Questions for Balkrishna Industries Management
1). ****Post-expansion achievable production capacity of ~230,000 MTPA. Agricultural Tires (65%), OTR Tires (29%), Others (6%).
Please explain to us the current demand-supply situation in Agricultural Tires, and OTR Tires segments. Is demand running far ahead of supplies? What makes for this aggressive expansion of over 80% from current levels? How have you planned for increasing Sales in tandem, or is that a given? What are the risks according to you?
2). ****Premium Products. Agri Radial and OTR Radials. BKT is the largest manufacturer of full range of radial tractor tires from Asia.
How much of the post-expansion capacity is planned for premium products like Agri Radials and OTR Radials? What is the revenue contribution from Premium products currently and is there going to be increasing focus on premium segments?
3). ****Off-take from Global majors like Michelin and Vredestein currently forms 6% of total Sales.
With large capacities available from BKT especially in premium segments, do you foresee greater interest from Global majors in increasing off-takes from BKT. We know that OEM market margins are lower than the Replacement market, but how are the margins in the Off-take segment?
4). ****Indian Market share currently forms 11% of Sales and most of it comes from OTR sales. The Indian Earthmoving and Construction Equipment industry is meanwhile expected to grow five fold from USD 2.3 billion to USD 12 â13 billion by 2015.
Would we see an increasing focus on the Indian OTR tires segment once you do not have any constraints on the capacity front? Who are the existing players in this market âsame Michelin, Titan, or there are others? What are their market shares, and how far behind is BKT.
5). ****Global competition. Michelin. Titan. Other players like Alliance from developing markets having similar advantages as BKT have emerged on the scene too.
Michelin 2008 Investor Presentation listed BKT as serious competition in Europe and showed BKTâs share as 3%. Kindly explain what has changed in the last few years. Do you still enjoy the 30% price differential? If there is a demand-supply mismatch situation, the bigger players also must have invested in creating larger capacities?
Mehensarias have a strong technical background, they have the Capital backing them up, the benefit of the BKT experience till 2005/6, and have lined up substantial capacities by now, and may well replicate most of the advantages that BKT today enjoys. How closely do you track local competition? Any changes in tactics/plans to tackle this emerging threat.
The new entrants in a bid to capture greater market share faster may resort to undercutting? Is that not a real threat?
6). ****Europe**** and American markets. Fast growing economies such as Brazil, Argentina, Colombia, Costa Rica
Tell us a little more on the penetration that you are making in your fastest growing markets, especially the Americas. Which of these markets will provide you most of the sales growth? Are you able to get similar margins form the South American growing markets?
7). ****In FY11 BKT registered an impressive 40% plus growth in Sales, but suffered an 11% degrowth on PAT front due to the reversal in raw materials pricing.
How do you see FY12 panning out? You mentioned order booking of 5 months in the last Conference call. Are you protected on the margins front in booked orders? At what levels 18-20%? What is a sustainable level for the full year?
If prices are expected to soften in coming months, how are booking your current orders?
8). ****Financial Strength. BKT has always maintained prudent debt levels in the range of 0.7x to 1.3x. Capex for FY12 of ~700 Cr is going to be a bigger burden on the balance sheet this year.
We may see Debt-to-Equity levels touching 1.5x or so. Please tell us a little more on the financing costs. Working Capital/ Sales has risen to over 32% of Sales, and is likely to go further up as inventory levels go higher. Is Working Capital also financed in foreign currency? What will be the overall financing cost? Will it be lower than your traditional 4-5%?
9). ****European economy is troubled. The current bailout to Greece may not be enough and there are fears this may lead to more such bailouts for Greece and the other countries like Ireland, Spain too. The Euro as a currency is under tremendous pressure. BKT derives ~47% of revenues from Europe.
What are BKTâs views on the risks from this front and what are its plans to mitigate these risks?
10.****Exports account for ~90% of Sales. More than 70% exports are to developed markets.
How soon will emerging economies together account for something like 40-50% of Sales? What are BKTs views on entering the Chinese market?
11.****Sustainable Competitive Advantage. We have seen BKT holding its advantage through the last 10 years and growing more than 10x in the same time in size.
What are the reasons you have continued to enjoy competitive advantages and have not faced serious threats from emerging or bigger players?
If we look at tractor tyres in India we see mostly MRF or Goodyear. Why has MRF for example not found it profitable to compete with you in exports for Agricultural tires? Itâs not that MRF or Apollo or any of the tire biggies in India arenât aware that BKT operates at something like 2x their margins and returns!
Why has no one from the mainstream tire industry ventured out in off-highway tires in a big way despite clearly seeing a decade long growth story unfolding before them?
And for the first time there is hint of serious competition coming from players like Alliance who seem to be capable of replicating the same advantages as BKT. Why do you think you will retain sustaqinable competitive advantages for the next 5 years?
12.****Manufacturing Plants & Automation
The modern fully automated plant at Chopanki (60000 MTPA) is reportedly delivering 110 TPD at 75-80% utilization. Both the plants are functioning on three shifts per day on a 7 day week. But your Bhiwadi plant (60000 MTPA) is over 18 years old and reportedly still delivers about 135-140 TPD close to 100% achievable capacity. Is this true??
This is an amazing record and speaks well of Managementâs ability to maintain its plants and progressive de-bottlenecking. It also indicates maneuverability and the expertise of the company to implement a complex manufacturing process and switching it flexibily to accommodate client specific requests.
This must be another source of competitive advantage? Please elaborate on this aspect a little for our benefit.
13). Mould Division Merger
BKT reportedly has 500-600 moulds used for various applications in varying sizes and designs laid in these two plants, all manufactured at BKTâs mould manufacturing plant at Dombivali, Maharashtra. This division is now being merged with BKT?
Kindly tell us a bit more on the advantages of having your own mould manufacturing plant. And why this decision now to merge it with BKT?
BKT used to be paying above 20% of earnings as dividend to shareholders. This has been gradually coming down and has seen drastic cuts in the last 2 years. FY10 dividend payout was at 6,.48% and FY11 is even lower
Can you please clarify the Managements thinking on this front? What kind of dividends can we expect in the future?
**14.****$1 Bn in Sales? **
What are the important milestones on the way? With a Sales target of 130000- 135000 MTPA fro FY12 we are probably doing ~2300-2400 Cr in Sales?
With 230,000 MTPA achievable capacity from 2HFY13, what kind of Sales is probable in FY13? 3300-3500n Crs?
What kind of market share will this transalate to for BKT? When will we see BKT claiming a 10% market share in the global off-highway tires market?
15.****Challenges Ahead. We have tried to cover the issues before the company as we see it from our limited understanding of BKT and the Industry.
Please elaborate on the main challenges before the company as it is scaling up in a big way and trying to address the huge opportunities before it.