|Main Products||Main Customer Industries|
|Off-Highway Tyres. Pneumatic tyres for special applications.||OEMs - agricultural, construction and earth moving (OTR), and other specialized applications for industry, material handling, forestry, lawn and garden, and All-Terrain-Vehicles (ATV) tyres.|
|Bullish Arguments||Bearish Arguments|
|Balkrishna Industries has significantly expanded its presence in the niche off-highway tyres segment in the last 9 years. From about Rs. 166 Cr in FY 2001, Balkrishna Industries Revenues crossed Rs.1200 Cr in FY09. The focus being on export-led growth, Balkrishna Industries now derives over 85% of its revenues from exports âprimarily to Europe and other countries.Currently, Balkrishna Industries enjoys a market share of around 3% in the specialty tyres segment, according to a Michelin Investor presentation||The tyre industry is raw material intensive. The main raw materials for tyre are rubber (natural or synthetic or mixture of both), carbon black, nylon tyre cord and rubber chemicals. Except natural rubber, the costs of all the other raw materials in tyre production are related to crude oil prices.|
|Over the last 9 years since '2001, long-term sales growth recorded is ~32 percent while long term EPS growth stands at a very impressive 85 percent.||Debt to Equity at 1.15 (FY09) is not insignificant. There is also an outstanding 4.5% FCCB aggregating to US$ 22 million are outstanding with premium of 1.5% p.a. payable on cumulative basis on redemption date (Dec 31st, 2010). The bonds are convertible at a price of Rs. 1,375 at a pre-determined exchange rate of Rs. 45.66 per US$. The current price situation suggests the FCCBs may not convert on the maturity date and redemptions will have to be met through internal accruals. That may pose an additional burden.|
|Balkrishna boasts of industry leading margins (FY09 OPM ~16%) and returns (FY09 RoE at ~17%) besting bigger international competition like Mitas, and Michelin.It has concentrated on increasing its presence in the replacement market, which tends to be somewhat less cyclical than the OEM market. The replacement market also offers the potential for higher profit margins and is larger in most markets.||Exports accounts for around 85% of sales. The appreciation of the rupee against the US dollar and Euro could impact revenue growth. Balkrishna Industries follows the system of hedging its receivables and major payments well in advance by entering into Forward Contracts. Further, about 65% of sales are to the EU countries, so a major part of the company's earnings are in Euros. Among total sales, 52-53% of the revenues are in Euros, while 45% are in US dollars. This spread between the US$ and the Euro mitigates the risk of forex volatility to an extent.|
|Entry Barriers||Interesting Viewpoints|
|The specialty tyres segment in which Balkrishna Industries operates is predominantly represented by large varieties and low volumes. It is geared up to take advantage of the peculiarities of this segment and has developed more than 1800 Stock Keeping Units (SKU) to meet the diverse needs and applications. The wide product range covering nearly all segments of off-highway tyres is the company's main strength.||India being the world's third-largest producer of rubber, the company can procure natural rubber at lower rates. In order to minimize raw material price-volatility risks, the Company not only enters into medium-term contracts but also adopts the policy of âBuy and Stockâ large quantities during lean periods. The companyâs plans also include setting up of enhanced storage facilities at different locations (some 160,000 square meters) to store finished goods and raw materials towards achieving better cost-control measures|
|The off-highway tyre business is fragmented, with low-volumes, and labor-intensive. In India, employee cost is around 5%-6% of net sales, whereas in overseas countries it accounts for 12%-15%, pressurising operating margins.Some tyre majors including Continental and Goodyear exited the OTR and farm-tyre market in the US in 2005-06 as labour costs began eating into profitability.||Most of the BILâs exports are to EU (European Union) countries and these countries are now focused on increasing productivity. The large size of farms in these countries, coupled with declining farmer populations, is boosting demand for tractors and other agriculture related applications. There are substantial opportunities to equip high-powered agricultural machinery, extra-large or highly compact equipment, and more of radial tyre applications.|
Balkrishna Ind (BKT) is a perfect example of Indian Co going Global in a big way. BKT has made its mark in the nice area of OTR tire business. The global biggies such as - Goodyear, Bridgestone are slowly losing market share due to high costs of production and BKT is gaining market share.
BKT has a fantastic track record of almost 30% CAGR for last 11 yrs!! The co has high operating margins of about 20-25% and ROCE of about 22-25% for last many years. Yet many analysts mistake it as a regular tyre company and give it a multiple of 6-7 times.
BKT wants to be a $ 1 Bln turnover co by 2015 and is taking all the steps toachievethe same.
This updated Balkrishna Industries stock story should be more convincing.
To me the most intersting aspects are:
a. Entrenched entry barriers - No new entrant can easily disturb Balkrishna’s niche. Bigger players have been slowly losing ground
b. BKT brand is getting major acceptance in US market. Growth seemingly is only constrained by capacity constraints. pricing flexibility is higher by 30-35% with balkrishna vs International majors
c. Growth trajectory is being maintained by 1QFY10 results. Valuations are quite reasonable for a company of this pedigree
Disc: I am invested in Balkrishna and accummulate on most dips.
There was a news that Balkrishna is raising $ 175 mn (approx. Rs 750-800 Cr)in debt for capacity expansion in Gujarat.If true this will add another Rs 70-75 Cr to interest cost. FY10 interest was approx Rs 19.3 Cr and PBT was approx RS 326 Cr.
Yes, the co is taking the debt to double their capacity in next 2 years. I don't think the debt will have any impact till the expansion is done caus as per the accounting policy, the co should capitalize the interest cost till the expansion is completed.
I came across an update by India Infoline recently...copying the same:
In our recent meeting,BalkrishnaIndustriesâs (BIL)management said demand continues to be robust in its key markets, and that tyre volume growth in FY11 is likely to beat its previous estimate of 25%. BIL has raised tyre prices by 2-3% in the last two months to pass on increases in raw-material costs. The company has taken forward cover for euro receivables for part of FY12 (about 4-5 months) at Rs62/euro.IIFL had factored in euro receivables for FY12 at Rs58/euro earlier, so we upgrade our FY12 earnings estimate by 11%, primarily on account of the change in the euro rate assumption. In FY12, volume growth is likely to be lower, at 15%, only on account of capacity constraints. BIL plans a capacity expansion from 150,000tpa to 260,000tpa through a greenfield plant at Gujarat; the plant is likely to start by 3QFY13. Price increase of 2-3% taken in the last two months: To pass on increasing rubber cost, BIL has increased tyre prices by 2-3%. BIL increased tyre prices by 5% in January-February 2010 to pass on cost increases. The company plans to increase tyre prices by another 2-3% in the months ahead, to pass on rubber cost increases. Euro receivables covered at Rs62/euro for part of FY12: About 50- 55% of BILâs revenues are in euros, and the rest in US dollars. For part of FY12, BIL has covered euro receivables at Rs62/euro and US$ at Rs48/US$. For FY11, BIL has covered euro receivables at Rs64/euro and US$ at Rs47/US$. Capex plans at Rs14bn for the next three years: For the greenfield plant at Gujarat and other miscellaneous capex, BIL expects to spend Rs14bn in the next three years. About Rs8bn capex is likely in FY12 and the balance in FY11 and FY13. BIL plans to fund this capex through debt and internal accruals.
India Infoline News Service / 13:00 , Sep 24, 2010
BIL plans a capacity expansion from 150,000tpa to 260,000tpa through a greenfield plant at Gujarat; the plant is likely to start by 3QFY13
In our recent meeting,BalkrishnaIndustriesâs (BIL)management said demand continues to be robust in its key markets, and that tyre volume growth in FY11 is likely to beat its previous estimate of 25%. BIL has raised tyre prices by 2-3% in the last two months to pass on increases in raw-material costs. The company has taken forward cover for euro receivables for part of FY12 (about 4-5 months) at Rs62/euro.IIFL had factored in euro receivables for FY12 at Rs58/euro earlier, so we upgrade our FY12 earnings estimate by 11%, primarily on account of the change in the euro rate assumption.
In FY12, volume growth is likely to be lower, at 15%, only on account of capacity constraints. BIL plans a capacity expansion from 150,000tpa to 260,000tpa through a greenfield plant at Gujarat; the plant is likely to start by 3QFY13. Price increase of 2-3% taken in the last two months: To pass on increasing rubber cost, BIL has increased tyre prices by 2-3%. BIL increased tyre prices by 5% in January-February 2010 to pass on cost increases. The company plans to increase tyre prices by another 2-3% in the months ahead, to pass on rubber cost increases. Euro receivables covered at Rs62/euro for part of FY12: About 50- 55% of BILâs revenues are in euros, and the rest in US dollars. For part of FY12, BIL has covered euro receivables at Rs62/euro and US$ at Rs48/US$. For FY11, BIL has covered euro receivables at Rs64/euro and US$ at Rs47/US$.
Capex plans at Rs14bn for the next three years: For the greenfield plant at Gujarat and other miscellaneous capex, BIL expects to spend Rs14bn in the next three years. About Rs8bn capex is likely in FY12 and the balance in FY11 and FY13. BIL plans to fund this capex through debt and internal accruals.
What about management integrity? This is what I would call a “cash business” (easy to siphon away money).
Dewan Tyres was into the same business, exported too. Went no-where.
I don’t think this is a “cash business”. This co is exporting almost 90% of its production and hence cash transactions are not easy. Morever look at the past track record…this co has had an excellent track record for last 11 years and the co has consistently done well. This co is part of Siyaram group and if one checks out Siyaram Silk, that is also an investor friendly co and pays high dividend.
The management is good. I was at Apollo Tyres HQ on Friday last week and had a meeting with their CIO and MD regarding something entirely different, but over lunch I was enquiring in general about the tyre industry and they seemed to be fairly bullish. I asked them about their main competitors and they said its mainly MRF, JK Tyres and CEAT and that the rest are all bit players like BKT, Michelin, Goodyear etc. I did not pursue the topic much further.
Equity master predicts only a 11% CAGR from here on! reason for which I have not been able to fathom, not from their write-up atleast. But am wanting to discover if there are some negatives!
On scrutinising the text below everything mentioned is a positive for the stock including ability to pass on price increases, etc. The only negative mentioned is aggressive expansion plans.
They seem to have reached full achievable capacity. The land 100 acres is acquired, ECB loans tied up at 3-4% cost, so there aren’t big execution risks. Are there marketing risks for such a big expansion?
Maybe but with BKT being an entrenched brand priced at steep discounts, volumes were never an issue. Unlikely that the company will make such an error of judgement in estimating demand given their track record.
Has the stock run up too fast?? don’t think so - at 7x TTM PE, it is by far the best tyre company with great numbers and good visibility into revenue growth with ability to protect margins around historical levels.
So what’s the catch? maybe we should write to equity master asking them why the pessimism?
A look at the current shareholding (Sep 30) shows all the major funds and PE arms holding on to their shares. As Ayush mentioned it was good to see Copa Cabana, an arm of PE player Chrys Capital (Ashish Dhawan fame, recently exited M&M financial Services) invested in the stock for long and remaining invested.
A friend tracking Balkrishna who had attended the recent concall had this to say in brief.
I do think that this stock has a very rosy picture. I attended their concall and found that they are on a strong footingâ
- They are only constrained by the capacity to sell
- Huge traction in the American market where their tyres still sell at a 30% discount
- Hedged for rubber prices at Rs 140 a kg till Jun 2011, so the volatility in rubber prices will not impact them much in the immediate future
- Have taken a 10 price hike in 2010 and another one is on the cards in Jan 2011
The main negative I saw was the depreciation of euro and dollar against the rupeeâ
Really comfortable with the management qualityâ So I do think that this stock can double in the next 2-3 yearsâ Sales CAGR should be of the order of 25-30%, and in case the rubber prices come down then their profits will rise at a faster clipâ do not see any major downside from hereâ
As per Equitymaster the new capacity comes online only in mid FY13.
Any idea how the company will manage in FY12 & FY13 first half. What if execution slips till end FY13?? That can be a risk on the company’s growth?
Friends: Posting anything from other websites which may be premium confidential content or otherwise need permission is both highly inappropriate and is not in the long term interests of Valueickr either!
Hope you get my point.
We should be alert that we do not cross the lines in our eagerness to inform/educate and debate.Thanks Vikram for pointing this out. The offending portions have been removed.
Look forward to continued “moderation” help from your side!
This is the first day in the new year I have been able to sit down and look at the market:)
Had a quick look and among our not-so-hidden-gems universe, Balkrishna seems most attractively placed at 125 or so (pre-split 625 levels) for a 2 year kind of horizon.
Is there anything else that looks equally attractive? May be a Relaxo footwear at 330? That reminds me I must do a stock story on Relaxo, asap. I like the story feet on the ground conservative growth, the best working capital track I have seen so far, many things going for the stock.
I would agree with you on BKT. I am reading up its ARs and trying to come at a valuation. It does look cheap. Wild card is rubber prices but it looks like they are able to pass on the prices to customers.
I am also re-looking at Sintex and it has also got cheaper after its split. The only negative I saw in Sintex is the -ve cash flow in 2010 but it has posted excellent Q3 results today. You might want to take a look at it as well.
Thanks for approving my registration request, Donald ! Terrific site, I hope to learn and contribute more as I am just starting to get my feet wet in Indian markets.
I recently analyzed BKT business and tried to come up with a valuation - report is available athttp://www.scribd.com/doc/47369876/Balkrishna-Industries
Any feedback will be appreciated.
I went through the report and its impressive! You have covered almost all of the aspects of the company.
I agree that BKT is an excellent long term investment opportunity and I also agree on the re-rating of the story…this stock may at some point trade at 12-15 time PE given their superior margins and ROCE as compared to anyother tyre player.
I wan’t able to open the tirebusiness link (as the same is paid) similarly the google doc couldn’t open. Please post the same or email me.
Thanks Ayush. Nice blog you have, I am just getting started at indianequityinvesting.wordpress.com
Can you please try the Google Docs now ? It just captures the financial statements from 2003-2010
https://docs.google.com/leaf?id=0AsZvedn77lFOdFJ2dTVYUW9GVlplTm1RY3lLVzVRaXc&sort=name&layout=list&num=50&authkey=CNv__vQO Link: https://docs.google.com/leaf?id=0AsZvedn77lFOdFJ2dTVYUW9GVlplTm1RY3lLVzVRaXc&sort=name&layout=list&num=50&authkey=CNv__vQO
I dont have access to Tire Business either - just google “Tire Business, BKT” and you will find “BKT eyes expanding OTR presence” as one of the search results.
Click on that and you will be able to read the article.
Btw, I found another article and interviews with MD, R&D and Marketing in Tyre Asia - link ishttp://www.slideshare.net/BKTINDIA/bkt-special-report-aug-sept-10-tyre-asia
Link: mailto:[email protected]
Thanks for your work on Balkrishna. Makes for good reading.
BKT remains one of our top conviction stocks in this market, with a good margin of safety. Yes, if they do not slip up on execution on enhanced capacities, this stock has the potential to double in 2-3 years from here. There is comfort despite the high rubber-prices situation, as it is able to pass on price increases regularly.
Welcome to ValuePickr and look forward to your active participation in the discussions here.
Discl: I hold good positions in Balkrishna and continue toaccumulateat dips.