Balkrishna Industries


(Donald Francis) #141

Let’s look at data points. It isn’t that bad a situation NOW. It could get worse, though.

Bhuj Plant has about 40-45% OTR Capacity specific for larger sizing Mining OTRs. The rest is geared for Agri and other sector. The other plants had 30-35% OTR capacity but of smaller sizes.

The company is pretty smart on execution - it is this flexibility in producing as per demand, changing production lines flexibly for different SKUs, even for low volumes that has been the main key to their competitiveness. Managing a larger SKU size ~2000 now up from ~1600 BKT maintains is their biggest competitive advantage - the Management Q&A elaborates on this aspect.

The debt situation too is not that bad - certainly not astronomical. BKT has always been careful to maintain debt/equity not exceeding 1.3x. It is currently at 1.15x (~1460 Cr). The company has clarified that the debt levels will remain at these levels for the year. They would not need to draw more as they already have about 540 Cr left over. The interest coverage ratio is really handsome at 21x. (Remember they have access to low cost Libor+3% Funds; considering hedging costs WACC may not exceed 8-9%). I will be worried on debt servicing front only if this ratio comes less than 3x.

The REAL situation is that if demand situation doesn’t pickup, growth will be slow, capacity will not be utilised optimum, higher depreciation and interest costs will impact margins. And who knows how long the demand slump continues or worsens from here!

My submission is that its not all hunky-dory. There are tough times ahead! So not the best time to add. Perhaps a good time to reduce exposure if it is high. And there will be a time to load up - when the demand situation turns for the better. BKT will definitely weather this situation - just as it has so many times in the past.

-Donald


(Amit) #142

The screener shows debt of 1600 crore+ and debt equity of 1.5+ already.


(Ashish Goyal) #143

Agree that the situation doesn’t seem too bad right now, but as I said, the downside risk going ahead is too high. In case things go south, I believe this could be as bad as a leveraged commodity P&L. Not saying that’s how it will be, but that’s how things could get.

Fx debt / mining exposure / softness in its core market a highly likely scenario given Europe - all three put together make me nervous. Even if it was only any two of them, there was a way to think of the maximum downside. With all three present, that becomes a bit difficult. In all likelihood, the company will emerge fine - I’ve tremendous respect for the management here, but I think the market will overreact at some point, and provide me with a better buying opportunity. I may be wrong, though (as I’ve been on many such calls expecting the stock to get cheaper, and it never does!).


(TCX) #144

I would recommend when dissecting a company’s financials, refer to the company’s results published quarterly. Also download investor presentations - in BKT case you can.

BKT long term debt at Sep’ 12 is 1462.85 Cr, Equity 19.33, Reserves 1257.57, so d/e is 1.15, not 1.5+. Screener data may or may not get updated in time!Why not go to the Source?

-tcx

**

The already.

**


(Donald Francis) #145

Hi Ashish,

No debate on tougher times ahead. Not the time to buy - absolutely agree with you.

Differ with the reasoning:

I may get cheaper later reasoning -I will not count on that - as results will keep showing good performance for atleast 2 quarters. Margins may show little change, not big drastic changes in 6 months.

My thinking:

Becasue there can be big risksover the medium term, if my exposure is high I should look to cut it. and the time to get in is not now. A better risk/reward adjusted time to get-in is when the demand situation improves - Esp as we have a transparent management communicating honestly. So we can keep track, positively.

Commodity company- high debt P& L --:))

This comparing with high debt commodity companies isnt it a bit far-fetched:). Commodity companies never have EBITDA levels of 20%. Commodity companies never have Interest coverage of 10x+ let alone 20x;

Just wanting to bring some balance in viewing -what is no doubt a tough situation, which as you say can surely get worse.


(Abhishek Basumallick) #146

http://www.mydigitalfc.com/sectoral-watch/stuck-rut-158


(Abhishek Basumallick) #147

My personal view is that the de-stocking in the US is more in anticipation of tax raises and spending cuts in response to the “fiscal-cliff” situation. The situation itself is exaggerated and has a low probability of happening. Although, US conditions will continue to remain tough and may get tougher from here.

If I am right, this may be a 2 quarter phenomenon.


(Ashish Goyal) #148

Hey Donald -

I’ve also learnt to not count on “it will get cheap reasoning” but still, old habits die hard :-). Yes, headline numbers for next two quarters may not be that bad, so the weakness will emerge only after that when the forecasted off-take for the new capacity does not materialize (if that indeed turns out to be the case). So that’s why I thought it will probably get cheaper (not necessarily cheap, though) after a couple of quarters when it starts trading on EV/EBITDA basis, than just a PE basis right (10x P/E looks great for a 30% CAGR company)

On commodity company comparison, I brought that to the fore not from the strain on BS perspective, but the steep decline in reported net income that such companies can exhibit, which I think will make the stock really volatile, especially as the company has been a steady 30% CAGR performer for an extended period. However, not to forget that it is only half the business that will exhibit that characteristic. The other half will still continue to perform reasonably well (and that’s why the BS will never be as strained as can be for leveraged commodity P&Ls).

At the same time, I am not sure if any drag from the underperformance of capacity allocated to mining segment will be a temporary phenomenon for just a couple of quarters - it could well be a temporary blip, or it could last long enough to end up straining its cashflows, especially as I think that a 3% to 4% cost of debt is on the lower side. Most companies with overseas debt report about 6% to 7% interest cost over an economic cycle (again, this is just an empirical observation, not based on hard analysis, so please correct me if I am wrong).

So relatively speaking, that P&L performance would be as volatile for BKT given its track record as consistent performer as it would be for a leveraged commodity P&L. I agree with you that there is no way one would get BKT at depressed P/B valuations that many of these commodity plays get sold at during the bottom of the cycle.

-I risksover –:))) far-fetched:)).


(Raj Panda) #149

http://www.thehindubusinessline.com/companies/apollo-tyres-to-invest-1-b-on-global-expansion/article4142910.ece

Looks like Apollo Tyres too has now started targeting "off-highway tyres (OHTs)"market and expanding Kalamassery plant in Keralawith a planned expenditure of 200 cr.


(Ayush Mittal) #150

The screener shows debt and debt:equity ratio correctly fromtheoreticalperspective. The reason for lower debt equity ratio by donald is that he has deducted cash on balance sheet from the loan outstanding…computers can’t do that :wink:

Ayush


(Rudra Chowdhury) #151

Hi Ayush,

Sorry to dampen the mood, but the thing missing here in screener.in is the Half-yearly balance sheets :slight_smile:

I discussed this with Pratyush in the screener thread itself and he mentioned no proper source is available for the same :frowning:

Donald has calculated Debt:Equity based on the half-yearly balance sheet of Sep 30, 2012 Link: http://www.bseindia.com/corporates/AnnPdfOpen.aspx?Pname=Balkrishna_Industries_Ltd_121112_Rst.pdf%7C1 where debt:equity (1462:1277 Cr) is at 1.14x. The cash in the BS is fresh proceeds from ECB (ready to be deployed Capex spend) so that cannot be considered for net debt consideration anyways.

We somehow need to figure out a way to look at (and compare YoY between) half yearly balance sheets, as referring to March balance sheets in the second half of the fiscal year would be meaningless.

fromtheoreticalperspective. ;))

Ayush


(Ayush Mittal) #152

Hi Rudra,

Thanks for the suggestion. We will keep it mind to include, if possible.

Ayush


(Deepak Swamy) #153

Q3/Fy-13 Results out…

Total Income Down 10.3% to 704.73 Cr from 785.41 Cr.
EBIDTA up 9.1% to 155.79 Cr from 142.75 Cr.
Net Profit up 2.1% to 74.41 Cr from 72.88 Cr.

EBIDTA margin is 22.1% v/s 21% (SQ-12) and 18.2% (DQ-11)
NET Profit margin is 10.6% v/s 14% (SQ-12) and 9.3% (DQ-11)

Total Raw material costs as a %ge to Income is 55% v/s 57.1% (SQ-12) and 57.1% (DQ-11)
All Other expenses to Income is 22.9% v/s 22% (SQ-12) and 24.7% (DQ-11)
(Including employee and Power & Fuel expenses)

Financial costs to EBIT is 3.4% v/s 3.8% (SQ-12) and 4% (DQ-11)
Tax Rate 32.5% v/s 32.3% (SQ-12) and 32.5% (DQ-11)

Forex loss of 14.5 Cr v/s loss of 9.68 Cr affected net profits.

9M/Fy-13 v/s 9M/Fy-12:
Total Income up 18.6% to 2411.27 Cr from 2032.31 Cr (Fy/11-12: 2788.98 Cr)
EBIDTA up 34.2% to 498.42 Cr from 371.35 Cr (Fy/11-12: 505.81 Cr)
Net Profit up 41.1% to 271.21 Cr from 192.25 Cr (Fy/11-12: 268.52 Cr)

Reported 9-month EPS 28.06 v/s 19.89 (Fy/11-12: 27.43)
Recorded TTM diluted EPS: Rs. 35.95

On 14/02/2013, stock on BSE Closed at Rs. 277.25/-


(Madyam KS) #154

Hi All,

Noticed a deterioration in the information disclosed in the results and in the presentation. The balance sheet apparently is no longer disclosed and the amount of information in the presentation is also substantially reduced.

It may be good to check on this in the upcoming call/management interaction esp as the large capex is about to be completed in the next 6 months and hence forth the Co will have to account forthe interest on this project loan through P&L.

regards


(Ayush Mittal) #155

Yes, the co has stopped giving the order book details…lol. It shows the pain in the environment. I’m yet to hear the concall…missed that day as was busy with MPS


(NJ) #156

Hi Ayush - Do you think this is a buying opportunity given that it trades at the lower end of its historic multiples (7x FY13). Also most of the capex is done so there is upside from the current levels.


(Raj Panda) #157

2 news article related to off-highway tyre industry.

The CEO of an American tire maker has launched a brutal attack in writing on productivity in France, telling the government that some French workers put in only athree hoursa a day and that his company would be astupida to take over a troubled factory in the country.

Buyout firmsKohlberg Kravis Roberts(KKR), Blackstone,TPG CapitalandAdvent Internationalare set to firebidsvalued at more than $300 million to acquire majority shares inAlliance Tire Group, a Mumbai-based offroad tyre maker, said people directly briefed on the matter.


(Donald Francis) #158

BKT Concall 18 Feb 2013. Short Notes from my side.

Opening Remarks

2 months of RM inventory @ avg 160-165/kg

demand situation seen improving in this quarter

Growth in current quarter should be 10% over last Qr

Capex completed by dec Qr -1283 Cr out of a total outlay of 1800 Cr

Interest Costs likely with total debt of 1800-1900 Cr for next year

Debt costs - 60 Cr?

yes thats the peak that can be touched

but next year will be less

Current order book 2.5 months

Capitalised already

Dec -220 Cr

Mar 500-600 Cr

Slower volumes

)- basically because of Inventory cut-down across all channels

)- so all your channels are now inventory clear? yes

Dec Qr

2000 Cr Gross Debt

1700 Cr Net Debt

After Bhuj Debt?

Should be around 2200 Cr

So @5% interest cost - 100-110 Cr?

No no Working cap @ 1.5% and Long Term Debt less than 3%

peak interest cost should not be more than 60 Cr

Capitalised Interest costs in quarters

Everything is capitalised;; whats that figure capitalised?

Dont have it right now

Depreciation Guidance for FY14

Should be around 160 Cr for the year

Realisation

can you hold it over next 2-3 quarters

difficult to say - if RM comes down further, or others offer a price cut


(Donald Francis) #159

Even factoring in a demand revival in subsequent quarters and a somewhat optimistic 25% growth, shows there is going to be degrowth in FY14E.

Year on year EPS growth for FY13E may be camouflaging the real picture! let's look beyond that. I would like to err on the conservative side, and wait for demand revival to be seen on the ground. Many things can go wrong. Large Quantum of Debt can make things worse. Her's a look at the ground situation so far in FY13

Q12013 (MT) Q22013 (MT) Q32013 (MT) 9M2013 (MT)
Q-o-Q Variance
Europe 16650 Europe 15977 Europe 14298 Europe 45.00% 46925 -10.51%
RoW 5551 RoW 5572 RoW 5561 RoW 16.00% 16684 -0.20%
America 9250 America 10771 America 6049 America 25.00% 26070 -43.84%
Asia 5550 Asia 4831 Asia 4218 Asia 14.00% 14599 -12.71%
Total 37001
37152
30125
100.00% 104278 -18.91%

Fresh positions are not advised at this stage. If there is significant exposure to BKT, that should certainly be reduced/exited. Small/Minimal exposure may not matter.


(Donald Francis) #160

And here's the Optimistic projections (25% growth) for a change! As mentioned before even this scenario shows de-growth. Should serve to highlight what can happen if demand slowdown continues.

Balkrishna Industries 2007 2008 2009 2010 2011 2012 2013E 2014E
Growth
12.96% 26.84% 10.88% 43.65% 40.30% 12.73% 25.00%
Net Sales 877.66 991.38 1257.47 1394.30 2002.88 2809.98 3167.63 3959.54









EBITDA 182.07 234.56 202.83 398.40 370.70 493.49 668.45 752.31
EBITDA Margins 20.75% 23.66% 16.13% 28.57% 18.51% 17.56% 21.10% 19.00%
Depreciation 36.00 43.83 56.52 66.22 74.44 83.14 102.82 158.38
Depreciation/Sales 4.10% 4.42% 4.49% 4.75% 3.72% 2.96% 3.25% 4.00%
EBIT 146.08 190.73 146.31 332.18 296.26 410.35 565.63 593.93
Interest* 17.02 26.81 37.65 18.66 21.22 12.13 25.49 59.39
Interest/Sales 1.94% 2.70% 2.99% 1.34% 1.06% 0.43% 0.80% 1.50%
PBT 129.06 163.92 108.66 313.52 275.04 398.22 540.14 534.54
Taxes 45.91 57.09 37.94 104.80 89.38 129.69 178.25 176.40
Tax rate 35.58% 34.83% 34.92% 33.43% 32.50% 32.57% 33.00% 33.00%
PAT 83.14 106.83 70.72 208.72 185.66 268.53 361.90 358.14
Net margins 9.47% 10.78% 5.62% 14.97% 9.27% 9.56% 11.42% 9.05%
# of Shares 1.93 1.93 9.67 9.67 9.67 9.67 9.67 9.67









EPS 43.01 55.26 7.32 21.60 19.21 27.78 37.44 37.06
Adjusted EPS 8.60 11.05 7.32 21.60 19.21 27.78 37.44 37.06
EPS growth
28.48% -86.76% 195.14% -11.05% 44.64% 34.77% -1.04%
P/E




9.07 6.73 6.80
P/Sales




0.87 0.77 0.62

Invite discussion from those invested/interested/tracking.