Balkrishna Industries - Blazing off highway track; initiating coverage; Buy :Edelweiss PDF link

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Balkrishna Industries (BIL IN,  INR 266, Buy)

Balkrishna Industries (BKT) is a niche play on the off highway tyres (OHT) segment with 3.5% global market share. It has strong product portfolio of 1,900 SKUs coupled with low labour cost and strong distribution network, thereby placing it at distinctive advantage over competitors. BKT derives 80% revenue from replacement market which ensures superior margins and lends stability in turbulent times. Initiate coverage with ‘BUY‘.

Aggressive capacity expansion to trigger market share gain

BKT has chalked out an aggressive INR18bn capex plan to augment achievable capacity from 1, 44,000 MTPA to 2,76,000 MTPA, a ~90% jump. The new greenfield Bhuj plant is logistically well placed near the port and also has captive power plant. The expansion will help company grow at 30% p.a. compared to industry growth of 5-6%, thereby enhancing its market share (from 3.5% to 5% by FY15E). BKT has 1,900 SKUs built over 15 years and develops 100-120 SKUs every year thereby acting as a major entry barrier.

Low labour cost and efficient distribution model: Winning edge

The company has a competitive advantage over international peers in terms of labour cost (~3% of revenue vis-à-vis latter’s 20-24%). BKT derives 80% revenue from the replacement market wherein margins are 3-5% higher than OEMs. The company has strong global network comprising 200 distributors across 120 countries catering to the replacement market. This low-cost model enables BKT sell its products 20-25% cheaper compared to competition and still earn healthier margins.

Outlook and valuations: Attractive; initiating with `BUY’

BKT is well known brand in OHT segment with 3.5% global market share. We expect BKT to grow at 30% as compared to 4-5% industry growth thereby garnering higher market share. Given the capacity constraint, robust order book, we believe BKT has high growth visibility going forward. We value the company at 9x standalone FY14E EPS of INR 39.5 and arrive at a target price of INR 356 on the stock .We initiate coverage with a BUY.

Balkrishna Industries - Blazing off highway track; initiating coverage; Buy

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