Balkrishna Industries

Stock Opportunities Not-so-Hidden Gems
182
Mr B K Bansal, Director Finance took the queries in the call.

Key Points of the call by Capital Mkt:
  • Balkrishna Industries has reported a standalone sales turnover of Rs 884 crore and a net profit of Rs 124 crore for the quarter ended Dec '13. Topline and bottomline rose by 25% and 65% respectively.
  • Production during Q2 FY 13-14 stood at 33,590 MT. For 4Q FY 14, it will be around 38,000 MT.
  • Q3 margins should be sustained going forward.
  • The company is confident of achieving FY 14 Volume Guidance of 140,000 MT.
  • For FY 15, volume will be around 160000-165000 MT.
  • Capacity at 3 plants is at 160000MT. Rest 5000 MT will be out of debottlenecking.
  • Regarding geographical breakup sales, Europe - 50%, US - 23-24%, India - 12%, balance rest of world.
  • The order book is currently around 2 months.
  • Market is steady at US in agricultural markets. Last quarter, deliveries were very stable.
  • Interest payouts of Rs 350 crore will start taking place from FY 16.
  • For FY 15, depreciation will be around Rs 200 crore and interest will be for Rs 40 crore. Tax rate will be unchanged at 34%.
  • OEMs now form 20% of company's sales. The company expects that in next 2-3 years, it might go up to 30%.
  • In Bhuj plant, 40% production will be radial tyres.
  • Current production at Bhuj is @ 75MT /day.
  • Raw material prices are moving in a broad range currently. It is expected to be steady currently. It might be subdued for medium to long term period (demand supply scenario).
  • No one has taken price reduction in the industry but the way raw material prices are moving, one might go for it.
  • The company holds 2 months inventory of rubber.
  • Total debt is around Rs 2400 crore (Rs 1700 crore long term ECB) and net debt will be Rs 2100 crore. All are dollar loans.
  • The company has incurred Rs 2300 crore capex for Bhuj project till date. Total would be around Rs 2,800 crore. Total capitalization stands at Rs 935 crore as of date.
  • Margins in OE is 4-5% lesser than in replacements in some cases.
  • Industry projection is for 8.6% growth till 2017 in the mining machinery markets. The demand will be from large developing markets like Brazil, China, India. There is already a vacuum in market place
  • Euro has been hedged at 75-76 for current year. For FY 15, it is around Rs 82. The management does not have any hedges for the $ as it has a natural hedge due to raw material imports.
  • 60-65% of sales is to agriculture sector, 34% is to Industrial and construction business and balance 5% is to small applications.
  • Price increase is ruled out. Price correction in terms of reduction might happen.
  • Overall Bhuj project cost stands at Rs 2800 crore. If Re comes down, it will come down to Rs 2400 crore.
  • Capacity utilization is @ 75% excluding Bhuj. At Bhuj, it is @ 80-90%.
  • Current capacity at Bhuj is at 30K-40K MT.
  • Last price correction was taken at beginning of last year which was around 7-8%.
  • FY 15 and FY 16 to be much better than FY 14

183

My notes from the recent con-call held on 20th may 2014

    • Company recorded sales of 1037 cr for Q4FY14, an increase of 33% YOY and net profit of 154 cr, an increase of 82% YOY.

  • For the full year FY14, sales are up 11.1% and EPS is up 35.6%.

  • Achieved volume of 142 kmt for FY14

  • Expected to achieve 160-165 kmt FY15; 200 kmt FY16 and 30 kmt addition thereon per year.

  • After Bhuj expansion completes total capacity will be 300 kmt

  • Margin sustainable and may expand (1-2%) from 25-26%

  • Interest cost has been reduced through refinancing

  • New geographies â Russia and CIS â may look towards Canada and South Africa too â mgmt says constraint was lack of capacity â but that has now changed after Bhuj and the company can market more aggressively

  • Also, even though the total market size is $10 billion, mining and infra related (high dia tyres) is $6 billion â where the company has very little presence â but will expand as Bhuj becomes operational

  • EUR for FY15 is hedged at 90!! So no worries about appreciation of Rupee. Dollar is naturally hedged through raw materials and interest payments. First 2 months of FY16 also hedged at 87 â company will continue to hedge at around 85 â even though spot rate is 80, company gets 6-7 rupees forward premium.

  • Company took a price cut of 4-5% due to decrease in price of raw materials â pass on the benefit

  • Full tax rate is applicable â but all the rubber is imported because they get it duty free â as exporters they get a special license

  • Company does not depend on incremental demand â the business model is to gain market share â even though globally OEM production had a degrowth â their revenues from OEM increased from 12% of revenues to 20% - and expected to increase to 30% over the next few years. (even though margins are lower in the OEM by around 4-5%, IMO company is trying to cover its fixed costs)

  • Depreciation guidance for FY15 around 160 cr and 200-220 cr for FY16

  • Interest guidance of 40 cr for both FY 15/16 â refinancing some loans at around 2-2.1% (1.9% above LIBOR)

  • Strong demand expected from infra â US market is yet to respond to the global pick up â Europe has responded well.

  • Radial tyres have premium of 7-8% and 40% production in Bhuj will be Radial

    • No major capex for next 3 years â expected to generated healthy cash and pay back debt â looking to be debt free in around 3 years
184
Mr Rajiv Poddar, Jt Managaing Director and Mr B K Bansal, Director Finance took the queries in the call.

Key Points of the call by Capital Mkt;

BIL reported revenues of Rs 881 crore registering 5% growth in Q2 FY 15. The growth was driven by volume growth, which came at 37,281 MT (~7% YoY increase).EBITDA margins in Q2 FY 15 stood at 23.6% vis a vis 24.1% on account of higher other expenses due to increased discounts, poorer contract obligations.PAT for the quarter stood at Rs 90.2 crore, was 17% lower on yoy basis.Euro basis realisations fell ~4% YoY to $3.9/Kg during Q2 FY 15.For FY15, the management has highlighted that EBITDA margins will remain close to present levels with little room for upside due to weak demand scenario.

The new Bhuj facility has produced 3000-5000 MT in Q1FY15. Going ahead, the Bhuj facility would enhance the total capacity to 300,000 MT/year by FY16.With the new capacity in Bhuj likely to cater mainly to the OTR segment, the bulk of BIL's incremental volumes is likely to come from the OTR segment.

The mgt has reset the target of sales for FY15 and the same has been downgraded from 160,000 MT to 155,000 MT.The Co undertook a pricing cut of 4-5% on a blended basis across various markets.On the geographical mix, for H1 FY 15, Europe's contribution has marginally declined to ~53% while the share of US has been stable at 19%.On basis of product mix at present, 30% of sales is radial and the rest is bias.In terms of mkt, out of the total~$15billion market, 60% is from OEM while theremaining is replacement. BIL has ~5% market share in the overall mkt which has just moved up ~1% from 2010 onwards.

While OTR forms ~65% of the global market, for BIL, the segment only contributes ~37% to its revenue.With an improvement in agri-demand in North America after the end of the severe winter, the management expects better growth in volumes in the coming quarters.The â¬/Re has been hedged at Rs 82 for Q2FY15 and stands at Rs 87 for FY15.The mgt does not have any hedges for the $/Rs as it has a natural hedge due to raw material imports.

Currently,net debt for the Co stands at Rs 1700 crore. Gross debt stands at Rs 2400 crore & cash stands at Rs 500 crore.Net Long Term Debt to Equity is at 0.58x as on September 2014.

185

**Mr Rajiv Poddar, Jt MD & Mr B K Bansal, DF took call.**Key Points by Capital Mkt:

Balkrishna Industries reported 9% increase in the topline and 5% increase in Net Profit for the third quarter ended December 14.For the nine month ended December 14, the company has reported 14% increase in the total income from operations at Rs 2886 crore.

The management saw no change in demand outlook. It has remained same across all geographies.

Market has been very slow in Europe. But the company remains very hopeful about recovery.The company remains focussed on agri segment. But at the same time, it remains also focussed on industrial, construction, and mining segments.

OEM segment constitutes 22-23% of total business and replacement forms the rest 78%.

The company is hedging USD/Re @ 67 for FY 2016-17.

The company is witnessing good sign of pick up in US market across all segments

The company has registered volume growth of 13% ytd this year and next year is hopeful of 10% volume growth.

On segment breakup, 30% are radial tyres for overall company and the rest is bias.

60-65% of agri business tyres are from Europe.

Going ahead, the Bhuj facility would enhance the total capacity to 300,000 MT/year by FY16.With the new capacity in Bhuj likely to cater mainly to the OTR segment, the bulk of BIL’s incremental volumes is likely to come from the OTR segment.

The management does not have any hedges for the euro/Rs as of now and is keeping it open as of now waiting for euro to recover.

186

I track this company for many years now… Few observations … Not in any order of importance but my overall current impression.

  1. Titan International sales in March quarter '15 is down but they claim 60% of this drop is due to currency adjustment. Against this, most of the high margin gain in Q3 15 for BKT was due to currency gain.

  2. Large equipment machinery sales in US is down 48% in March quarter but their market share is up. They attribute it to the adoption of LSW assembly technology (Low Side Wall) by many OEM.

  3. They have taken management control of Voltyre Prom in Russia and expect to have better foothold there in coming months. Titan / Goodyear ATV has an advantage of supplying entire wheel assembly to OEM where companies like BKT is at disadvantage as they have to follow the emerging technological trends to adjust their tire manufacturing for sales in the replacement market. I don’t know how much lead time is needed for these types of adaptation.

  4. Pirelli, the largest ATV, OHT, Agri tyre company of Brazil is recently taken over by China Chem. (I think, it will increase competitive intensity on price front in Latin American market and possibly in US market too).

  5. BKt has set up their new warehouse in California recently. It may help them in West Coast market.

  6. Now Alliance and BKT has similar SKU varieties (2500 - 2600). Where Alliance reached in 8 years in revenue, BKT took many years to reach there (they are at same revenue level now). Also, their Israel facility / KKR backing / existing network of GPX gives them an edge in penetrating incremental US market (it is my opinion).

  7. The results of Michelin, Yokohama Rubber and Bridgestone would give an overall direction of the demand scenario in the sector across the world. I am yet to check these.

  8. I am not really concerned with the bloated debt / WC level of BKT if they can reach full achievable production capacity of 3 L ton by end 2017 or end 2018 with 22% margin level.

Let’s see how it goes from here …

Disc: Presently no holding.

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187

On March 31, 2015, Nirvikara Paper Mills Ltd has allotted one fully paid up Equity share of Rs. 10/- each of Nirvikara Paper Mills Ltd for every nine fully paid equity shares held in Balkrishna Industries Ltd to those shareholders of Balkrishna Industries Ltd who hold the shares on March 25, 2015, being Record Date.

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188

any expectations for good results in this counter…as most of the benefit from Raw material price reduction expected to happen in this qtr.(as seen in results of other related companies).Technically it is trading very strong last few weeks…due to its inclusion BSE 500 index.

189

Conference Call - from Capital Markets

The company sees small growth in FY 15-16

Balkrishna Industries (BIL) held a conference call on 15 May 2015. Mr Rajiv Poddar, Managaing Director and Mr B K Bansal, CFO took the queries in the call.

Key Points of the call:
Balkrishna Industries reported 3% increase in the topline and 5% increase in Net Profit for the fourth quarter ended March 15 at Rs 1025 crore and Rs 161 crore respectively.
For the FY ended March 2015, the company has reported 12% increase in the total income from operations at Rs 3893 crore. PAT rose 2% at Rs 498 crore.
There is no major change in demand outlook. Demand scenario remains challenging as per the company. The company expects the same to improve in the coming quarters.
The company is maintaining its focus in the agricultural tyre segment.
Due to extended winter in US, the agricultural sector demand is taking time to come up.
The company is deepening its presence in industrial, construction and mining segments.
The company is focussing on sales on mining sector in India. Recent coal sector reforms should help the same.
Production for March quarter stood at 39,290 MT for Balkrishna Industries.
Full year production showed 8% growth at 154,000 MT.
Long Term loans are dollar denominated and Net Long Term Debt to Equity is at 0.37x times as on March 2015.
The company has cash & cash equivalents of Rs 875crore invested in Debt Mutual Funds & Bank Fixed Deposits.
The company has plans to be debt free by FY 19
The company has achievable capacities of ~300,000 M.T.P.A (post Bhuj operations).
The company has incurred a capex of Rs 2600 crore for Bhuj plant.
The company sees small growth in FY 15-16. The company plans to review the same mid year and guide accordingly.
No price cuts was taken by the company in fourth quarter.
India forms 12-13% of sales currently. From here, the company sees the figure to be 20% in four years time.
OEM proportion of sales is increasing. But there will be no difference in margins for that as margins for both OE and replacement are mostly the same.
The management does not have any hedges for the euro/Rs as of now and is keeping it open and has a year time to do so.

Disc: Not invested.

190

@malli

I missed to see that you asked the question to me… Sorry for late response.

The result is already out … Seems from Titan concall. I surmised correctly that result for Q4 '15 and probably next two quarters won’t be anything great … Competition and possible newer varieties of technologies may keep a check on major upside at least in short term … But the BIL story remains as good as it was before. If BIL can fully utilise its capacity in next 3 years without compromising on price and make it debt free by 2018 - 19, it would be a steady and robust business.

Recent coal auction, resumption of halted projects with lower interest cycle etc may help in increasing domestic % of sales to some extent … I guess key monitorable are volume growth (should increase) and EBITA margin (should not fall). If cash flow improves, that is a plus…

Thanks

191

@aveekmitra : I have been watching BKT for some time as well and had it in my portfolio in the past. One question I have in my mind is how of the success was because of Yogesh Mahansaria? Because when I see the performance of BKT after he left it seems to have really struggled. On the other hand, going by magazine reports, I see that Alliance is doing really well.

192

@basumallick

My subjective opinion is possibly Mr. Mahansaria was responsible for its initial success to a large extent. Also, going by magazine, reports, unlike the Poddar’s, he never claimed everything was hunky-dory at the time of parting ways.

Warburg would never have backed one individual like a freshly ousted CEO to start afresh in the same business had they not been sanguine about his abilities and his strong passion to prove again. He has made Alliance equal in size of BIL in flat 8 years almost in every aspect.

Secondly, a company based out of Israel and backed by KKR owning 90% and run by CEO who has some axe to grind with BIL are lethal combinations at least for US market :smile:

However, BIL didn’t do all that badly over the years … after all 8 years have passed after the episode…

193

Mahansaria may have grown the company aggressively, but has anyone paid heed to how much capital infusion Warburg has had to undertake to enable the expansion. For similar performance a listed company would have diluted so much equity that EPS growth would have been negligible.

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194

Start-up phase is usually EPS dilutive. So, I can’t read much into it.

195

PPFAS Mutual Fund recently added in their portfolio.

196

Hello Donald,

The link on this post does not work. Can you please check.

Regards,
Chetan Chhabria

197

Can you tell which link does not work? I checked the last 2 links pasted here and both work perfectly.

198

The management interview links. However I was able to access the interviews in management Q&A section.

Regards,
Chetan Chhabria

199

Hi,

I have been studying this company recently. I have prepared a document which is points taken from

Annual reports
Investor presentations
Management concalls
Industry reports/ concalls

The stock is very well covered here, however this document covers everything in one section from FY09. This write has been published below

I have also analyzed the ROE drivers of BKT and made a seperate document. Which I am uploading here and is covered in the second part of this document.Decoding the ROE (2).pdf (551.7 KB)

200

Next five years is going to be great for BKT. Value and moat is there in the current market price. Just think about few points given below :

  1. Big Capex coming in Coal
  2. Market for 51" inch and above growing rapidly. This is fastest growing segment.
  3. Bhuj is completed.
  4. The entire debt taken for Bhuj is being paid in three instalments.
  5. Negative WC in 2015. Likely to continue in future.

Only risk : NR and SR prices. But the present prices are quite far away from the peak USD 6473/mt in 2011. I am expecting an EPS of Rs 60 for FY16.

Rgds,

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201

company has posted good results. the demerger of the paper business has really improved margins.

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