Balkrishna Industries

I have started initial research on this stock by going through their annual reports and other relevant material. Initial thoughts, in no particular order-

a) low cost high quality manufacturer in OHT segment (low cost demonstrated with higher margins during leaner times and high quality- based on lower insurance claims (0.5% compared to 1-2% by other majors).

b) barriers to entry high in this business- many PV tyre manufacturers tried to enter but could not take through

c) BKT undertaking major Capex (INR 22 Bn) over next few yrs (mainly funded by mix of internal accruals + debt). This is a mix of green field + brown field Capex (up gradation of one of their existing plants in India).

d) capital intensive industry. Industry fortunes tied up with global economy outlook + demand/supply dynamics of raw material (like recently there was shortage of carbon black and prices were up ~ 20%). One of the reasons, company is setting up a captive raw material unit (will be operational in a phased manner - 60000 MT to be operational in 2019 and additional 80000 MT by 2021/22).

e) Competition: their major competitor would be Alliance Tires. I was going through Yokohama Rubber company (they acquired Alliance in 2016) annual report and found that, Alliance are also doing well (as of Dec 31, 2017 annual turnover was USD 561 mln and net profit margin of 12%). Alliance tyres have 3 manufacturing units (2 in India and 1 in Israel). They have similar SKUs like BKT. Their sales, like BKT are mainly to US/Europe (both regions account for ~ 96% sales). I feel, with a strong promoter (like Yokohama) backing Alliance, they would rapidly expand their foot print in future. Apart from Alliance, other global majors like Michelin/ Titan etc operate in OHT as well as PV.

f) compared to Alliance, BKT has higher margins (may be due to majority operations being in India, slightly higher capacity ? Need to understand this bit more).

g) currently BKT is expected to have cap utilisation of ~ 76% during FY 19.

Key things to watch out/ trying to get more clarity-

i) Cost/time overruns for their on going Capex plans and their track record?
ii) being capital intensive, fin metrics would look stretched in the medium term till their new capacities become operational. Capacity to suffer/PE derating likely in future?
iii) on going trade war implications if any, possible higher ADD in future?
iv) was trying to understand buying patterns of a customer in this business? Why will they prefer a BKT/Alliance tyre and what are the key differentiating factors (if any for a new customer, apart from price).
v) a big slump in global economy in next few yrs (if it happens), one of the first sectors that could get impacted would be OHT. With the ongoing capex by BKT, how will they cope up if there is a drop in sales/earnings and rise in leverage? Pertinent to note, in 2009 there was a dip in the industry and their earnings got impacted. But now, with huge ongoing capex, it looks bit more scary.
vi) any one has access to some industry report with specific details on OHT segment?

On valuations, I believe it would be prudent to wait for another 20-25% correction? (may be, I am too greedy here ! And such correction may not happen and it may be cost of omission :)) Views/ thoughts on some of the above points? Sorry, if some of the points were covered above and I might have missed them.

disc: no investment. Not a buy/sell reco. Pls do your own due diligence.

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I’m invested in this stock. So, I would like to know whether management would really proceed with capex if they believe that BKT suffers in case a blig slump in the global economy.

They have been very prudent with their capital allocation as far as I know and carefully expanded their capacities over the years.

The recently released report from Dolat Capital has some useful commentaries. Refer the attachment.

Also attached is a summary report of BKT financials for last 10 years, prepared on screener data. One interesting thing to note would be how BKT has repaid debt in the last few years despite drawing up significant capex plans.

image Balkrishna Ind_VU.xlsx (293.2 KB)

BKT_Dolat Capital.pdf (629.5 KB)

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Good Indian Tyre Cos are trading at PE 18 upwards, which seems high when compared to their foreign counterparts. Bridgestone 11PE, Michelin 9PE. Therefore, in case of Balkrishna Industries I am fairly sure that we would be paying-up at these levels, and definitely not getting it at a discount, which should be the second criteria for a value investor, first being investing in a good company, which it is.

Its chart also looks like one which has gone through PE upgradation based on past expectation. I think that is not the case now.

Therefore, it will not be a surprise if the stock continues to correct. Given their growth numbers, I would not want to pay more than around 10 PE or so for tyre companies.

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This is a quality company with good set of promoters. They have been increasing market share and handling capex well.
I am accumulating in a sip mode and will continue to do so till the PE is reasonable.

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Thanks for sharing, wonderful analysis. I could never think of food price index and mining industry health as the infuencing parameters… A completely different vantage point and perspective, well researched and well presented… I am following Finception on social media now…
Disclosure: Entered on 25th Jan

If you did not know.

The current weakness could be a precursor of muted results this quarter.

@jamit05 Seems like your analysis was spot on. Since you mentioned about charts, can you provide your views wrt technicals?

Cutting of newspaper advertisement of notice of Board Meeting of the Company scheduled to be held on Friday, the 08th February, 2019

As expected poor quarterly results. Interim dividend of Rs.2 may not be enough to arrest the upcoming slide.

Hello,

Has any attended the concall yesterday? If so, can you please share the summary of the call.

Regards
Vijay

EPS growth last 3 years has been @ 13% CAGR. Why should we should be so excited about this company? Price CAGR has been way ahead of the fundamentals.Am i missing something

https://www.moderntiredealer.com/news/733273/bkt-displays-tires-in-new-sizes-at-2019-sima-show

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Expansion plans are good for Balkrishna Industries.
Huge investment in HDFC FMP :wink:

HDFC Child plan and hdfc life hold 7.3% and 1.4%

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image
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Did anybody has Macquire report about balkrishna tyres, seems the rating / valuation has been reduced. stock is hovering in 700-740 priceline for the past 2 months and don’t see further reduction in value. Unless or until any major turmoil happens in Europe / US. Any additoinal insight from VP forum is appreciated…

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Dolat Capital - Annual Report Analysis - 2020.pdf (951.0 KB)

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Tyre maker Balkrishna Industries is scouting other markets to import chemicals and raw material, as it seeks to reduce its dependency on China.

Balkrishna Industries (BKT) manufactures agricultural, off-road and all-terrain vehicle tyres for exports and domestic market.

Its manufacturing facilities are located at Bhiwadi and Chopanki (Rajasthan), Waluj, Aurangabad (Maharashtra) and Bhuj (Gujarat). As much as 80 percent of its sales come from overseas markets.

The company sources carbon black, key input material from its own plants.

BKT is the only tyre maker in the country which has its own carbon black plant at Bhuj, with its total current capacity at 1,40,000 tpa.

Phase-II of the project with a capacity of 80,000 tpa was commissioned on 12 March 2020. Besides meeting its own requirement, BKT sells carbon black to the market also.

The company is expecting pick-up in industrial construction and mining, a sector which the government is pushing to open up.

The company expects to spend Rs 600 crore in FY21, largely towards its ongoing capex programme as well as routine maintenance capex as against Rs 761 crore incurred in FY20. The total production during FY20 stood at 1,94,000 tpa.

Europe and the US are its biggest exports market, with around 51 percent and 17 percent sales volume coming from these two markets

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