Balkrishna Industries (BIL) is the flagship company of the Rs. 1,800 crore Siyaram Poddar Group. BIL is one of the leading Indian tyre manufacturers focused on the OHT (off-highway truck) tyre segment.
In FY07, the company boasted of 1 lakh tpa (tonnes per annum) of total installed capacity. BIL has three manufacturing facilities located at Bhiwadi and Chopanki in Rajasthan, and Waluj in Maharashtra. The company has established its presence in this segment with over 1,700 SKU, for agricultural, industrial and construction and earthmoving applications. The tyre segment contributes around 85 per cent of total sales and the company exports almost 90 per cent of its total tyre production.
BIL had a paper and paperboard division manufacturing coated duplex/triplex boards with installed capacity of 54,000 tpa that contributed around Rs 118 crore in FY07. It also had a small textile processing division, which is used to undertake job work from Siyaram Silk Mills (a group company) with a capacity of 24 million metres per annum and a modest turnover of Rs 28.5 crore in FY07. To focus on its core business of tyres, the company divested these two units into separate subsidiaries, Balkrishna Paper Mills and Balkrishna Synthetics, with effect from March 31, 2007.
Presence in Niche Segment
BIL has a presence in the niche OHT tyre segment. Globally, OHT tyres accounts for 10 per cent of the total tyre sales. The global size of the OHT tyre market is estimated at US$ 7.5 billion. There is a very high degree of concentration in the segment, with the top three players (Bridgestone, Goodyear and Michelin) having a 50-55 per cent market share. OHT tyres are used for agricultural, industrial construction and earthmoving purposes. The OHT segment focuses on highly customised requirements, unlike automobile tyres.
BIL's major strength lies in its R&D (research and development). Over the years, it has developed over 1,700 SKUs (stock keeping unit), which provide a wide range of offerings. It rolls out around 150 new products every year to cater to the requirements of varied industries. Its SKUs and product development act as an entry barrier in the industry. The company exports around 90 per cent of its products and the balance 10 per cent is sold to OEMs (original equipment manufacturers) in India. Out of total sales, around 70-75 per cent comes from the replacement market and the balance production is mainly for companies who outsource production to BIL. Since BIL's revenues are primarily derived from the replacement demand, the company has established a robust distribution network and has 200 dealers worldwide.
Excellent EBITDA margins
BIL's EBITDA (earnings before interest, taxes, depreciation & amortization) margins are a hefty 20.2 per cent, against 5-6 per cent of its global peers. This is mainly due to the low labour, power and fuel costs in India. In India, employee cost is around 5-6 per cent of net sales, whereas in overseas countries it accounts for 12-15 per cent. Its low cost of production also enables BIL to sell its products at around 25-30 per cent cheaper rates when compared to its global rivals. The company currently has a 3 per cent market share. Going forward, we believe that its lower pricing strategy would enable it to garner a higher market share in the coming years.
Appreciating Rupee No Concern
Exports account for around 90 per cent of BIL's sales. Further, about 65 per cent of sales are to the EU countries, meaning a major part of the company's earnings are in Euros. Among total sales, 53 per cent of the revenues are in Euros, while 45 per cent are in dollars. While the dollar has depreciated by around 13 per cent against the rupee in the past few months, the appreciation in rupee against the Euro is only 5 per cent. This has mitigated the risk of currency depreciation. Furthermore, the import content of raw material is around 42 per cent, which is mostly dollar denominated. This has also mitigated the negative impact on dollar-denominated exports.
Risks
The appreciation of the rupee against dollar and the Euro could impact revenue growth. There exists a regional risk as around 65 per cent of the company's revenues are from Europe. This regional concentration could become a risk for the company going forward. Rubber is a key raw material and a rise in rubber prices beyond our projection could impact EBITDA margins and net profit estimates as well.
Financials
BIL reported a robust 41.6 per cent growth in net sales to Rs 877.7 crore in FY07 from Rs 620 crore in FY06. Higher operational costs, mainly due to a rise in raw material, and power and fuel expenses, restricted EBITDA growth. This resulted in a 140 bps decline in EBITDA margins. BIL has decided to focus on its tyre business with a thrust on increasing its presence in the export market. Backed by capacity expansions, net sales are expected to witness a 21 per cent CAGR over FY07-10E. The main growth contributors would be the volume expansion by 29 per cent, the company's exit from the low-margin paper and textile businesses and a marginal rise in sales realisations, ranging from 2.5 per cent to 4 per cent y-o-y basis. A re-rating is expected on the stock on account of the company's continued high earnings growth and the recent de-merger of its non-tyre businesses. BIL is a cheapest stock available on the bourses on P/E basis. It also enjoys highest return ratios as against its competitors.
This article was originally published on March 18, 2008.
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