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.