What are the future prospects of Balkrishna Industries Ltd.?
Balkrishna Industries Ltd. (BIL) operates in the off-highway tyres (OHT) segment. OHT is a niche segment and is associated with making of tyres for machinery associated with material handling, construction, earthmoving and farms.
With its manufacturing base in India, the company enjoys an advantage especially when it comes to labour costs. Close proximity to rubber producing nations such as Indonesia and Thailand is another advantage BIL enjoys, considering natural rubber is the key raw material and constitutes around 45 per cent of the raw material costs. Also, it generates 80 per cent of its revenues through its distribution network wherein the sale is made to the distributors, resulting in savings in the inventory carrying costs, warehousing expenditure and selling and distribution expenses. This low cost model enables BIL to sell its products cheaper as compared to its peers by around 25 per cent and still maintain healthier margins. Its operating profit margin and net profit margin have averaged around 20 per cent and 9 per cent over five years.
Despite all this, any new capacity addition in a low-cost region like India by other players could threaten the cost advantage it enjoys. Going forward, BIL has undertaken capacity expansion plans of around 90 per cent of its existing capacity. With this significant capacity expansion plan, BIL expects to gain market share in the global OHT space.