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Balkrishna Industries

This niche producer of off-the-road tyres has sound prospects

Balkrishna Industries is the flagship company of Mumbai-based Siyaram Poddar Group. It manufactures and sells OTR (off-the-road) and agricultural tyres. The company is present in more than 120 companies through a network of 200 dealers. It has 3 per cent share of the overall world tyre market.

Strengths
Niche products: Balkrishna Industries operates in a niche segment. The company has the advantage of being present in a sector where there is less competition. According to a recent report from LKP Securities, “With the automobile industry worldwide growing rapidly, companies in the OTR tyre space are now concentrating more on the auto tyre segment. Some players have also reduced their production of OTR tyres and are concentrating on segments such as commercial vehicles (CV) and private vehicles (PV).” These developments have lowered the level of competition for Balkrishna Industries.

BIL is in a business segment that requires the production of a large range but low volumes of tyres. This prerequisite makes the segment unattractive for new entrants.

Moreover, the OTR segment is largely non-cyclical as its growth depends on sectors such as infrastructure, construction and mining.

Focus on research: BIL develops over 150-160 new sizes every year. It has the world’s fastest turnaround time of 8-10 weeks for new product development.

Expansion: The company has the opportunity to take advantage of radialisation, a trend that is gaining momentum rapidly. In this pursuit, it has set up an all-steel OTR radial tyre plant at Chopanki. It also plans to set up a plant at Bhuj.

Weaknesses
Currency fluctuation: About 90 per cent of the company’s revenues are generated through exports. The company also imports a lot of its raw materials and capital equipment. Hence it is highly exposed to the risk arising from currency fluctuation. It undertakes extensive hedging to mitigate this risk.
Rubber prices: Rise in prices of key raw materials like natural rubber, synthetic rubber and carbon black is an area of concern for the company. It could affect the company’s margins adversely.
Business concentration: The limited focus on specific vehicle segments prevents the company from participating in the high growth being witnessed in automobile and two-wheeler sales in India. Exposure to Europe for revenues also makes it vulnerable as the Euro zone is likely to witness subdued growth in the medium term.

Valuation
The company’s current price-to-earning (PE) ratio stood at 7.18 (December 2, 2010). This is lower than its five-year median PE of 9.71.

The company has registered a five-year EPS growth rate of 22.07 per cent. This gives it a price-earnings to growth (PEG) ratio of 0.33, which is quite attractive. Invest in this stock with at least a three-year investment horizon.