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BALKRISHNA INDUSTRIES
OUTPERFORMER (RS125, MCAP: RS12BN / US$267M)
• Specialty tire space: Balkrishna Industries (BIL), which is part of the Poddar Group, operates in specialty off-highway
tires in the international market. Revenues are predominantly export-driven, with annual sales of Rs19bn in FY11E
(110000MT of volumes). It has a wide portfolio of 1900 SKUs of tires for agricultural, construction and industrial
purposes, and presence across 120 countries. Europe accounts for 51% of sales and America accounts for 20%.
• Penetration-led growth: BIL, through its brand BKT, predominantly operates in the replacement tire market. The offhighway
tire market is 8% of the global USD130bn tire industry and BIL has just 2-3% of this market. As BIL expands
its reach in newer countries like Russia, increases its distribution in existing European and American markets, and
enhances its portfolio with the launch of all-steel radial mining tires, agri-radial tires, etc., we see immense scope for
sustained growth momentum.
• Capacity expansion mode: BIL has manufacturing facilities in Waluj (Maharashtra), Bhiwadi and Chopanki
(Rajasthan), with an annual achievable capacity of 120,000MT. With YTD sales already at 110,000MT, BIL has lined up
aggressive investments for capacity expansion. While Rs2bn of capex on debottlenecking the current facilities would
help improve achievable capacity by 10,000MT, BIL has lined up Rs12bn in investments for a greenfield expansion in
Bhuj, Gujarat. This plant will have achievable capacity of 90000MT and will be operational in H2FY13. Of the Rs12bn
project cost, BIL has tied up USD175m in debt, with the rest to be funded through internal accruals. So, even if BIL
maintains a growth pace of 15% in volume terms, it would have sufficient capacity for the next five years. However,
capacity constraints would curtail growth until FY13.
• Rubber prices remain a concern: The price of natural rubber (which accounts for 32% of BIL’s raw material) has
moved up Rs235/kg (USD5500+/ tonne) from Rs130/ kg a year ago and an average of Rs80-100/ kg. While BIL is
covered up to May 2011 at a blended natural rubber price of USD3800, concerns remain on the sustained high prices
of rubber. If the international rubber prices remain at current levels, BIL will have to take a price hike of 15-20% to
sustain current spreads. Other raw materials like carbon black, synthetic rubber, chemicals, etc, would remain high in
the near term as they are derivatives of crude oil.
• Better placed to increase prices; but expect margin erosion: Compared with tire companies operating in the
competitive and commoditized CV market, BIL is in the specialty segment and enjoys much better gross margins (35-
40%). So, in the wake of increasing commodity costs, BIL is better placed to pass through costs and maintain spreads.
BIL’s price differential of 20%+ versus competition gives it room to increase prices. However, given the differential of
50% in the spot rubber prices to BIL’s current cost, we are building in a margin erosion of 120bp in FY12.
• BIL currently has debt of Rs4.6bn on the books.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
BALKRISHNA INDUSTRIES
OUTPERFORMER (RS125, MCAP: RS12BN / US$267M)
• Specialty tire space: Balkrishna Industries (BIL), which is part of the Poddar Group, operates in specialty off-highway
tires in the international market. Revenues are predominantly export-driven, with annual sales of Rs19bn in FY11E
(110000MT of volumes). It has a wide portfolio of 1900 SKUs of tires for agricultural, construction and industrial
purposes, and presence across 120 countries. Europe accounts for 51% of sales and America accounts for 20%.
• Penetration-led growth: BIL, through its brand BKT, predominantly operates in the replacement tire market. The offhighway
tire market is 8% of the global USD130bn tire industry and BIL has just 2-3% of this market. As BIL expands
its reach in newer countries like Russia, increases its distribution in existing European and American markets, and
enhances its portfolio with the launch of all-steel radial mining tires, agri-radial tires, etc., we see immense scope for
sustained growth momentum.
• Capacity expansion mode: BIL has manufacturing facilities in Waluj (Maharashtra), Bhiwadi and Chopanki
(Rajasthan), with an annual achievable capacity of 120,000MT. With YTD sales already at 110,000MT, BIL has lined up
aggressive investments for capacity expansion. While Rs2bn of capex on debottlenecking the current facilities would
help improve achievable capacity by 10,000MT, BIL has lined up Rs12bn in investments for a greenfield expansion in
Bhuj, Gujarat. This plant will have achievable capacity of 90000MT and will be operational in H2FY13. Of the Rs12bn
project cost, BIL has tied up USD175m in debt, with the rest to be funded through internal accruals. So, even if BIL
maintains a growth pace of 15% in volume terms, it would have sufficient capacity for the next five years. However,
capacity constraints would curtail growth until FY13.
• Rubber prices remain a concern: The price of natural rubber (which accounts for 32% of BIL’s raw material) has
moved up Rs235/kg (USD5500+/ tonne) from Rs130/ kg a year ago and an average of Rs80-100/ kg. While BIL is
covered up to May 2011 at a blended natural rubber price of USD3800, concerns remain on the sustained high prices
of rubber. If the international rubber prices remain at current levels, BIL will have to take a price hike of 15-20% to
sustain current spreads. Other raw materials like carbon black, synthetic rubber, chemicals, etc, would remain high in
the near term as they are derivatives of crude oil.
• Better placed to increase prices; but expect margin erosion: Compared with tire companies operating in the
competitive and commoditized CV market, BIL is in the specialty segment and enjoys much better gross margins (35-
40%). So, in the wake of increasing commodity costs, BIL is better placed to pass through costs and maintain spreads.
BIL’s price differential of 20%+ versus competition gives it room to increase prices. However, given the differential of
50% in the spot rubber prices to BIL’s current cost, we are building in a margin erosion of 120bp in FY12.
• BIL currently has debt of Rs4.6bn on the books.
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