I attended www.Excon.in exhib’n last month in Bangalore. What follows is my general impression abt BKT’s exhibit and my detailed notes of discussion with them.
BKT was a co-sponsor of the event with a huge can’t-miss-booth in the main hall. Being co-sponsors they had good visibility in all official signages, but they had also advertised a lot on their own (like full back-page advtmt in trade exhibitor’s guide which is given free to all exhibitors). They told me they are now spending more on marketing and brand building.
Thanks to Ayush who encouraged me to make it a propah info-gathering exercise. Also I do have a close relative who’s thinking of setting up a tire agency in Kokan region. Till now he was thinking on the usual MRF/Ceat lines for auto-segment, so I thought let me figure out if BKT can be a good fit and what it takes to set one up.
My overall impression of exhib’n was that they were having a good response. Lots of tier-II-city type prospects in tier-II biz attire (safari suits:-) trickling in every few mins with proper sitdown-chats rather than the casual strollers who are there to just collect pens and freebies.
I spent around an hour there and spoke at length with two sales guys (one OEM sales like mines etc, and one Domestic sales mgr) and two technical mgrs. incharge of fitments, after-sales, gathering technical data for feedback etc. All the four were super-enthu about the company and their product.
Some of the data in my notes below contradicts with stock-story here and in Mgmt Q&A so either my data is incorrect or the execution has changed a little bit since the last updates on valuepickr.
a) The new plant coming up in Bhuj (already partly-operational) will double the capacity of existing 3 plants combined. Tire revenues from this plant will should start trickling in late next year.
b) Along with tires, in the new plant they are also manufacturing tubes and flaps - production of which has already started in first phase - which until now they were sourcing from OEM vendors. So this should improve their overall margins slightly as they are doingbackward product integration and will have more QC control. In 2nd-3rd phase the tire capacity expansion will come up.
c) All four guys told me that they have confirmed orders booked for next 6-8 months so looks like their CFO’s confidence in QnA that they won’t have any challenges in mktg the new capacity is justified.
d) Every day they are sending ~30-35 containers for export (anyone has idea how much each container means in sales terms?). I also learnt that in this line of business their sales is on per kg/ton basis (not on SKU or unit), and that they measure the life of these tires in operational hours (not kilometer usage).
e) Domestic sales is approx ~5%, whereas stock-story and mgmt QnA says its 10-11%.
f) Quality wise, they said since they are selling in EU/US mkts, they are way above domestic quality from MRF/Ceat and cost-wise also they are ~5-8% costlier here.
g) The direct-to-customer sales guy told me they have tied up some new mines as customers. (I’m sorry I forgot their names. Can try to get it if need be).
h) The channel sales guy told me they are not very aggressive and don’t want to rush in creating dealers/agencies. However they are giving exlusive dealerships in each district and apparently the place where my relative wants to setup falls in their priority area. Also I specifically told him that there is not much construction/earth-moving equipment business to be had there. Only Commercial vehicles, transport fleets and Agri-biz thru mostlytractors. And the guy confirmed that that’s what they are targeting - Tractors in agri mkt.
i) Around this time I had a chance to discuss with two tech guys. Apparently after the sales, fitting the tire is a big issue. Most Indian customers don’t operate their vehicles as per the prescribed limits (overloading, air-pressure etc), and then they blame the manufacturer for substandard quality. So they have an entire team who goes around regularly to dealers sorts out any technical issues or feedback they may get from mkt.
Also, since BKT has mostly manufactured for Euro mkts so they need mkt feedback from early Indian customers to redesign their treads or other tech. changes to suit Indian requirements.
Sometimes as case-study they monitor some particular customer and regularly gather data about tire-usage and share the numbers back with QA/QC in factory.
So (h)+(i) above conveys that they are looking to expand in the Indian farm sector.
In contrast the CFO in QnA clearly denies expansion in Indian tractor mkts. This seems like a major contradiction which needs a clarification.
My dealership enquiry will be passed onto someone else in BKT who is directly in charge of dealerships so I will update this thread as soon as I hear back from them.
One shocking fact that stunned me COLD is:
)- For the future order book visibility of 6-8 months, apparently the customers have all paid in advance! So every single tire being manufactured in their plants right now is all fully paid-up! I corroborated this fact while discussing with the dealer guy - he said, all their dealers pay upfront for all the stock in stores. No x-days credit limits for even dealers.
Cow-u cow-u holy cow-u, they manage do this how-u? !!!*
Is it covered in the stock story? If not, I think this is a huge plus which deserves a mention.
Some questions from my side:
i) Considering (a) above: Doubling capacity in next 1.5 years - even conservatively let’s just say only 50% growth realisation - should we straightforward assume that much topline/bottomline growth and more or less similar EPS growth too? Even if there is no further PE re-rating just the earnings bump itself is huge plus.
ii) Can someone here educate me as how this advance payments, if true, impacts their financial statements. I mean in concrete terms how it directly shows up somewhere in their P&L, BL, CF etc? And compared to their peers (MRF, Apollo) how it looks different. eg: Does it mean they should have low/negative working capital (like HUL) and if so, doesn’t this stock deserve a much higher PE?
All in all it does look like this is one solid company in terms of sales outlook and growth atleast for nxt 2-3 yrs. Even a fleeting meeting like this has given me good confidence; moreover it has given me four solid employee-level contacts which can come handy in future.
As far as numbers go, and how much upside from CMP in next 3-5 years this can give, I look upto gurus here to guide plebeians like me and what levels you advise to enter and how to value this stock. I am already holding a small position and thinking of increasing my stake.
The stock has already doubled in the last two years, and as far as my learning goes I don’t see any reason why biz.value should not double in another 2-3 years just on earnings basis.
Feel free to ask me any questions. Maybe I’ve missed out something, hopefully not much.
_ps: My first post here.