Balkrishna Industries

Stock Opportunities Not-so-Hidden Gems
162

Donald,

dont you think the EBIDTA margins would be the same/lesser with rubber prices expected to hover around 150-155 range for FY14.it was around 200 rs a year ago.

biju

163

Looking at the demand problems and a significant capacity coming up for BKT, I think one should just wait and watch things from a distance and see how things are shaping up.

With so much of debt and demand issues, things can go a lot wrong. It would be better to buy when things have stabilized and balance sheet healthier.

Ayush

Disc: Do not hold

164

Hi Prashant,

BKT has an excellent track record over the years and has a decent size and brand positioning of its own in Europe & US. Management has proven its excellence over many business cycles.

But that does not mean we should sit and be sanguine about its ability to ride through the present slowdown smoothly. The economic situation is its biggest markets US & Europe is grim and despite Management protests to the contrary, we have seen consistent slide downs in the first 3 quarters. Distributors have cleaned up all stocks, and Orderbook is no more being ‘presented’.

The timing of the expansion completion makes it worse - slowing demand, unutilised capex, high fixed costs and depreciation costs, coupled with the high debt - is not a happy position to be in.

As Ayush advises, its better to wait and watch the situation carefully - rather than project with any confidence - both Sales & Margins can suffer. if you are seeing a situation deteriorating clearly, why would you want to stay put.

As Hitesh astutely mentions, you must be clear in your mind, manufacturing companies like BKT & GRP face cyclicality in demand, you must learn to ride them differently. It will be great to ride these companies when the demand situation revives.

At the moment, I would stay away but keep close track. If your’s is a completely passive strategy - perhaps there are much better choices than BKT to stay put, however small the allocation.

-Donald

165

Hi Biju,

Yes BKT has an advantage at the moment with the Rubber pricing situation. This can help neutralise some pressures - not sure for how long!

I am not confident of them holding margins. They have been capitalising the Interest & forex fluctuations on it so far. This will perhaps not be available beyond 3-6 months when Capex will be completed.

If demand does not revive for a year or more (which it can) there will be serious pressures due to unutilised capacity, higher fixed costs, higher depreciation and higher interest costs. And they might be forced to incentivise the distributors more and/or cut prices too. We must also remember BKT has higher realisations in FY13E (~230/kg) vs ~211/kg in FY12 due to the Forex effect. This might change, who knows.

A more prudent view is to scale down EBITDA margin expectations by a notch or two.

-Donald

166

Donald,

There is a ICICIdirect report on balkrishna and they have updated it after q3 results,the fy14 results project eps of 37 similar to your projections.However they have done a FY15 projection with utilization of new capacity and ebidta margins of 22%,projecting benign prices for natural rubber, and expected eps of 44 for FY15. The projection is that demand has hit the bottom and things are going to improve with geography shifting to US.They have given a TP of around 350 based on FY15 projections.The D/E is supposed to reduce to 1 by then.These seem to be optimistic projections.Maybe a pessimistic scenario also has to be thought if they would go into financial distress.

167

Hi Biju,

Everything boils down to the demand situation. If demand doesn’t revive there are tough times ahead for the company.

As I said before, I would like to err on the conservative side, see actual demand revival in place before making any projections. Demand having bottomed out may be a far call from reality. The US market (reason for the reports optimism) has seen the biggest fall 43% sequentially this quarter.

Broker reports have vested interests to sell HOPE. The actual situation may even play out like they project, who knows. But I will start banking on something when I see a quarter or two of actual gains (not declines signalling bottoming out). We don’t need to, do we.

-Donald

168

icici brokerage has a habit of getting carried away by momentum and not looking at the debt or demand situation.

They were quite bullish on koutons retail from 370-380 levels. I dont know how such a big brokerage can afford to miss looking at cash flows, debt and such factors.

Many more examples are there esp with icici.

Even kotak guys were very bullish on diamond power when many in the markets knew that the prospects of the company were not that bright.

169

Hi Vivek,

Pls stop polluting all threads and spewing forth your random CNBC-ish BS global gyaan (There are other google groups you can join to partake in that kind of discussion). If you have any update on stock being discussed, do so, else leave it.

Donald/Admin: Vivek has been warned by other senior members in two or three other threads that I noticed. Not sure how many more. I guess he needs a final warning from admins. Some people don’t understand unless they are bludgeoned with a banhammer club. Thanks.

170

Sanjay Bhattacharya talks of Balkrishna Industries in Forbes India.

He points out that for an overwhelming majority of Investment professionals the only thing that matters is to figure out ’ what the market thinks’ as opposed to building a well informed opinion of one’s own.

He suggests that investors must adopt a sensible method of taking investment decisions by making simple reconciliation between the market price of a stock and its fundamental value. He goes on to add that any asset must be worth the higher of its fundamental value and its market price.

Read more:http://forbesindia.com/article/column/investors-should-defy-conventional-wisdom/34855/0#ixzz2Oq2o3jSO

171

New BKT compound has 25% wear improvement

Following extensive field testing, Balkrishna Industries Ltd. (BKT) has developed its new Agrimax compound with cut and chip resistance that is improved by 25%.

The new compound was developed with an optimized polymer type/proportion, a more reinforcing carbon black type and with a more effective vulcanizing system, resulting in an improvement of 30% of the cut and chip compound engineering controlling factor compared to the previous compound.

Several Agrimax a70 and a85 series tires have been manufactured with the newly developed compound and extensive controlled tests have been conducted in the most severe markets, under the most severe service applications, proving the nonoccurrence of cut and chip, notes BKT, resulting in an overall wear improvement of +25%.

BKT field engineers conducted the market surveys in countries where BKT radial a70 and a85 series products are sold and used in severe service conditions. The company was then able to establish the level of cut and chip wear and identify the compound engineering controlling factors (physical property) governing the cut and chip phenomena.

The in-depth investigation has allowed BKT engineers to establish the minimum level required of the compound property in order to fully satisfy the most critical service conditions in terms of cut and chip non-occurrence.

The newly developed compound has been released for production on Jan. 1, 2013. For more on BKT visit the company’s website.

Read more: http://www.moderntiredealer.com/channel/performance/news/story/2013/04/new-bkt-compound-has-25-wear-improvement.aspx#ixzz2RT5APVpV

172

Balki results were out yesterday, a quick comparison with Donald's estimate left me highly impressed, he was spot on.

Donald's E Actuals
Growth 12.73 13.12
NetSales 3167 3190
EBITDA 668 557
eps 37.44 36.81

Waiting to see how he is adjusting 2014E based on the results but going by instinct it is going to be close.
Tried attaching the results pdf but failed for some reason. Will try once again.

173
Conference Call by Capital Market

Balkrishna Industries held a conference call on 31 May 2013. Mr Arvind Poddar, MD and Mr Rajeev Poddar, ED took the queries in the call.

Key Points of the call:

For FY 13, the company's revenue was of Rs 3,191 crore, YoY growth of 13.1%. 6% was due to volume growth. Rest was due to price and mix change.

FY 13 EBITDA was of Rs 664 crore, YoY increase of 31.4%. Profit after Tax of Rs 356 crore, growth of 32.5% YoY.

Some signs of recovery are being seen at major markets. Macro economic picture is looking much better. In Europe, East Europe is showing recovery.

There was partial commissioning of Bhujplant in September 2012. Ramp up to take place in a phased manner as below

  • FY 13 â10,000 MT
  • FY 14 â60,000 MT
  • FY 15 â120,000 MT
  • Rs 1,422 crore is incurred till March 2013
  • Rs 528 crore Capitalized till March 2013

In FY 13 in tonnage terms, the company did 138339 MT, a growth of 3.4%.

Guidance for FY 14 is around 145,000 - 150,000 MT (growth of 7-10%). It indicates a capacity utilization around 72%.

The company is trying to enter OEM segment and signs are very encouraging.

Post Bhuj expansion, BKT's tonnage will be 276,000 MT per annum

Natural Rubber is moving in broad range. It is expected to remain steady.

The company currently holds inventory of 2-2.5 months.

Profit increase in FY 13 was due to cost reduction and increased realization.

Staff cost increased q-o-q as the company started partial production at Bhuj.

FY 13 sales breakup: Replacement market was 81%. OEM was 15% and rest off take was 4%.

Production no for FY 13 139392 MT and for Q4 it was 32573 MT

The company has order book of around 20-25 K MT (45 days).

For FY 13-14, there will be Rs 10-12 crore additional interest cost. Depreciation will go up by 80-90 cr.

Geography wise breakup for FY 13 - Europe 46%, America 25%, India - 8-9%.

Gross block (Net) is Rs 1276 crore. Work in progress is around Rs 950 crore.

Regarding US Market from agricultural point of view, the company says that it is improving.

The mining segment is doing well. The capacity addition at Bhuj will be mainly for this segment. It will be large tyre all steel. In mining, it will be 80% replacement and 20% OEM.

In India also, the company is targeting the mining segment. Coal India etc are its customers.
174
Conference Call by Capital Market

Balkrishna Industries held a conference call on 06 August 2013. Mr B K Bansal, Director Finance and Strategic growth advisor took the queries in the call.
  • Balkrishna Industries Q1FY14 results were in-line with expectations. The topline at Rs 816 crore was down ~ 2% YoY as volumes at 34,941 MT declined ~6% YoY.
  • PAT was at Rs 102 crore, (against Rs 73 crore) came higher, aided by higher other income Rs 17 crore vs. Rs 1.1 crore in Q1FY13. Other income has increased due to exchange fluctuation on sales and purchases.
  • Operating margins at 21.9% during the quarter was higher as raw material prices

continued to remain muted.

  • Raw material prices have remained muted. While natural rubber prices have decreased, carbon black and synthetic rubber did not show much change.
  • For the quarter ended June 13, other expenses have increased due to increase in advertising, promotional and marketing expenses.
  • Geography wise, revenue breakup was that Europe is around 51%, US was 17%, India was 11%, and the balance was rest of world.
  • OEMs accounted for 18% in Q1 FY 13-14 against 15% last year and replacement market currently is 77-78%.
  • Production during Q1 FY 13-14 stood at 35,191 MT as against 37, 900 MT in corresponding last quarter.
  • Natural rubber inventory stood at about two months. For Q1, international rubber prices were at ~$3000, which is currently $2500-2800/tonne.
  • For FY14, the management has maintained its previously given guidance of volumes of 145000-150000 MT, which would be ~70% utilisation
  • The management expects to meet its guidance as OEM penetration is likely to increase. An increase in focus on India and newer markets like Russia and CIS is likely to drive volumes.
  • BIL has taken a price cut in tandem with a decrease in raw material prices by 8-10%. The price cut is in-line with the industry pricing.
  • Euro has been hedged at 74-75 for FY14E. The management does not have any hedges for the $ as it has a natural hedge due to raw material imports.
  • The current order-book for the company stands at about two months, i.e. 22000-23000 MT.
  • After the complete ramp-up at Bhuj, BIL's capacity will be 276,000 MT at end of FY 15. At end of FY 14, it will be 236,000 MT. Bhuj's capacity is 120,000 MT. Last year the company did 15,000 MT from Bhuj.
  • The company has incurred Rs 1720 crore capex for Bhuj project till date.
  • For FY14, interest costs are expected at Rs 32-33 crore and at Rs 50-55 crore for FY15. The management expects depreciation of Rs 170 crore in FY14E and Rs 225 crore in FY15.
  • Demand recovery is being seen across many areas, and US is seeing strong recovery.
  • Current level of debt stands at Rs 2000 crore.
175

Thanks Hemant for the regular updates on BKT. We must keep tracking pedigree companies like BKT, GRP etc where we have an excellent overall understanding of the business/industry and we have faith in very competent Management.

We have a Mumbai trip coming up possibly end-Aug. Will try to meet BKT and get first hand update on some specifics - key monitorables, etc.

176

Good read on the industry , competitors & future opps

177

Any idea why BKT tyre volumes are falling in the last couple of quarters? I can understand sales falling, because of drops in raw material prices, but I cannot understand volumes falling, especially in the face of new capacities coming on line.

I am a little perplexed without more information, because on the face of it, Q2 results were not so great, but the stock has gone up smartly since the results.

Could Hemant post the con-call details?

Thanks

Samir

178
Balkrishna Industries held a conference call on 29 October 2013. Mr B K Bansal, Director Finance and Strategic growth advisor took the queries in the call.

Key Points of the call by Capital Market
  • Balkrishna Industries has reported a standalone sales turnover of Rs 839.58 crore and a net profit of Rs 107.94 crore for the quarter ended Sep '13. Topline and bottomline slipped by 5% and 13% respectively.
  • Production during Q2 FY 13-14 stood at 33,461MT, drop of 10.8% on a y-o-y basis.
  • The company holds 2 months inventory of rubber.
  • Currently, the company has 20,000 MT operational capacity at Bhuj, plans to take that up to 60,000 MT by 2014.
  • Regarding the large size 51 inch tyres â the company plans to start production about end of March 2014. It will go for both OEM and replacement markets.
  • Though realization was up 8.5% on q-o-q basis, its reflection of better currency realization. After exchange gain/loss the increase is only 2%.
  • Commodity prices have remained largely stable.
  • Order book stands at one and half to two months.
  • The company has incurred Rs 1500 crore capex for Bhuj project till date. Total would be around Rs 2,500 crore.
  • Other than Bhuj, there will be Rs 60-70 crore yearly capex on a whole.
  • For Russia, CIS countries, sales numbers are small right now. Hence it will not give a true picture of the market potential. However, growth is as per plan. On a long term, it is a good market.
  • US is seeing recovery. It is definitely positive on season. From Europe, the company is getting good numbers and it will continue.
  • Looking in mining segment, a large size will be for OTR tyres.
  • Geography wise, revenue breakup was that Europe is around 50%, US was 20%, India was 12%, and the balance was rest of world.
  • The company expects dollar to be stable.
  • Raw material to sales shows a 400 bps drop on yoy basis and it is sustainable.
  • On 51 inch tyres, 8% of overall comes from mining. In terms of volume they are at 40% and value terms they form 60%. But numbers are not high.
  • For FY14, interest costs are expected at Rs 25-30 crore and at Rs 45-50 crore for FY15. The management expects depreciation of Rs 162-170 crore in FY14E and Rs 200-225 crore in FY15.
  • The company maintains its guidance of 23-24% EBITDA margin for full year FY 14.
  • Margins in OE 3-4% lesser than in replacements.
  • Euro has been hedged at 83 for next one year. The management does not have any hedges for the $ as it has a natural hedge due to raw material imports.
179

Thanks a lot Hemant for posting con call details without fail for all stocks covered on valuepickr. Indeed appreciate your efforts.

180

Thanks Rohit,but i am only doing copy/cut paste:) ,real hard work is done by all other seniors.

181

Copy/Paste also requires an effort. So I think we st_ill owe you a large thank you._

Regards

Samir