Balkrishna Industries


(Ayush Mittal) #61

Hi Donald,

Couple of observations on your projection picture:

1). I don’t think the interest cost would bloat to approx 34 Cr. If one looks at the recent qtrs, the int cost was at about 3.5 Cr and hence annual charge was about 14-15 Cr. For this year expansion, the cost would be around 150 Cr…even if we take 10% cost on that, the interest cost should remain at less than 25 Cr for this year. Assumption - Interest cost on expansion at Bhuj would be capitalised till the plant becomes operational.

2). Similarly depreciation might remain at around 90 Cr.

Also we should do a couple of sensitivity analysis in our excel sheets…like take turnover range between 2500-2700 Cr. Take margins range between 18-22% and try seeing the results. As this year the natural rubber prices are decreasing and end prices stable or increasing, i would expect margin expansion to happen after a qtr or so(aveg OPM for last 8 years is about 22%)…and if it happens, the EPS for FY 2012 could be way higher.

Views Invited

Regards,

Ayush


(Donald Francis) #62

Thanks Ayush for your pertinent observations. Makes me learn new things, as always:)

Interest Costs - Yup, I forgot to take out the 6-7 cr additional finance costs borne by the company in Q3 for complete FCCB repayments. Interest & finance costs in FY 11 was around 14-15 Crs, you are right! That doesn’t make a difference though to the estimated interest & finance costs for FY12.

But if the 500 Cr Capex is capitalised, that will make for a major savings! let me check with the company if possible, on this front.

I agree, we should do a sensitivity analysis. Ofcourse, I presented what I thought was surely in the bag, more like a Realistic estimate.

Lemme show a simple Pessimistic & Optimistic chart, to educate ourselves on bonus upsides!

-Donald

1).


(Vivek Gautam) #63

FANTASTIC STORY .sHOULD HAVE READ EARLIER SUCH a great story with out preconceived notions.


(Donald Francis) #64

http://www.dnaindia.com/money/report_balkrishna-a-good-specialty-tyre-bet_1580724

Balkrishna, a good specialty-tyre bet

Balkrishna Industries, a leading player in off-highway tyre (OHT) solutions, is set to benefit from steady demand for its niche products with capacity expansion providing for strong revenue growth and easing rubber prices aiding its operating margins.

**Business:**Balkrishna Industries, a flagship of Siyaram Poddar Group, is engaged in manufacturing and sales of off highway specialty tyres, tubes and tyre flaps. The company is a pure-play OHT producer having a product portfolio of over 1,900 stock-keeping units that find application in niche segments such as agriculture, forestry, mining, construction, material handling, golf, lawn and gardens and sports. The company has three manufacturing plants in India with the current installed production capacity of 126,000 metric tonne (mt). It derives almost 90% of its standalone revenues from exports as it has strong presence in over 120 countries across America, Europe, Asia Pacific and the rest of world (ROW).

The company sells almost 80% of tyres under its own brand through its network of about 200 distributors catering to replacement market while almost 14% of revenues in fiscal 2011 came from sales to original equipment manufacturers such as Volvo, John Deere, Bomag, JCB and Ferrari.

It is also supplier to leading global tyre manufacturers with almost 6% of revenues coming from aoff-take salesa.

**Investment rationale:**Balkrishna is one of the few specialised pure-play OHT manufacturers with strong research and development capabilities and diversified product portfolio, catering to low volume, high variety applications. It derives close to 65% revenues from agricultural segment while off the road tyres (earthmoving) segment and ATV tyres contribute 30% & 5% to sales, respectively.The company, being largest manufacturer of full range of radial tractor tyres, would benefit from replacement demand in Europe and Americas and growing trend of mechanisation in developing countries.

Balkrishna would also benefit from increased focus on mining and infrastructure development in developing regions that would drive demand for off the road tyres for earthmoving and construction equipment.

The company enjoys low-cost advantage over its global strong competitors such as Bridgestone, Michelin and Titan International and has shown a 30% compounded annual growth in revenues over last five years. Balkrishna would benefit from steady replacement demand and continued focus on core infrastructure and mining sectors even in case of slowdown in automobiles.

The company is increasing its focus on Russian and CIS market to further increase its revenues. It would also benefit from expansion that will almost double its installed capacity in two years.

The company has undertaken brownfield expansion for increasing capacity to produce premium products like agri radials and OTR radials that command better margins. This would increase its existing installed capacity to 140,000 mtpa by September 2011.

Balkrishna has also taken up greenfield expansion project at Bhuj that is expected to increase the capacities by further 90,000 mtpa by September 2012.

The companyas current order book of close to 65,000 mt provides volume visibility for the next six months and with additional capacities coming on line, the company would be able to overcome capacity constraints currently faced in the wake of steady demand for its products.

On the input side, prices of natural rubber that constitute almost 47% to raw material volumes seem to be peaking out and this would help to improve its operating margins over next few quarters.

**Concerns:**Any adverse movement in prices of major raw materials like natural rubber and crude-based derivatives would impact its margins. However, the company has room to pass on some of these additional costs through price hikes to its customers.

Also, with majority of its sales coming from exports, the company faces foreign exchange currency fluctuation risk. Any delays in capacity expansion plans would also affect expected production volumes.

**Valuations:**Driven by stable volume growth from original equipment manufacturers and replacement market along with increased capacities coming on line, the revenues are expected to grow at a CAGR of over 22% over FY11-13 while the net profits are expected to rise at similar pace during this period.

At current market price of Rs167, Balkrishna Industries trades at 6.52 times its expected earnings per share in fiscal 2012 and 5.57 times its expected fiscal 2013 earnings.

Investors can consider the stock on declines to get decent returns from medium- to long-term perspective.


(Donald Francis) #65

Sushil Finance Balkrishna Industries Report, Sep 13 2011


(Donald Francis) #66

Balkrishna Industries concall

The Earnings Call to discuss the Financial Performance ofQ2FY12of our client âBalkrishna Industries Limitedâwith Mr. Arvind Poddar, Vice Chairman & Managing Director, Mr. Anurag Poddar, Executive Director & Mr. B.K Bansal, Director-Finance will be hosted on :

Date : 25th October 2011 ( Tuesday )

Time : 2:30 pm

**Dial in :**022 â 66290541/ 022-40392893


(Donald Francis) #67

Some notes from Balkrishna Q2FY12 results Concall 25 Oct 2011

Large number of analysts tracking and asked questions. This is a “discovered” stock now, but valuation gap exists!

1). The interest cost incurred for the the Bhuj plant is being capitalised till the plant goes commercial i.e. Sep 2012. The forex mark to market costs also get included and capaitalised. So no impact seen on FY12 P&L on account of rupee depreciation on the interest costs for the ECB loan.

2). Exports to Euro zone comprise 46-50%. 96-98% of this is booked in Euros. There are no credits extended to anybody. Simple 1 ye forward hedges are taken on the net exposure (Exports minus Imports). 90% of Net exposure is hedged. Average hedging Euro - at Rs 68; Us$ at Rs 47

3). Order booking at 70000 MT. Equivalent to 6,5 months of Sales volume ~1450 Cr Again 46-50% is from Euro zone.

4). Average Rubber prices Q2 - $4700-4800; Q1 $4500-4600; Q3E - marginally lower; Q4E -$3700-3800; Thailand floods no impact on rubber production

5). Highest order booking in Sep -across all regions and all segments. No slowdown in demand seen.

6). 40% growth in Americas markest is mostly in North America - Canda, US , Mexico

7). ECB loan $175Mn fully drawn. Interest cost being capitalised; Rs 300 cr spent of the total 1200 cr projected till Sep 2012. 650 Cr is Cash on Books

8). By sep 2012 - company will have 90000 MTPA additional capacity coming on stream ora 40% increase. To a pointed quesion if it is fair to assume market share will grow to 6%, the company affirmed the same.

9). The company reaffirms the guidance of achieving 130000-135000 MT production in FY12. This does not factor the additional incremental capacity that will be in place by October 2011. Current capacity 144000 MTPA

10). Receivable cycle 40-45 days. Some cases 60 and in some others 90 days. Basically the time it takes shipment to reach customer. There are no credit terms offered.

The story remains as promising as it seemed before. I cant see any downsides.IInclined to keep buying on declines.Invite comments!


(Nigam) #68

Stupid cheap, thats what it is - almost 7 times FY12 earnings. We dunno when Mr. Market will wake up but what we do know is that price vs value will converge eventually


(Rohit Chauhan) #69

Hi donald

A hypothetical though not completely impossible scenario - lets say we have some crisis in europe which causes the demand to slow (with 60% agri …question is will it ?). At the same time we have new capacity and debt coming on the books.

Willthe management be able to get additional demand from other regions (asia, india, CIS etc) and balance out this drop ?

Again, i dont know if the above will happen, but have been puzzling over it. your thoughts ?

rgds

rohit


(Donald Francis) #70

Hi Rohit,

Its a scenario that may yet unfold! We also think Euro as a currency may be more at risk, relatively speaking.

Disc: I have sizeable investments in BKT. with over 90% coming from Exports, naturally we have pondered at length over this. And quizzed Management a couple of times. Recently Ayush, Gaurav and a couple of others also visited BKT’s plant and naturally went over similar concerns. (They came back very impressed with the company btw).

Some more facts/Our considered views:

1). BKT has not seen any slackening in demand. Infact they are very confident of improving market share when the new capacity comes on stream. Half year is behind them. The numbers look good. They have some 6.5 months of order booking. All positions hedged $-at Rs. 47 Euro -at Rs 68, if I remember correctly.

BKT derives only 15% from OEM sales. 80% is Replacement Sales. The OEM market is the first to get affected in a recessionary environment. Replacement market takes a long time to get affected.

2). Indian market sales is ~11% (Asia 15%) of total sales. BKT has maintained they have not been able to able to aggressively grow this market due to capacity constraints.

FY12 Sales are all booked. And hedged. The falling rubber prices will also ensure margins are maintained/expanded in FY12. Should they be seeing a slowdown in Orderbooking, the company seems to have options of course-correcting by increasing focus on Indian market penetration.

We should also note the 40% growth in America Sales (Mostly Canda, US & Mexico) H1FY12 over H1FY11. BKT has been making very rapid inroads into that market, and that augurs well should there be a slowdown in Europe.

The company Analyst Presentations are a great source of information. They have been reporting transparently till now. We feel reasonably confident that any slowdown in Export order bookings will be reported and can be tracked by anyone interested!

I remain a buyer at lower levels, till I see any reason to reverse the outlook.Having said that, RISKS always remain. Can’t say what may happen in a Euro-zone contagion panic.

Ayush - perhaps you may like to add your views?


(biju john) #71

Donald,

** a few doubts,was just looking at the financials,what could be the reason for drop in cash flows from operations from 09 to 11,was just looking at moneycontrol data.**

2.the existing debt is around 600 crs,is this only long term and the additional 700 crs also only long term,what could be theworking capital requirement,overall what can assume interest rateto be ?Even if the interest rates are capitalize would they be facing cash flow issues.650 cr cash on books which was mentioned earlier,was not able to get it from bal sheet.

3.Iam not sure how to doan analysis,they spend about 1200 cr,achive additional profit of x,how do we calculate the return on this capital they have employed,just to understand the scalability.What after 2015,they have to gain go on a capex drive.

regards

biju john


(Ayush Mittal) #72

Hi Rohit,

Yes, the points raised by you have been concern areas for me also but looking at the performance of the co, order book etc, it seems BKT is an excellent co and doing very well at the moment. Their plans, actions seem to be realistic and well planned.

During my recent co visit and after interaction with co officials etc one thing to note is -BKT doesn’t seem to be a regular tyre co trying to sell cheap tires in Europe. Most of the analyst keep highlighting about the cheap labor as the main factor but I felt the reason behind BKT’s success is more than that. Few things:

1). They claim to be among top 3-4 brands in Europe now.

2). They say they guarantee about quality equivalent to likes of Michelin yet 30% cheaper.

3). Their main focus is on replacement market and this segment keeps increasing due to ever increasing no of vehicles on road and demand is more stable here.

4). They have adopted distributor push model. And their partners have grown like BKT and this is a huge factor and not easily replicable.

5). They have in-house mould manufacturing and they also have the lowest development time in the industry and one of the highest no of SKUs

Now coming to the risks from Europe:

1). It has been a huge concern for last 2-3 years and still BKT has been able to deliver 30%+ growth with good profitability. The co didn’t had a single qtr of decline in turnover during 2008-09 crises also.

2). If one goes through the con-calls of last 1 year, the co has been witnessing increasing order book. Earlier they used to have 2-3 months of order book…now it is 6.5 months. The mgmt seems desperate for capacity and confident that they would be able to utilize the expansion.

3). See the segment results - Europe has slowed over last 4 years (613 Cr to 935 Cr from 2008 to 2011). The growth has been coming from new areas - especially North America (growth was 100% in 2011 and now at about 50%).

4). I used to feel that due to Euro crises, the Euro will weaken vs rupee and this could be the risk to BKT but now the Euro is back to 69 levels and this is good for BKT.

Overall I think there is a definite shift in manufacturing of OTR industry from developed countries to developing countries and BKT is a specialized player capturing the market share aggressively. I think it would be rare to come across a co growing at about 30% CAGR for last 11 Years!! with one of the best margins in the industry.

But yes, risks are there and if some black swan event takes place, they can get hit as a huge expansion is coming up.

Regards,

Ayush


(Rohit Chauhan) #73

Hi ayush/ donald

I agree with all your comments. I have read the same points and believe that is the case.

What worries me is this - The company has a small (non zero) risk of getting hurt if things unravel in europe. If things unravel, i think the company can compensate for it in US and asia as both of you said. At the same, one needs to consider the second order effects. A problem in europe will hit the rest of the world hard too and could depress the demand. BKT is a global company, with operations in india - so what happens in rest of world is important

I would not normally not worry about it for a company such as BKT as it would be a temporary hiccup - at best for a year to two and then as things normalizes, it should be back to normal.

What worries me now, is that company has a lot of debt. So a black swan event could hurt it much more, if the slowdown happens at the wrong time.

At current PBIT of around 380 Crs, operating margins have to drop by more than 60% to start hurting the company fundamentally. Do you guys know the terms of the debt - interest rates and re-payment profile ?

But again, may be i am seeing much risk in a low probability event and the company should be able to compensate for it

rgds

rohit


(Donald Francis) #74

Hi Biju

1). Cash on BS 682.70 Cr as on 30 Sep, 2011- You need to see Q2 results. Companies have to declare most BS items along with half-yearly results.

2). Existing debt is 1545.22 Cr as on 30 Sep, as they have drawn the $175 Mn ECB loan in full. Working Cap/Sales (FY12E) has shot upto over 51% of Sales, but that’s because of the cash on book. Take that out and Working cap/Sales is at 28-30% the normal levels for their business. The cash will be utilised during the year. Working Capital requirements have been in the range of 400-600 Crs in the last year. As per the company the ECB loan is at 3% interest cost.

3). Return on Capital has been in the 16-20% range. FY10 was an extraordinary year recording RoC 28%. MY projections show ROC dipping for FY12 and 13 to 15-16% levels before picking up in FY14.

Let me know if this was helpful.

-Donald

Donald,

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drive.

regards

biju john


(Donald Francis) #75

Hi Rohit

Thanks for your inputs.

As per the company the ECB loan is at 3% interest cost. Since this is for the Bhuj expansion all the interest cost Incl. rupee depreciation related cost are being capitalised till Sep 2012, the company has clarified.

I am not too worried at the debt situation. For a manufacturing company of BKT size d/e of 1.5x with very low interest costs is pretty comfortable. And looking at how the Management functions, they would bring this down to quickly to normalised levels. I am more or less sanguine about this, more so as FY12 Sales 2600-2800 Cr is already in the bag. And all indications point to margins being sustained or enhanced for FY12.

A good FY12 will help them manage the BS better and equip them to handle a depressed FY13, should the worst happen. The odds are on that the replacement market getting affected significantly will take beyond FY13.

I remain pretty confident of the performance of the company in the next 2 years, should they maintain their excellent execution record. If that falters for some reason, or some force majure, the odds will change.

In my books that’s a risk very much worth taking. Should a normal environment prevail, the company looks set to get on to the next level.

-Donald


(biju john) #76

Hi donald,

still

reduction in cash flow from operations,can it be due to the working capital changes which are included in cash flow from opearations in money control data and that has been increasing.

regards

biju

Hi Biju

1).

2).

3).

-Donal


(Donald Francis) #77

Seeing good demand within off highway space: Balkrishna Industries

This seems such a steady business. they are 90%+ export dependent!

They manage the forex situation and loans/liabilities risks smoothly too…haven’t seen much hiccups! of course they are a much larger company than our usual microcap companies!

This goes off the radar of most people, so bringing it back into discussion. Despite the export dependency risk, the odds are on this company will manage to sail thru difficult periods. There are good reasons for that too!

ET Now: With respect to your exports to continents like Europe and now North and South America and things given the kind of volatile situation there have your exports been affected in anyway and that in turn affected your margins?

Anurag Poddar: No, not really because we are seeing good growth coming in all of these sectors that we are present in both in Europe and North and South America as well. So, for us the business is going on as normal. We are just being watchful of the situation on the ground and taking our decisions based on what is happening in the environment also.

ET Now: Just one quick word on your margins which have held at about 17% to 18% do you expect that you will be able to maintain those margins even if the environment gets a little challenging?

Anurag Poddar: Yes, going forward what we feel that we should be operating within this 18% to 20% kind of EBITDA level margins and that is what we are working towards.


(Abhishek Basumallick) #78

I continue to be surprised by BKT. How are they managing the forex hedging? For the ECB loan, any ideas at what rate have they taken the loan?

The business seems to be on solid ground.


(kamiKazi) #79

Hello Guys,

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.

My notes:
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.

-kamiKazi

_ps: My first post here.

  • : #Kolaveri_

(Donald Francis) #80

Wonderful! just for the effort and the enthusiasm, Kamikazi gets huge accolades! Well done. Welcome to the ValuePickr collaborative community and thanks for adding much steam;)

1). Domestic tractor biz - we will need to clarify; they might have come out with some products?

2). Domestic sales - 9% - that’s part of the Investor Presentation at company website

3). Advance Payments - They mentioned that they collect 100% advance from all new customers in our Q&A. Debtor days have always been at around 50-60 days of Sales. Q2 debtor days stood at 54. One would assume this is normal for the business. Their working capital/Sales has been ~24-30% of Sales, which is a pretty decent track fro this size of a business

4). Capacity is slated to go up by 90000 MT to ~230000 MT

Yes this is a very steady business, managed very well. Ignored somewhat by markets -One can expect a 25% CAGR business growth surely in next 2-3 years.

Suggest you go through the Investor Presentation, correlate the discrepancies once again with your anecdotal references (which are sometimes more important, and closer to the reality on the ground).

And flag up, what you still find not reconciled. We will take that up formally with the company, as needed.

And 3 cheers again for your superlative effort. we need more mentors like Ayush too:) Well done Ayush!

-Donald