Balkrishna Industries

Background

Balkrishna Industries is one of the world’s leading manufacturers of “OFF-HIGHWAY tires”. BKT has the widest product range with more than 2000 SKU’s (Stock Keeping Units) and is “One Stop Shop” for all off-highway tyre solutions.

The success story of BKT begun in 1995, when it entered into production of cross ply off-highway tires. Product received instant acceptance in European & North American market. With the help of persistent & intensive market research coupled with ever expanding production capabilities, today BKT has made its mark in the specialty segments like Agricultural, Construction, Industrial, Earthmover, Port, ATV (All Terrain Vehicle) and Turf care applications in both cross ply & radial construction.

More than 90% of tyre production is exported to more than 120 countries across all five continents, in all the major markets of Europe, North & South America, Africa, Asia & Middle East.


Main Products/Segments

Balkrishna Industries operates in the specialty tyres segment – Off-Highway Tyres. Pneumatic tyres for special applications for agriculture, construction, earthmoving industry, material handling, forestry, lawn and garden, and All-Terrain-Vehicles (ATV).


Main Markets/Customers

  • Agriculture sector is the mainstay, contributing ~65% of the Sales. Industrial and Mining sector are other key sectors
  • Exports contribute ~90% of Sales. Europe contributes ~55%, US ~16-18%, and Rest of the World (ROW) 15-17%; Domestic sales contribute ~9-10%
  • OEM Sales contribute ~12%, rest comes from Replacement market sales: Replacement market margins tend to be higher

Bullish Viewpoints

  • Impressive Track record – Balkrishna Industries has significantly expanded its presence in the niche off-highway tyres segment in the last 9 years. From about Rs. 166 Cr in FY 2001, Balkrishna Industries Revenues crossed Rs.1386 Cr in FY10. The focus being on export-led growth, Balkrishna Industries now derives over 90% of its revenues from exports –primarily to Europe and other countries.
  • Industry leading margins & returns – Balkrishna boasts of industry leading margins (FY10 OPM ~21%) and returns besting bigger international competition like Mitas (FY09 OPM 14%), and Michelin (FY09 OPM 8%). It has concentrated on increasing its presence in the replacement market, which tends to be somewhat less cyclical than the OEM market. The replacement market also offers the potential for higher profit margins and is larger in most markets.
  • Aggressive Capex Plans – Already operating at 100% of achievable capacity, it has announced big capacity expansion plans. Rs. 120 Cr capacity expansion at Aurangabad facility , 25 Cr for mould shop expansion and another 10 Cr for warehouse expansion for FY11. Another Rs. 1000 Cr is planned over the next 2 years for a new factory at Bhuj. 275 acres of land has already been acquired and ground levelling is being done. This will add another ~90,000 MTPA to existing capacity of 132000 MTPA. As per the company, the demand for BKT brand is strong and it is only supply constraints that’s holding back further growth.
  • Strong Balance Sheet – Current debt-equity stands at 0.25. There is enough headroom for leveraging the balance sheet for funding expansion plans through debt and internal accruals. The company has announced plans of taking a $175 Mn debt to fund this and the balance from internal accruals.
  • Valuation – the stock is valued at general tyre industry valuations despite having much better operating margins and ROCE as compared to the industry. Balkrishna has margins & ROCE almost double the industry average yet stock is available currently at a PE of less than 7.

Bearish Viewpoints

  • Depreciation of the Euro – Since exports to Europe constitute 55% of Sales, depreciation of the Euro can pose a serious drag on the margins and ability to compete. Major competition like Michelin and Bridgestone continue to manufacture in Europe, US & Japan and they need to import the raw material (35% natural rubber, 15% synthetic rubber) in dollars; for them raw material imports neutralises the benefit of Euro depreciation. As per the company, there hasn’t been a major impact. The company has hedged the Euro at Rs. 63/64
  • The tyre industry is raw material intensive. The main raw materials for tyre are rubber (natural or synthetic or mixture of both), carbon black, nylon tyre cord and rubber chemicals. Except natural rubber, the costs of all the other raw materials in tyre production are related to crude oil prices. Natural rubber has seen huge price-volatility in recent times.
  • There is an outstanding 4.5% FCCB aggregating to US$ 22 million with premium of 1.5% p.a. payable on cumulative basis on redemption date (Dec 31st, 2010). The bonds are convertible at a price of Rs. 1,375 at a pre-determined exchange rate of Rs. 45.66 per US$. The current stock price situation suggests the FCCBs may not convert on the maturity date and redemptions will have to be met through internal accruals. That may pose an additional burden.
  • Huge Capex plans – The 150 Cr Capex plan for FY11 and another Rs. 1000 Cr for the Bhuj factory will be funded out of $175 Mn debt and rest from internal accruals. While operational leverage takes time to kick in, there is a possibility of increased interest and depreciation costs, and lower capacity utilisations having a negative impact on bottomline. Execution risks remain significant as the company looks to almost double capacity in the next 2 years. To be fair it must be mentioned, the track record so far has been impeccable.

Barriers to entry

  • The off-highway tyre business is fragmented, with low-volumes, and is labor-intensive. In India, employee cost is around 3%-5% of net sales, whereas in overseas countries it accounts for 12%-15%, pressurising operating margins. Some tyre majors including Continental and Goodyear exited the OTR and farm-tyre market in the US in 2005-06 as labour costs began eating into profitability.
  • The specialty tyres segment in which Balkrishna Industries operates is predominantly represented by large varieties and low volumes. It is geared up to take advantage of the peculiarities of this segment and has developed more than 1800 Stock Keeping Units (SKU) to meet the diverse needs and applications. For any new competitor to match up, this is a huge and complex task. The wide product range covering nearly all segments of off-highway tyres is the company’s main strength.

Interesting Viewpoints

  • BKT Tyres are currently priced 30-35% lower from that of international tyre brands like Michelin and Bridgestone. Earlier this was about 45% lower. This indicates two things. One, that BKT brand is slowly finding more acceptance; Two, there is headroom to pass on price increases in case of raw material price rise. In the current year, Balkrishna has passed on price increases of 10% in two trenches, while the majors have hiked price by 3-5%.
  • As per the company, demand for BKT brand is very high. People have come to appreciate that BKT Tyres match performance of the higher-priced international brands. The current sales contribution from US is 16-18%, it can easily go over 25% if the company did not face capacity constraints.
  • In order to minimize raw material price-volatility risks, the Company not only enters into medium-term contracts but also adopts the policy of “Buy and Stock” large quantities during lean periods. The company plans on increasing warehouse capacity with an additional investment of 10 Cr in FY11.

Disclosure(s)

Donald Francis: No Holdings in the Company;


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