company has posted good results. the demerger of the paper business has really improved margins.
BKT is good quality business and growing at decent clip. more the recession in global market more it helps this company strengthen its competitive MOAT. This is one off the road company investing when others are scaling back. In the long run BKT is gonna reap rich dividends due to this MOAT.
One observation is …In the past many years significant role is played by financial leverage to the ROE of BKT. If you take out leverage then ROE may fall to just about cost of capital or slightly above. This makes sense if you understand that the business is very very capital intensive. But the management is so far clever in using leverage to grow the business. Their bets so far have played out.
The prices of commodity input have fallen and that should help improve profits. Something this company needs in large quantity to pay back the huge loan taken to expand the capacity.
One significant red flag is corporate governance- attitude of promoters. The family has gifted themselves almost Rs 60 Cr this year as compensation. This is after the fact that they hold almost 55-60% share in this 6000 Cr plus market cap company. Talk about the greed!!! Rest of the outside board members and management get pittance in comparison. Only divine few are blessed.
The competency and track record - Super.
Integrity and shareholder friendliness - ?
Disclosure- I am invested in BKT for many years.
Mr Rajiv Poddar, MD & Mr B K Bansal, CFO took the call.Key Points by Capital Mkt
Balkrishna Industries reported 9% decrease in the topline to Rs 870 crore and 3% rise in EBITDA at Rs 246 crore for first quarter ended June 2015. Margin stood at 28.22%. Volumes for the quarter stood at 37,309 MT.Production volumes were close to sales numbers for the quarter.Regarding geographical breakup for the quarter ended June 2015, 54.2% of sales was from Europe, USA was 14.3%, India was 15.2% and rest of world was 16.2%.
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 following stability in Eurozone.
BIL is trying harder to gain market share in US market. But it is quite a difficult situation. US is more difficult market than Europe right now.In terms of volume, the company will be flattish this year. There can be marginal improvement in H2 of FY 15-16.In India, the company is increasing focus on both agricultural and mining segments.The Indian market is a big opportunity with farming getting more organized and mining getting more focus from the current government.
The Difference between mining and agricultural sector realization is 5-7% with mining on the higher side.
Regarding raw material cost trends for the quarter, the rubber prices has been on declining trend but has stabilised. The fall was more on crude derivative side and the company expects this trend to continue for few quarters. LongTerm Debt to Equity is at 0.28x as on June 2015. Company has cash & cash equivalents of Rs695 crore.Net debt as of 30 June 2015 stands at Rs 1200 crore.
The Bhuj plant is nearing completion and the company has incurred capex of Rs 2700 crore till now.
Capitalization stands at 2154 crore.Bhuj plant produced 6500 MT in June 2015 quarter.
Prices hikes were announced in the industry by some players but nothing like that took place. Getting 6-8% price increase will be difficult in this situation.
I have some doubts about BKT:
If there is any change in duty structure in US or UK, how can BKT cope with it (as there is already duty applied on Chinese tyre players exporting to US).
What will be the effect of rising rubber prices on BKT as it is very difficult to pass the price rise to OEMs.
I had doubts on the FX handling of this business. On going through the material on the company my understanding is as below.
- The company imports its raw materials from outside, hence any appreciation in the USD/EUR (depending in which CCY it pays) will benefit the company. Hence the company needs to hedge on the required CCY (let us call this the first leg)
- Company derives majority of its revenues from outside, 55-60% from Europe and 15-20% from USA. Hence a depreciating CCY (EUR/USD) will help the company. Company needs to hedge against appreciation (let us call this the 2nd leg)
- As the company imports its RM, the import and export gives it a natural hedge. However degree of imports need to be weighed against the exports.
- Company books revenues on the day of generating the invoice, the exchange rate that it takes is the once that is provided by the custom department. However when it realizes the amount depending on what the rate is, it books a profit/loss and puts it on the P&L account.
- The company realization per tonne may be effected by CCY. In Q1FY16 the management realized 219000 per tonne, the figure for Q1FY15 was 241000. As per the management this is not due to price drop but due to CCY movements which is not hedged uniformly through out the year.
However on going through few of the con calls, the management has not hedged the second leg EUR-Rupee. It seems that the company is taking a bet on the direction of the currency.
The above is my simple understanding. I would like to understand if there is anything more to it and what more does one look at. However one would buy the business based on its operational strength and not on any currency movements.
The company had a concall on its Q2 results yesterday,below are a few of the points that I have noted down
a) Demand remains subdued across all geographies. However there is some positive news like better employment data from the US. Quantitative easing from ECB
b) Company is positive on India because of reforms undertaken by the government. Coal reforms to help in the mining sector. The company is also focusing on the agricultural sector
c) The bhuj plant is complete and the company has capitalized 2570 Cr as on 30/9/15. Company will break even at 20-25% of capacity utilization at EBIDTA level
d) Sales volume for the quarter 34333 MTPA, overall guidance for the year below than the last year
e) Gross debt 1900 Cr cash & cash equivalents - 800 Cr, hence net debt is 1200 Cr
f) Imposition of anti dumping duty by Titan on Chinese and Indian players will not effect the company as this will effect the commercial vehicles
g) companies cost of debt works out to less than 2%
h) $-rupee hedge has been done, however the EUR-$ hedge is still open for FY17
i) Gross margins were higher due to lower RM costs. Rubber cost at 95/KG versus 104/KG
j) Company is not facing pricing pressure due to lower RM costs, however company may offer discounts in the future to encourage sales
k) Production at bhuj facility at 7100 MTPA
l) Everyone working with thin inventory due to slow down in demand
m) Growth drivers for the company are as follows 1) OTR segment - 10 billion opportunity company has sales of only 200 million 2) growth in the present market 3) OEM segment 4) India opportunity 5) demand from CIS countries
n) global market share of 4%
o) Markets that are doing well in Europe - Italy, France & Germany. Brazil and Poland are not in good shape. Do not see any recovery in the European market for the next 1-2 quarters
p) EBIDTA per KG Rs 72
If other members have gone through the concall, please share your inputs which I may have not covered.
This is a great thread, makes it very easy to understand the business.
I wanted to clarify something to make sure that I am not making a mistake.
Based on reported eps, TTM P/E is 11.1x. However, the company has had a foreign exchange gain of 261cr over the last 12 months. This is certainly not a recurring gain, and so if one takes it out, TTM P/E is 20.7x.
It is almost twice as expensive as the quoted P/E. I think this is very significant. Want to make sure I am thinking of this correctly.
CONFERENCE CALL - from Capital Markets
Decline in forex gains can hamper margins in FY 17
Balkrishna Industries (BIL)held a conference call on 15 February 2016.Mr Rajiv Poddar, Managaing Director and Mr B K Bansal, CFO took the queries in the call.
Q3FY16 - Key Points of the call:
BIL’s Q3FY16 revenues came in at Rs750 crore (down 19% yoy); as both volume and realisations declined substantially. Volumes declined 8.4% and realizations were lower due to lower pricing power.
As of 9MFY16, the geographic revenue mix for BIL was Europe - 53% of revenue, America - 15% of revenue, India - 15.9% of revenue) and rest of world (Middle East, Asiaexcluding India, Africa, Australia and New Zealand) accounting forthe remaining 16% of revenue.
The segment mix remainedunchanged, with agriculture accounting for 62% of revenue, OTR constituting 34% of revenue while the remaining 4% is from other segments.
Channel wise revenue break-up is replacementaccounting for 75% of revenue, OEM 22% and others 3%.
The revenue share from Indian operations has moved up from~8% in the past to ~16% currently. The mix in terms of OEM &aftermarket is at 50:50 for BIL.
During Q3FY16, BIL took a price cut of 3-4% while for 9MFY16 theaverage price cut was at 5-6% across segments.
The radial shareis currently at 30-35% of the total production of BIL.
The average realisation from thedomestic operations is down 3-4% vis a vis that of exports.
BIL’s dollar has been hedged for FY17E. Its exposureto the euro has been hedged only for two months in FY17E.
Theaverage euro hedge rate is currently available at Rs 79-80/€ forFY17E as against Rs 84-85/€ in FY16E. Hence, the forexgains, which came in FY16E would be normalised in FY17E and islikely to negatively impact margins by 300-400 bps.
The management expects the demand scenario to be challengingacross geographies and the outlook remains unchanged.
BIL may face a countervailing duty (3-5%) in the US, as thegovernment is protecting their local manufacturer. The dutystructure would not be levied in adjacent regions like Mexico,Canada, etc, and is likely to impact core American operationsfrom where it currently derives 9-10% of its total revenue.
The Directorate General of Foreign Trade has given anotification on restricting the import of natural rubber in Indiaup to March 31, 2016. According to the management, BILcurrently has an NR inventory of 40-50 days. Hence, it would not impactQ4FY16E. But if the restrictions on import of NRcontinue beyond that, then it would impact BIL in terms ofsourcing and procurement cost.
BIL’s long term debt has reduced from Rs1745 crore in Q3FY15 toRs1437 crore in Q3FY16.
BIL’s netlong term debt to equity has improved gradually from 0.47 in
Q3FY15 to 0.18 in Q3FY16.
Long term sustainable margins would be in the rangeof 25%-27% going forward
Balkrishna Industries (BIL)held a conference call on 19 May 2016.Mr Rajiv Poddar, Managaing Director and Mr B K Bansal, CFO took the queries in the call.
Q4FY16 - Key Points of the call:
For FY16, the geographic revenue mix for BIL was Europeaccounting for 53% of revenue, America (15%), India (16%) andrest of world (includes Middle East, Asia excluding India, Africa,Australia & New Zealand) accounting for the remaining 16% ofrevenue.
The segment mix remained unchanged, with agricultureaccounting for 62% of revenue, OTR (34% of revenue) and theremaining 4% from other segments.
Channel wiserevenue break-up is at replacement accounted for 74% ofrevenue, OEM 23% and others 3%.
During the year and fourth quarter, segment wise agriculture did better while geography wise, Europe did better.
The revenue share from Indian operations has moved up from ~8% in the past to ~15% (Rs 500 crore) in FY16.
BIL currently has an natural rubber inventory of 30-45 days. Hence, Q1FY17
would be partly impacted by higher NR prices while the fullimpact of the same would be seen from Q2 onwards.
For FY17, the depreciation amount is expected to be around Rs 300 crore.
The company expects maintenance capex of Rs 100-150 crore for the year.
For Q4FY16 andFY16 production from Bhuj plant is at 11,600 MT & 35,200 MT
The current utilisation level at the Bhuj plant is at 25% which is the break-even level. For FY17, the management expectsthe production from the Bhuj plant to be ~46,000 MT (utilisation level of 33%).
The management expects demand to remain stable.
The mgmt has guided volume growth in the range of 5-11% (in the range of
155,000-165,000 MT) for FY17.
The company believes that long term sustainable margins would be in the range
of 25%-27% going forward.
BIL’s overall strategy is broadly to provide newer products to its existing customer, get into newer geographies and positionits product at a discounted level, thereby gaining market share.
No one in the industry has gone for any price hikes currently. Hence BIL will also be in the watch out mode.
In FY17, the company is likely to repay its debt worth ~$91million in the next four-month period time.
The management aims to be debt free by FY19.
Its net long term debt to equity has improved from 0.6 in September 2014 to 0.1 in March 2016.
BIL’s dollar leg is booked (natural hedged) for FY17.
BIl’s exposureto the euro has been hedged only for two months in FY17. The
average euro hedge rate is currently available at Rs 79-80/€ for FY17. It was Rs 90/€ during Q4 and will be Rs 78 for Q1 FY 17. The forex gains, which came in FY16, would be normalised in current year and islikely to negatively impact margins by 300-400 bps.
There was no prices taken during the quarter. It was given in form of discounts and was to the tune of 3-4%.
Finished goods inventory is always in the range of 10-15 days.
The company sees good potential from Americas and India markets. In Americas, it will be strong in the agricultural segment.
Thanks for the conf call details.
Seems like there has been some anti dumping hearing going on OTR tires initiated by the titan group: Here are the links to the deposition:
and the following links talk about an anti dumping duty:
From the above PDF:
In the India investigation, Commerce calculated a preliminary subsidy rate of 4.70 percent for mandatory respondent Balkrishna Industries Limited. Commerce also calculated a preliminary subsidy rate of 7.64 percent for mandatory respondent ATC Tires Private Limited. All other producers/exporters in India have been assigned a preliminary subsidy rate of 6.17 percent
Also to understand how this was derived at:
Discl: No holding. I do not clearly understand how the entire process of US Govt anti dumping is arrived at and imposed. This is not a buy sell reco.
Balkrishna Industries Limited (BKT) is a leading manufacturer in the Off-Highway tire market which was incorporated in the year 1987. The company has successfully focused on specialist segments such as agricultural, construction and industrial vehicles as well as earth moving, port and mining, ATV, and gardening applications and as a result, company comes out as a global player in the Off-Highway tire industry with a 6% market share.
The company sells products in 130 countries worldwide through a network of distributors. And company having a five production sites in Aurangabad, Bhiwadi, Chopanki, Dombivali, and Bhuj which employ more than 7,000 people.
Not much activity on this huge wealth creator identified so early by our VP. I missed out investing here due to price anchoring.
How is Balkrishna Ind at cmp with 1 to 2 year pov? Views invited from those who are tracking it.
Found this link, the video explains the details.
As you mentioned from Rs.2 in year 2000 to Pre-bonus of Rs.2400 a couple of days back, literally had a dream run. Not tracking or positions though.
looks like the promoter has increased stake this qtr to 58%. Rubber price is 43% down yearly. Anyone tracking BKT? what will future look like for tyre sector post budget
Major capacity expansion plan in US (100 USD million) and India (1000 crores). https://www.nseindia.com/corporate/BALKRISIND_01092018165659_Outcome_073.pdf
Good returns here to those who invested in it in Nov dec 17 on top of 15% gain due to bonus stripping. One of the few make in india stories which has the big edege due to it being the lowest cost producer in the world and increasing opp size due to huge demand n depreciating rupee.
manfg being set up in US is another good step in right direction.Bkt was identified in VP years back @140 to 160 n must hav created huge wealth for those who held on to it.
I intend to stay invested for long time in this high quality stock.
I’ve been holding it since Jan18. I’ve no doubt about its fundamentals.
What I’m unable to understand is their announement yesterday. Why set up a plant in the US when their competitive advantage is low cost which is coming from their production in India? Can you please let me know your take on this?
US mkt is a virgin mkt with huge opp.siz for.Bkt. under trump admin this seems a visionary step as manfg in US helps. Lets wait for more details from.mgmt before concluding too soon. Max world.mkt can be catered still by Indian manfg. Bkt imho is a 5 to 10 year buy n forget due to huge opp size n good execution track record by promoters.
Here is the outcomes from the Board meeting on 01.09.2018
 USA Capex: The Current sales volume have been around 30,000 MT in Americas. We are seeing
increased traction in sales volume over the next few years. ln view of this, a local plant would
accelerate our growth prospects in this Region. The Board of Directors have therefore approved
setting up of a greenfield project with a capacity of 20,000 MT p.a. through a wholly owned
subsidiary to be set up. The capital outlay will be up to USD 1OO million. The USA project will be
funded via investments from the Parent Company and local debt. Various formalities of this project
will commence now.
 Domestic - Maintenance : (Waluj) In lieu of the existing production facilities, which require revamping, a greenfield project will be setup on a freehold land of 22 acres owned by the company which is within the 5 km radius of the current location. The capex for setting up of the new state of the art facilities will be approximately Rs 500 crores including a Co-generation plant and in-house warehousing facilities for raw materials and finished goods. The new facilities will bring operational efficiencies compared to the existing plant leading to a recurring saving in operation. The existing plant will continue to operate till the new plant becomes operational. There would be no change in the capacity.
 Domestic - Expansion 2: (Bhuj) Looking at the overall demand in the higher diameter segment, the Board of Directors have approved a capex of up to Rs 500 crores towards setting up a new line of 5,000 MT p.a. for layers of All Steel Radial OTR Tires and additional Mixing line in Bhuj.
Let’s now look at what spooked the market today
BKT’s primary business moat is around being the lowest cost provider - it makes in India and sell in US and other markets, leveraging the cheap labor cost and enjoy high margin - the direct foray in US is a big question as it destroy’s BKTs main competitive advantage
In addition to the already ongoing capex of 425 Cr for Carbon Black (backward integration; can support upto 550,000 MT capacity of tyre manufacturing; 1.5% EBITDA benefit on completion) here is another 1700 Cr of Capex ( net addition of only 25000 MT capacity; lower margins; low RoCE). Thus, free cash flow for the firm would be low or negative for the next three to four years
"While the currently announced capacity in the U.S. is relatively small, if Balkrishna Industries adopts the strategy of setting up more capacity overseas to gain market share, then its return ratios could come down significantly leading to a de-rating of the stock,” Jalan said
High Risk of if this is the future strategy, then it might decouple BKT from the past and the low ROCE would be the new normal, thereby leading to a permanent PE de-rating for the company.
Now let us look at the potential positives.
1. US Market :
- The current sales are close to 30,000 MT for the US market (FY18). Assuming even a 15% CAGR in the US, all incremental requirements till FY21 can be met from this additional capacity of 20,000 MT.
- Currently the US market attracts a countervailing duty of 5% till FY21. Given the current atmosphere, this might be a potential strategy to safeguard sales
- Higher lead times had been a consistent problem specially with OEM sales. Having a local presence in the US would mitigate that to a large extent
- Lower cost of capital ( US$ borrowing) and current Tax incentives (21% Corporate Tax : Link) would improve the post Tax RoCE for US investments
2. India :
- Waluj Capex is just extension of Maintenance Capex - as the plant and equipment from the old factory needs to be refurbished. This can be seen as absolutely must and only lead to leaner, more cost efficient operation from the new facilities (including co-generation power plant, equipped warehousing facilities)
- Bhuj Capex for the high diameter OTR tyres - Management has been consciously looking at filling the portfolio gaps with OTR tyres of 51" and above. This is an low-asset-turn, higher margin segment but would help BKT gain market share in future years
- Current Cash on books is Rs 1267 Cr while long term debt is 228 Cr, leaving 1000 Cr+ as surplus.
Company generated 2690 Cr of Cash from operations during last 3 years (FY16-18).
The total Capex requirement of 2325 Cr (over next 30 months) can be comfortably met from internal accruals and low cost debt (in the US) thereby making BKT FCF positive
In Summary, this doesn’t look like a misaligned strategy and the current knee-jerk reaction from the market might create additional entry points for the stock