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Balkrishna Industries Ltd.
Balkrishna Ind has presence in niche Off-the highway (OHT) Tyre
market and majorly exports farm, construction and mining tyres.
Leveraging on the structural benefit the company is expanding
its capacity by 90% by 2013 and it has sufficient headroom to
increase prices and maintain margins which will have minimal
risk on cash flows and capex plans. Company has delivered
superior performance in past with 30% earnings CAGR over past
5 years and average ROE of 27%.
The recent stock correction (-17%) we believe factors in the
margin pressure (QoQ) going to be witnessed in H2FY11, (rubber
hedged @USD3500 against current price of USD 4500). While
price hikes in coming months (in line with global players) and
volume pick-up from Q2FY12 (13% capacity addition through
debottlenecking) is expected. We believe at P/E of 6.6 and EV/
sales of 0.7 the stock is attractively priced and initiate coverage
with BUY with target price of Rs 169, potential upside of 32%.
Structurally well placed to double global market share
BIL has presence in niche Off-the highway (OHT) Tyre market which is
currently pegged at USD 11.5 bn and has historically grown at 3-4%,
we expect OHT industry to be USD 13.6 bn in 2014. We believe the
company will be able to penetrate into the OHT market and double its
market share due to competitive pricing and quality due to avaibility of
cheap technically skilled manpower and significant capacity addition at
Bhuj. OHT business is highly labor intensive and low volume for most of
the other tyre maker’s to enter this segment offering lesser competition
from local players to Balkrishna. Threat of Indian tyre and Chinese
companies moving into farm tyre market in US and Europe is less likely.
Also competitive position will provide resilience to de-growth in developed
economies as witnessed in 2009.
Sufficient headroom to increase prices
BIL provides quality products which are at 30% discount to global OHT
manufacturers. Given significant price differential, together with global
peers having already announced price hikes in OHT segment we don’t
foresee any risk in terms of price differential getting narrowed or risk
emerging from lower than expected EBITDA margins delaying the capex
plans. Company has done forward contract for rubber at USD 3500/
tonne (against current prevailing price of USD 4580/tonne) which will
take care for rest of H2 FY11 rubber requirement and company will be
insulated from the prevailing high rubber price. Company is planning to
take price hike of 8-10% in January 2011.
Excellent R&D with 1900 SKUs
BKT has established its brand image through quality and after sales
service and the brand “BKT” enjoys good reputation in the domestic as
well as international market. The key reason BKT tyres are globally
competitive is its engineering talent. BIL develops over 150 new tyre
sizes every year, coupled with a low turn-around time of 8 to 10 weeks
for new product development. Radial OTR & Agri-Radial Tyre Technology
has been developed in-house. The company is expanding market share
by increasing penetration of existing distributors and adding new
distributors. (200 distributors).
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