve just said is over, has had us to create a higher capacity for these larger times and you are seeing the impact of that.

Sonal Gupta — L&T Mutual Fund — Analyst

Got it. So, I mean — okay. So, got it. And just on the RM cost also, right, like on a quarter-on-quarter basis, it’s up almost $200 per ton. So, is that what is driving that?

Rajiv Poddar — Joint Managing Director

The dollar sort of market as the raw material prices have softened, but when we are converting it back from dollar, the impact of the higher dollar has made it go up.

Sonal Gupta — L&T Mutual Fund — Analyst

Sir, I’m looking at it in dollar terms only. So I’m just trying to understand. I mean, so what is driving that even in dollar terms, it seems to have got.

Madhusudan Bajaj — President, Commercial and Chief Financial Officer

Now, prices are going down. Last quarter because old inventory and metal in transit, price impact — raw material prices were almost stagnant or slightly plus. So about impacting of the dollar increase, and this is $200. Now in the coming quarters, you will [Indecipherable] the pricing.

Sonal Gupta — L&T Mutual Fund — Analyst

Got it. And any visibility we have on the freight rates coming down, right, like because first — I mean first half, like you mentioned earlier, you were tied into the higher freight rates. So, do you have any visibility and what sort of reduction we see in the second half?

Rajiv Poddar — Joint Managing Director

So, freights are continuously going down. The impact of that should start coming from December onwards.

Sonal Gupta — L&T Mutual Fund — Analyst

Some more in Q4, you’re saying?

Rajiv Poddar — Joint Managing Director

Yes, if you heard my commentary during my speech, I said that both the raw material and the lower logistic costs should start kicking in from early Q4.

Sonal Gupta — L&T Mutual Fund — Analyst

Got it, got it. Great. Thank you, sir. Thank you.

Operator

Thank you. The next question is from the line of Chirag Shah from Nuvama. Please go ahead.

Chirag Shah — Nuvama — Analyst

Yeah. Thanks for the opportunity. Sir, I have three questions actually. Sir, one on the FX side, if you can help us understand the forex gain that we have realized, realized forex in the depreciating INR scenario, if we have hedges, the gain should have been lower, right? So how does this work, because on a net basis, we have a higher realized gain and lower unrealized losses.

Madhusudan Bajaj — President, Commercial and Chief Financial Officer

US dollar, we are not hedging. We are hedging only euro. US dollar, we are keeping open for our raw material payment and machinery purchases.

Rajiv Poddar — Joint Managing Director

Because there is a natural hedge there. So we leave that open. And the balance then we procure on the spot. Thereby, it is impacted in a gain.

Chirag Shah — Nuvama — Analyst

So, how to look at this INR102 crores of gain that we have seen and which has been going up? How should we look at this number? How should we think about this number going ahead?

Rajiv Poddar — Joint Managing Director

So, our hedge rates — we’ve given you our average hedge rates. For euro, it was at 85%. Now going forward, we can’t comment on what the euro and dollar will go to. We can tell you what we are hedging it.

Chirag Shah — Nuvama — Analyst

Okay. So our hedge rates. So when I say INR85, is it right to assume that for the next 12 months, it is in this range INR85 plus/minus INR2?

Rajiv Poddar — Joint Managing Director

For this financial year, it is at INR85. For the next 12 months, I don’t have the number, but it is in that range.

Chirag Shah — Nuvama — Analyst

It is in that range. This is helpful, sir. Sir, second question was, in general, if you look at your commentary your guidance on volume, the way you have indicated is really very worrisome. But in your commentary, it doesn’t appear to be that worrisome. So why such a big conservatism in your volume guidance? One. What I’m highlighting is because if there are cost pressures coming up in, say, Europe, for example, you have a natural advantage of low-cost manufacturing base and you can use that lever to gain volume/market share without impacting the profitability significantly.

Rajiv Poddar — Joint Managing Director

So, we are seeing — I mean, as I mentioned is, we are seeing volatility in the marketplace. We are seeing — we don’t know how the geopolitical scenario will play out. So, those things are worrisome. It is not that there are cost pressures on those manufacturers there, and we are able to use. Today, we don’t know how the — in the backdrop of the war, how the scenario will play out, what happens, who does what. So those things are what are at a macro level can have a big impact in the — as I mentioned, if the winter is severe, then it will have a financial implication on all the countries there. That may result in having lower — there may be higher burden on the people with taxations or what — so we don’t know. So those are the issues which are creating worrisome factor. It is not that there is a cost pressure only on the local manufacturer, but also on the end users. There will be a cost implication on everybody.

Chirag Shah — Nuvama — Analyst

But if you can help us understand one small thing that versus a European plant who manufactures in Europe and sells in Europe and someone like Balkrishna who manufactures in India, the cost advantage would have gone up by how much? Is it possible? Would it have gone up by 5, 7 percentage points?

Rajiv Poddar — Joint Managing Director

I can’t give you the breakup of how much we have got advantage of, because those — we can’t disclose those.

Chirag Shah — Nuvama — Analyst

Relatively versus what it was before this war situation?

Rajiv Poddar — Joint Managing Director

Let me tell you one thing. If you look at the numbers, if you see in my commentary, I said despite these challenges, in the last quarter, our performance registered sales volume of 78,000 tons, which is more than the marketplace, which is more than what the people are doing there, which is what — so that itself is an indication that we are growing and taking out market share more than the market pace is growing. So that is an indication that we are already taking up market from market share.

Chirag Shah — Nuvama — Analyst

Sir, lastly, the shift towards bigger tires that you indicated, the driver of your ASP in the quarter, one of the reasons. Is this the new base because some of the efforts that you’ve been putting over the last one, 1.5 years has started playing out. So can we assume that the kind of ASP or the mix that you have seen in the quarter, can stay as a base or there were some specific orders that you won because of which the biggest tire was sold in larger quantity.

Rajiv Poddar — Joint Managing Director

No. So firstly, the product mix can change depending on the order scenario at that particular thing. We don’t have a control over that. What we have now is the ability to do a higher capacity of the higher larger diameter tires, which can improve my product mix. But if the order comes in the other one, I don’t use this as a base. I have only demonstrated that over the last one, 1.5 years, whatever investment we have done towards creating this capacity has played out. Now, if the product mix, order product mix continues to be this, I can continue to service in this category. If the product mix changes, we can continue to service better to the other ones. So we are here to demonstrate whatever the end user needs we can manufacture. Those are under my control. We can do that, but I can’t tell you that whether this will be a base or not that I cannot comment on because markets are not — the demand is controlled by the end user.

Chirag Shah — Nuvama — Analyst

Yeah. But at least for next three, six months, can we assume that the order book or the indication that you have is for better utilization of this bigger tire facility?

Rajiv Poddar — Joint Managing Director

No, I cannot comment on the future because we are uncertain of what’s going to happen.

Chirag Shah — Nuvama — Analyst

Okay. Thank you very much.

Rajiv Poddar — Joint Managing Director

We can comment on what we are doing. We are doing all the things that we have been telling you all about and some of them you are seeing the benefits of that, but we cannot comment on the market outlook because we see a lot of volatility due to uncertainty in the geopolitical scenario.

Chirag Shah — Nuvama — Analyst

Okay. Thank you very much, and all the best.

Operator

Thank you. The next question is from the line of Basudeb Banerjee from ICICI Securities. Please go ahead.

Basudeb Banerjee — ICICI Securities — Analyst

Thanks. Sir, just continuing on the same topic as Chirag was discussing, just trying to understand from a different perspective that, as you said, such good volume in such a scenario where peak of the geopolitical tensions were there, in fact, some kind of softening in the geopolitical situation that is coming. Also, the power cost and all other adversities were at their peak in such a situation where inventory destocking happens, such good volumes, record gross profit per kg, record ASP, all good things you delivered. In such a backdrop incrementally, you are taking the decision of removing guidance just because of a temporary volatility and uncertainty. So, shall one look at from a perspective that too much of guidance-related expectation, if you don’t need two months of pessimism just to avoid that you are taking a clean set or you are genuinely concerned about incremental demand debit? That will be great, sir, if you can explain.

Rajiv Poddar — Joint Managing Director

So, we are — firstly, thank you, sir, for summing it up very well for me. Thank you for that. So, I think there are — it’s a mix of both. There is a genuine concern because we don’t know how the political scenario will play out over there in Europe. We are uncertain of that. And again, that backdrop, it is very difficult to comment on a number because we don’t want to misguide people either upward or downward and being a conservative approach. We have always out beaten our numbers. So it’s a mix of both, but it’s under current circumstances, it is too difficult to put any number because we don’t know tomorrow, you wake up and what the political scenario plays out over there. So under those backdrop is extremely volatile to give a number. But so yes, you’re absolutely right. It’s a mix of both. There is a genuine concern and there is also trying to use translate so that we don’t miscommunicate on misguide the market as to where the number will.

Basudeb Banerjee — ICICI Securities — Analyst

Sure. Second question, sir, again, on the similar lines that record ASP sustainability is a function of multiple things, a few of them are beyond your control also. But if I look at gross profit per kg, which is about INR180, another record level, which is largely a thing which you can control through product mix and cost management, where we are almost at the higher end of the market. So any comment about sustainability or further improvement in scope of gross profit per kg?

Rajiv Poddar — Joint Managing Director

So, on the ASP, what we said is we may not be able to sustain these numbers because if the shipping costs start going down, we may have to pass it on to the end users, so which we are — we see there’s a lot of multiple things that have been built into that. Also the — if the dollar softness, that will also have an impact on the ASP because these are things which are the dollar movement, etc, has factored into the upward trend when the dollar and it’s at its peak today. If the dollar softens, we may have to soften that as well.

Regarding the gross margin, as I said, we are estimating some raw material correction, which has already come in and the logistic costs, which have started to go down, this should help us in our margins. And we have seen the benefit of that to start kicking in from the Q4 of this year.

Basudeb Banerjee — ICICI Securities — Analyst

So then, last question, sir, in the presentation, there are some comments about Waluj plant capex plan. So if you can explain that?

Rajiv Poddar — Joint Managing Director

So basically if you go back when we had taken up the idea of setting up a greenfield project, we have said that the Aurangabad or the Waluj plant is being our oldest plant, and the machinery, the building, etc, is becoming redundant. We had decided to make a new greenfield project, which was supposed to replace the old plant. When the new plant got commissioned, the business outlook was then very strong and positive. So we had said that we will continue both to cater to the demand as opposed to shutdown capacity which you can yet produce.

Now we have — and for doing that, we were going to spend roughly the board approved approximately INR350 crores for modernization of the whole plant. Now due under the current circumstances, we believe that rather than spending the money there, it may be either to spend it in the newer site where we have space to create a new brownfield and add this capacity over there so that in the long term, both the plants are new and also under one location. So your cost on economies of scale should kick in, in that one plant as opposed to running two plants.

So, this INR350 crores, which you are going to spend in the old plant or modernization will be used in the new location and create similar capacity. So at the end of the day, in the second half of next year onwards, as I have mentioned, our capacity will go back to 360,000 with 55,000 coming at a single location at Aurangabad as opposed to having two plants.

Basudeb Banerjee — ICICI Securities — Analyst

And the older plant machinery, those things will be…?

Rajiv Poddar — Joint Managing Director

Some of them will be shifted and the rest, we will see what to do. We have not yet taken a call on the old plant in the line work to do[Indecipherable].

Basudeb Banerjee — ICICI Securities — Analyst

So basically 3,60,000 will remain with a modernized plant rather than using old Waluj plant.

Rajiv Poddar — Joint Managing Director

Yes, yes. Absolutely correct. Temporarily, our capacity will go down to3,35,000 for the next six months. And in that much time, the new plant will be ready and shipping should happen and it should go back to 360,000.

Basudeb Banerjee — ICICI Securities — Analyst

Sure, sir. Correct.

Operator

Thank you. The next question is from the line of Rakesh from Axis Capital. Please go ahead.

Nishit Jalan — Axis Capital — Analyst

Yeah. Hi, sir. This is Nishit here from Axis Capital. Sir, I have two follow-ups. One, still trying to understand the ASP issue. Just two points here. One, the reason we don’t hedge our dollar-INR is because we have a natural hedge through RM imports in dollar terms. So is it fair to assume that whatever higher realization we get because of dollar appreciation versus INR, similar impact we will have on RM cost per kg, so it will not be incrementally negative or positive for the gross profit because in this quarter, we have seen a good INR21, INR22 increase in cost per kg. Is this a right understanding or we should understand it differently?

Rajiv Poddar — Joint Managing Director

Absolutely correct.

Nishit Jalan — Axis Capital — Analyst

So basically, when this dollar appreciation part is not impacting the EBITDA or the gross profit per kg thing, right? Second part is, just wanted to understand how is our Carbon Black plant ramping up? And has the contribution of Carbon Black to our total revenues increased over the last one year, which is also adding ASPs?

Rajiv Poddar — Joint Managing Director

Yeah. So, our Carbon Black sales is approximately 5% of our turnover now for the last quarter, which used to be about 3%, it is now going to 5%.

Nishit Jalan — Axis Capital — Analyst

Okay. Not that big a change?

Rajiv Poddar — Joint Managing Director

No.

Nishit Jalan — Axis Capital — Analyst

So because I was still understanding last year, same quarter, your ASP was INR286 per kg. This time, it’s around INR356 per kg. Our euro INRrate has broadly remained stable. There may be some benefit from a dollar INR budget, it has got offset from RM cost per kg. Apart from that, is mix very, very big impact, which is benefiting our ASPs or it’s a relatively smaller part within the overall scheme of things?

Rajiv Poddar — Joint Managing Director

No, it’s a good contribution.

Nishit Jalan — Axis Capital — Analyst

Okay. And now going ahead, ASPs will moderate a bit because of freight cost, whatever special hikes you had got from your customer, that will get removed from the ASPs as well, right?

Rajiv Poddar — Joint Managing Director

Absolutely. So, freight costs would also happen. The dollar movement may also contribute if it goes down. So that will also soften the ASP. So these two factors will — may affect our ASP.

Nishit Jalan — Axis Capital — Analyst

Okay. So last question is on the capex and the debt levels. I can see that your net debt level is closer to INR1,000 crores now. I mean they’re almost net debt free. So just wanted to understand what is the capex that you are looking for this year and next year? And is there an abnormal increase in working capital because of its debt levels have gone up or is it more of a normalization that has happened?

Rajiv Poddar — Joint Managing Director

So, the working capital has gone up because the turnover has increased and also the working cycle has gone up because of the extended freight rates and — I mean, freight shipping duration. So that was impacting. So that should now start normalizing as the schedules start reducing the shipping time reduces. So that should start normalizing. The working capital, the long-term borrowing that we had done was towards project. And as we said that we have about INR300 crores, INR400 crores of project left for this year and the balance for next year and of similar levels. And that is the capex that was already planned and approved. There is no new capex that we are envisaging for the moment.

Nishit Jalan — Axis Capital — Analyst

Okay. Okay. Sir, one last thing, if I can squeeze in. In Europe, the kind of uncertainty you are seeing, is it impacting more retail demand on the agri side? Or is it also on the OHT segment? Why I was asking this is, if I look at one of your larger peers, Michelin, they reported a couple of weeks back, and they are still talking about agri market to be flattish in demand, but we are being a little cautious. So I just wanted to understand, is it that agri is more under pressure? Or you are seeing OHT also — OHT basically OTR tires also getting impacted in Europe?

Rajiv Poddar — Joint Managing Director

We are seeing both, both being impacted.

Nishit Jalan — Axis Capital — Analyst

Okay. Thank you so much.

Operator

Thank you. The next question is from the line of Ankit Kanodia from Smart Sync Services. Please go ahead.

Ankit Kanodia — Smart Sync Services — Analyst

Thank you so much for taking. And I would say, impressive set of volume and given the guidance we gave last quarter with the cautious market. So I have two questions. One is, if you go back and look at the past recessionary period, if you can share with your experience, how do you see the OEM and replacement mix changing? Because with my limited understanding, I would assume that if Europe is going through a recession, probably, say, a farmer would be using. Would be using a reuse tires more, right? So maybe the replacement market would do better than the OEMs. So is it fair to assume that the replacement mix would increase during this period?

Rajiv Poddar — Joint Managing Director

Yeah. I mean, we are here to cater both the replacement as well the OE. We have the ability to cater to both. We have already got a good name in the OE sector, so that is all working. Also on the replacement side, the brand promotions and all that we have been doing has had an impact, and we’ve been able to create a brand name for us. So if the replacement cycle works, we are already there, today also roughly 70% of our channel is the replacement segment. So we are geared to cater to that be if it comes to it.

Ankit Kanodia — Smart Sync Services — Analyst

Yeah. And regarding market share, again, during recessionary period, I would assume even though absolute volumes may not increase only probably be flattish, but it would be a good time for you to have market share gain. If you look at history again, how it has happened in the past slowdown period?

Rajiv Poddar — Joint Managing Director

Yeah, that is what our working is towards to increase our market gain — I mean, to gain more market in these times. That is what we are working towards.

Ankit Kanodia — Smart Sync Services — Analyst

And my second question was related to capex. So, regarding our Waluj plant, we have been back and forth a year, we wanted to do the greenfield expansion and then there was a very good demand. So we stopped that. And now that we see that we have a lot of time. So the only thing which I see over here is that we would — it would take about a year from now to maybe 12 months from now to get that complete capacity up and running. So, the only risk could be if the market recovers or it doesn’t fall the way we are anticipating because Q1 also, we were mentioning that market, we are very cautious and we have also different from now given the guidance. But what if the market goes up and we get the demand back. So do you think that, that is a risk maybe in Q4 and Q1 of the next year?

Rajiv Poddar — Joint Managing Director

Yes, there is a short-term risk, but in the long term, it will have a better impact. And if you don’t do these activities during times when you are not — when there is a volume, there is no volume pressure, then you can never do it. But if you see in the long term, this will have a much better and positive outlook on the costing structure for the Waluj plant. So, at some stage, you have to do it. So you can’t do these when there is pressure from the market to supply more. You can only take these challenges and do it when there is not a challenge from the market, there is no pressure from the market. So we don’t foresee big pressure from the market in the next two quarters. And that’s when we decided to go ahead and — so the long term, you will see a benefit.

Ankit Kanodia — Smart Sync Services — Analyst

Thank you so much. That’s it from my side, and all the best for the quarter.

Operator

Thank you. The next question is from the line of Abhishek Jain from Dolat Capital. Please go ahead.

Abhishek Jain — Dolat Capital — Analyst

Thanks for the opportunity, sir. Sir, how was the logistic cost pattern in second quarter? And how is the outlook for the third quarter?

Rajiv Poddar — Joint Managing Director

Logistic cost is marginally going down.

Abhishek Jain — Dolat Capital — Analyst

So how much was logistic cost for second quarter, sir?

Rajiv Poddar — Joint Managing Director

I mean, if you go to see the logistics cost per se starting to go down. However, because of the marginal higher contribution from US per ton sales is higher, per ton cost is higher. But we are seeing the cost to — has gone down quite a lot. So you will see the impacts of those coming down in the next few quarters when starting from this quarter and the main benefit will start from early of next quarter.

Abhishek Jain — Dolat Capital — Analyst

Okay. So can we expect a 25% to 30% fall in the logistic costs in the coming quarters?

Rajiv Poddar — Joint Managing Director

We are hopeful.

Abhishek Jain — Dolat Capital — Analyst

And sir, what is the current RM basket prices, like synthetic rubber, rubber and Carbon Black [Indecipherable] in the second quarter and what would be the impact of the fall in the RM prices in the third quarter and fourth quarter in your margin?

Madhusudan Bajaj — President, Commercial and Chief Financial Officer

So, third quarter, you will see, but major impact will come in the fourth quarter already. Third quarter, there will be softening of the prices because of the inventory it will be the mix of both. But in the fourth quarter, you will see the real impact.

Abhishek Jain — Dolat Capital — Analyst

So, what was the price in the natural rubber in the second quarter, synthetic rubber a little while [Phonetic]?

Madhusudan Bajaj — President, Commercial and Chief Financial Officer

So, second quarter was — natural rubber was about INR150, but this quarter, it was INR157 and synthetic rubber was INR165 versus INR178 for this quarter. But for next quarter, we can see rubber, natural rubber INR157, synthetic rubber INR178 to INR145, INR150.

Abhishek Jain — Dolat Capital — Analyst

Thank you, sir. That’s all from my side.

Operator

Thank you. The next question is from the line of Garvit Goyal from Invest Research. Please go ahead.

Garvit Goyal — Invest Research — Analyst

Sir, in quarter two financial year ’23 itself, 49% of complete revenue came from the Europe and 20% came from the America. That geopolitical problems going on, say, like energy prices in Europe and recession in US, it will be very useful if you can share the industry data regarding export of tire to the Europe and the US market in quarter two financial year ’23 means how much export impacted because of all this scenario?

Rajiv Poddar — Joint Managing Director

We don’t have that number, mam.

Garvit Goyal — Invest Research — Analyst

Okay, sir.

Operator

Thank you. The next question is from the line of Disha Sheth from Anvil. Please go ahead.

Disha Sheth — Anvil — Analyst

Good morning, sir.

Operator

Disha, we are not able to hear you.

Disha Sheth — Anvil — Analyst

Now am I audible?

Operator

Yes. Please proceed.

Disha Sheth — Anvil — Analyst

Yeah. Sir, I wanted to say that — going forward, since the dollar rate and exchange rate is coming down, have you taken any price decrease in the near future right now on the dollar?

Rajiv Poddar — Joint Managing Director

Not at this moment.

Disha Sheth — Anvil — Analyst

Okay. And sir, I just missed the answer when you said that we have increased it in this quarter because of three reasons. What was that?

Rajiv Poddar — Joint Managing Director

The dollar movement upward, higher contribution of higher value large diameter tires and higher contribution from US sales.

Disha Sheth — Anvil — Analyst

Okay, okay. Sir, that’s it from my side. Thanks.

Rajiv Poddar — Joint Managing Director

Thank you.

Operator

Thank you. The next question is from the line of Chirag Shah from Nuvama. Please go ahead.

Chirag Shah — Nuvama — Analyst

Yeah. Sir, thanks for the opportunity, again. Sir, again, hopping back on the earlier question that given the cost advance increasing the cost advantage that we may have versus some of the local manufacturers over there. Do we intend to use that to gain volumes or you are looking to maintain margins at least for next one or two quarters. How do you look at given the uncertainly that you have indicated, the primary focus would be on utilization of asset or would be on per unit metrics, how would you look at it?

Rajiv Poddar — Joint Managing Director

So historically, we have always shown that we never compromise on our margins. That said, we will continue that. But we will draw a balance between both of these factors of utilizing the capacity available as well as maintaining margins. So we will strive towards what is the best — it will be on an individual basis. It’s very difficult to give a generic statement for that.

Chirag Shah — Nuvama — Analyst

Yeah. And sir, one last thing is, if at a different point in time, if you can indicate that what kind of SKU mix has changed for you in terms of bigger tires either in terms of proportion to your capacity or in some form, it would be helpful. You have done a lot of things over the last few years to improve your capabilities. If you can get a more slightly broader breakup of that, it would be helpful to understand the changes that you have done internally?

Rajiv Poddar — Joint Managing Director

We can connect offline to share those numbers.

Chirag Shah — Nuvama — Analyst

Yeah. Thank you very much.

Operator

Thank you. Ladies and gentlemen, that was the last question. I now hand the conference over to the management for the closing comments.

Rajiv Poddar — Joint Managing Director

Thank you, everyone, for taking time out to join us. See you next quarter.

Operator

[Operator Closing Remarks]