Balkrishna Industries - Management meet takeaways - Angel Broking

We met the management of Balkrishna Industries (BIL) to get an update on its business. BIL operates in a niche segment of off-highway tyres (OHT) and has a global market share of ~3.5%. BIL enjoys competitive advantage over its global peers (Titan International, Mitas, Michelin and Bridgestone) on account of its low cost-structure, strong product portfolio (with over 2,000 SKUs) and a strong distribution network (~240 distributors in 120 countries).

Strong and focused presence in a niche segment: BIL is amongst the few global companies alongside Titan International and Mitas with a focused presence in the US$14bn OHT space which is growing at a steady pace of 4-5% annually. The OHT segment in general is a low volume large variety business, which requires high level of customization. Hence, a wide range of product portfolio is a pre-requisite which acts as a major entry barrier. Over the years, BIL has built over 2,000 SKUs and develops 120-150 SKUs every year. BIL derives ~90% of its revenue from exports and has a strong presence in 120 countries through ~240 distributors. The major brands of BIL include BKT, Agrimax and Earthmax.

Low cost structure, a key competitive advantage: BIL enjoys a competitive advantage over its global peers due to cost arbitrage in terms of labor cost (~3% of sales as against 18-24% for global peers), duty-free rubber imports and lower distribution expenses. As a result, BIL is able to garner EBITDA margins in the range of 18-20% even after pricing products at a hefty discount to that of global peers (25-30% cheaper as stated by the management). This has helped BIL gain a foothold in the global OHT segment and gradually gain market share.

Capacity expansion to boost market share: BIL is augmenting its achievable capacity by ~90% to 276,000MTPA by FY2015 at an outlay of Rs.1,800cr through de-bottlenecking and greenfield expansion. The new greenfield facility in Bhuj (120,000MTPA) is placed attractively near the port and also has a captive power plant. The management expects that the ongoing capacity expansion along with venturing into newer geographies, like Russia and other CIS markets will enable the company to further leverage upon its low-cost model. This in turn will lead to rapid growth according to the management. The company is targeting a global market share of ~6% by FY2015E.

Outlook: The management expressed optimism about the company's business prospects and is targeting a volume and revenue growth of 20% and 25%, respectively in FY2013. Further, BIL expects margins to remain in the range of 18-22% going ahead. The company sees a revenue potential of ~Rs.3,000cr annually from the Bhuj plant, once fully operational by FY2015. However, an increase in depreciation and interest expense due to the functioning of the new plant will keep earnings growth under pressure. Nonetheless, the management expects lower tax rate (~25% in FY2013E as against ~33% in FY2012) to mitigate the impact of higher depreciation and interest expense to some extent.

While Chinese products are priced lower than the company's products, quality related concerns of the former have led to their lower acceptability in the markets. Thus, the management states that the company does not face any major competition from Chinese companies. At Rs.285, the stock is trading at 10.3x FY2012 earnings. Currently, we do not have a rating on the stock.

Source : Equity Bulls

Keywords