Balkrishna industries - Good Long Term Bet

BalKrishna Industries Ltd
- A Good Quality Export Manufacturer

Content Index
• Our Research Desk’s views on the Stock Idea :- Slide #3
• Balkrishna Industries Limited – Investment Snapshot :- Slide #6
• Industry Opportunity & Potential – An Overview:- Slide #7
• Balkrishna Industries Limited – Business Overview :- Slide #11
• Investment Arguments :- Slide #22
• Balkrishna Industries Limited – Financials:- Slide #38
• Concerns & Reasoning :- Slide #41
• Conclusion :- Slide #43

“ Specialists in discovering Multibagger stocks “

Our Research Desk’s views on the Stock Idea
Dear Members,
Before we get into the details of this Month’s “Multibagger Stock”, let us understand the broad reasons for the
recommendation of this idea,
Considering the delays and difficulties in setting up large Manufacturing facilities in India, we at HBJ Capital
believe that existing companies with strong manufacturing capabilities will have a good future. Also considering the
sustained Asset Inflation in India over the last many years, the Replacement costs of these assets have gone up
substantially and this has created a durable competitive advantage for the existing players.
Added to this, India’s structural Current Account deficit and continuing Currency Weakness makes Exports based
Manufacturing facilities even more attractive. Our idea for this month, “Balkrishna Industries” (BKT) falls in this
broad theme of an efficient Manufacturing company focused on Exports. We also believe that, considering the
possible Incremental Positives arising out of better Infrastructure, lower Power Costs and better Tax regime –
Efficient Manufacturing companies will be able to surprise the Markets positively.
Balkrishna Industries is India’s largest Off-Highway tire (OHT) manufacturer with over 90% of its revenues from
Export markets. Company has very strong Moats (or) Competitive advantage over its Global market peers and this
has led to consistent Market share gains. Company’s exclusive focus on OHT manufacturing has helped it to create a
Niche in this large Market and register less Volatile Financial performance when compared with other Tire players.
We have been tracking this company for many years now and believe that the Stock would provide attractive
entry levels over the next few months for a Long term investor to add it in his Portfolio. While the company may not
look attractive considering the short term issues, we believe that the Long Term Investment rationale has only been
strengthened over the events of the past year. Even though the company operates in a largely Commoditized
segment, “BKT still has strong Moats as it is the Lowest Cost producer of that commodity”. Also the company has
been Investing to build its Brand along with a strong Distribution Network to protect its Moat.


We are able to foresee pressures on the company’s Earnings continuing over the next few Quarters,

Short Term Pressures which are Visible :- Company’s Order Book has come down substantially over the last year. (From 6 Months to around 2 Months).
- Dealers have moved from Inventory model to Order delivery based model, indicating the weak Demand.
- Negative Operating Leverage which is expected to Kick in with the new Gujarat plant coming on stream.
- Low Capacity Utilization and Higher Costs will pull down EBIDTA margins meaningfully, going forward.
- Higher Depreciation and Interest Costs as a result of Capitalization of CAPEX will impact PAT margins.
- Product Mix shift towards a higher OEM share would also lead to slightly lower Margins going forward.
- “Mark to Market (MTM)” losses due to External Debt and Forward hedges will lead to one-time impact.
Despite these near term issues, we believe that there is a strong long term Investment rationale as indicated,

Long Term Positives about Balkrishna Industries :* A Strong Labor Cost Arbitrage considering the Labor Intensive operations of OHT manufacturing.
* Efficient manufacturing leading to a 40% discount in the cost of Manufacturing compared with Global Peers.
* Focused Distribution in over 125 Export markets with over 240 Distributors with improving reach every year.
* An Extremely strong Product library with over 2200 SKU’s considering the Low Volume, High Value business.
* Fastest In-House Mould design and manufacturing facility leading to creation of new SKU’s every year.
* A Flexible Manufacturing facility leading to an optimized mix of Output based on the demand situation.
* Consistent increase in Global Market share (5%) over the last 10 years with scope for doubling it going forward.
* No major Capacity addition from Global Peers leading to higher Market share on the Incremental demand.
* Majority of the Revenues from the stable and less volatile Agricultural segment and Replacement demand.
* Tie-Up with OEM’s will lead to better Brand recognition, improving Realizations in the Replacement market.
* Just In Time (or) Order Book based manufacturing leading to better Working Capital cycle and lower risks.
* New large Port based Manufacturing set up in Gujarat will be extremely efficient with Captive Power plant.
* Strong Track record of the Management in scaling up the Business and capitalizing on the Huge opportunity.
* Healthy Return ratios because of good Capital Allocation, higher Margins and access to low cost Debt.


Considering the strong long term positives of the company’s Business model and the huge opportunity (9 Billion
$ size), we certainly believe that Balkrishna Industries has a long way to go. With EBIDTA margins of over 18%, total
Asset turnover of 1.3X and a Financial Leverage of 1:1, we believe that the company can continue to sustainably
generate ROE (Return on Equity) of around 20% going forward. Hence it should not be seen as other Tire businesses
which are cyclical and have poor Return ratios.
In the mean time we also understand that it’s not a Great business, considering the lack of pricing power which
is visible in the lag effect of passing on Cost increases and dependence on global majors to set the Pricing trends.
Also being an Asset heavy business, the additional capacity coming on stream in an environment of slowing
demand can cause lot of volatility in its earnings. Considering all these, we are not building in the business to
undergo substantial Re-rating from here on.
But when we are paying less than 6.6X Earnings (Trailing P/E) and around 5.5X forward EV/ EBIDTA, it is like
buying a Commodity business and not factoring in the Huge structural positives of the business. Hence, even with a
Mild Re-Rating going forward and the earnings growth from the additional capacity, the odds of making profits from
this stocks is high when bought around the current prices.
We at HBJ capital are looking at the stock currently as a “Good Business at a Good Price”. While we are more
inclined to adding Great Businesses which we like to our Portfolio, we also think that - this stock if provided a
chance to buy at Great price going forward (decent correction) will be a definite add to our Portfolio. The Research
report is detailed and provides a holistic idea about the Business and the Stock.

Regards,

[ Gokul Raj . P, Head – Investment Research ]


Balkrishna Industries– Investment Snapshot
(as on Sep 30, 2013)
Recommendation :- BUY

Maximum Portfolio Allocation :- 3%
Investment Phases & Buying Strategy
1st Phase (Now) of Accumulation :- 60%

Current Market Price – Rs. 239
Current Dividend Yield – 0.66%
Bloomberg / Reuters Code – BIL.IN/
BLKI.BO

Current Accumulation Range :- 210-230 Rs
BSE / NSE Code – 502355/ BALKRISIND
While Investors can start buying this stock around the current
prices, the Allocation levels can be increased to much higher
levels in case of further correction in its share prices. Hence, we
suggest more back ended buying.

Core Investment Thesis :

Market Cap (INR BN / USD Mn) – 22.41
/361.45 [1 USD – Rs. 62.0]
Total Equity Shares [Mn] – 96.65

Face Value – Rs. 2

52 Week High / Low – Rs. 317 / Rs.199
BKT is a Good Export based manufacturing company which has
been able to build strong competitive advantages on its Brand,
Promoter’s Holding - 58.30%
Distribution, Cost structure and Product library. It is also available
FII
- 10.60%
at cheap valuations and is not receiving its deserved premium
DII
- 19.68 %
when compared with commoditized Tire companies.
Other Holdings
- 11.42%


Industry Opportunity & Potential
- An Overview


Global OHT Industry overview
• The OHT segment is dominated by
Bridgestone, Goodyear, Michelin and
Titan which account for over 60% of the
global market.
• The global OHT market accounts for
about 8% of the world tyre sales in 2013
at USD 14 Bn which has been growing at a
CAGR of 5% in the last decade.
• The OHT segment is a niche segment
catering to construction, agricultural and
industrial segments characterized by
relatively higher margins of 15-18%.
• The Specialty OHT segment constitutes
about 10% of the total sales of the major
players and margins in this segment are in
the range of 15-20%.
• The developed economies of Europe
and USA are the key markets which
constitute for over 60% of the global
demand for OHT tires.


Increasing Mechanization to drive demand
• The developed economies are the major
markets for OHT and constitutes about 60%
of the global market. This is due to the high
level of mechanization in agriculture and
earthmoving/mining segments which is
relatively higher in these countries.
• There is strong mechanization in
agriculture which drives demand in the
replacement segment. The Mechanization
levels has been going up structurally and
expected to move even higher.
• The developed countries are focused on
increasing productivity. The large farm size in
these countries and the declining farmer
population is boosting the demand for
tractors and agriculture related applications.
• Global peers are not expanding
significantly in OHT market and the
incremental demand of around 200 Million
$’s every year will need to be addressed by
companies like Balkrishna and Allianz.


Rubber – Major Raw material

• Natural rubber forms 48% of raw material cost, while carbon black (27%) and fiber (6%) are the other critical
components. Hence, Rubber cost movement has a huge impact on the financials of OHT companies.
• Other components (Synthetic rubber, carbon black, fabric and chemicals) are derivatives of crude oil and are
impacted with crude price fluctuations.
• Proximity to rubber producing countries in the South East Asian region like Thailand helps in lower Logistics cost
and more flexibility in Procurement. Hence, India has a good advantage compared with its Western peers.
• Companies that have manufacturing base in countries like India have a distinct advantage over their European and
US peers on account of low cost of labor in these countries, as Labor costs are extremely high in OHT production.


Balkrishna Industries – Business Overview


Balkrishna Industries – A Snapshot
• Balkrishna Industries is the
flagship company of the Siyaram
Poddar group.
• The company exports 90% of its
production to more than 120
countries across five continents
under the BKT brand with a
network of 240 distributors.
• Balkrishna Industries is
dependent on the Europe and US
markets which contribute about
75% of its revenues. Total Exports
contribute over 90% revenues.

• Balkrishna Industries is one of the leading OHT tyre manufacturers in the world and is one of the few focused OHT
players in the Market.
• Balkrishna Industries has the widest product range with more than 2200 SKU (Stock keeping units), as the business
works with lower Volumes and higher SKU’s.
• Balkrishna Industries is also into manufacturing of paper/paper boards and processing of textile fabrics through its
100% owned subsidiaries namely Balkrishna paper mills and Balkrishna synthetics.


10 Year – Solid Track Record


Export driven Business Model

• Balkrishna Industries derives over 90% of its revenues from exports with US and Europe contributing around 70%
of revenue share.
• Europe contributes around 46% of revenues with a CAGR growth of about 11% over 2009-13 . The US contributes
about 25% of its revenues with a CAGR growth of 17% over 2009-13.
• Almost two thirds of OHT global sales comes from Industrial, Construction and mining segment while the rest is
contributed by the agricultural segment.
• In a bid to tap newer markets to maintain revenue growth, Balkrishna Industries is expanding its presence in the
high growth countries like Africa, Russia and CIS countries.


Strong Distribution network
• Balkrishna Industries currently has a strong network of
about 240 distributors with presence in about 125
countries and has been consistently expanding its
distribution in existing as well as new geographies.
• Balkrishna Industries is unique unlike its global peers.
The company sells its products to its distributors globally,
and passes on risk and expenses involved in inventory
management as well, when compared to global peers
model of stocking Inventory themselves.
• Balkrishna Industries always matches the orders
received from distributors. Dealers, in turn, receive a
higher margin of around 15% from Balakrishna Industries
compared to 5-6% for global peers distributors. This is a
win win situation for Balkrishna Industries and its dealers.
• Incidentally, global peers manufacture goods in advance,
incurring significant sales and distribution expenses. More
specifically, capital employed is much higher because of
this model.
• The enhanced contribution of OEM’s will provide the
company order book clarity and enhances goodwill and
brand visibility.


Stable Replacement demand – Major Contributor

• Balkrishna Industries had concentrated on the replacement market and derives around 80% of its revenues from
the replacement segment.
• Balkrishna Industries strong presence in the replacement segment offers higher margins apart from being less
cyclical than the OEM segment.
• Balkrishna Industries dominance in the replacement segment lends stability in the event of a global auto
slowdown as the Replacement cycle would kick in.
• Balkrishna Industries has built a strong network of 200 distributors in 120 countries to cater to specifically the
replacement segment and with OEM contracts, its brand visibility in Replacement market is also expected to go up.


Product Portfolio

• Balkrishna Industries has been Investing in building product brands across its 3 major categories, under the
“AgriMax”, “EarthMax” and “RideMax” brands.
• Company’s product portfolio has been expanding into niche areas where the Management has been sensing good
potential. Agriculture sub-brands have been consistently launched for catering to various sub-segments.


Product Application


Reliable supplier for Global OEM’s
• Balkrishna Industries supplies OHT tyres to global OEM
manufacturers like Volvo, John Deere, BOMAG, SAME, CNH,
Ferrari among others.
• Balkrishna Industries derives around 15% of its revenues
from the OEM segment and this is likely to be around 25% of
its revenues in FY17.
• Though margins are lower than the replacement segment,
increase in supply to OEM player provides stability and
revenue visibility apart from creating brand value.
• Balkrishna Industries also manufactures and sells its
products under white – labeling for other players which
contributes around 5% of its revenues.
• We expect the company to add more OEM clients and also
get increased share of business from its existing clients.


Rising US Farm Income to drive growth

• Balkrishna Industries currently derives around 25% of its revenues from the US which has seen major spurt
in farm income over the years.
• The US net income is expected to increase going forward which will result in enhanced demand for
agriculture related equipments which will eventually benefit Balkrishna Industries.
• Balkrishna Industries capacity expansion at BHUJ is expected increase its market share in the US market
from the current 8% to about 25% in the replacement radial tyre market.
• Balkrishna Industries has also got a huge scope to increase its US small farm replacement segment where
the company has increased its market share from a meager 4% to about 16.5%.


Major Demand Drivers

Major demand drivers for the earthmoving equipments are:
• High demand for raw materials such as iron ore and lime stones.
• Continuous growth in logistics sector and there by improvement in ports and related infrastructure.
• Growth in mining activities in major emerging countries.
•Of o-fuel
Major demand drivers for Agriculture sector are:
• Increasing demand of bio-fuel.
• Large farms and Consolidation in emerging countries.


Balkrishna Industries – Investment Arguments


Durable Moats


Porters Five Forces Model
Bargaining Power of Buyers
(Moderate)
 Numerous Options for buyers.
No Switching Costs.
Price a major factor for Buying.

Bargaining Power of Suppliers
(High)
Demand outstrips Supply.
Geographic concentration of
suppliers = More power.

Industry Rivalry
(Moderate)
Global OHT has several peers.
Considering the requirement of
high capacity utilizations, rivalry on
price realizations Is there to grow.
Product differentiation is low

Threat of new entrants
(Low)
High capital requirement.
Labor Intensive business.
Existing players have huge
moats making it difficult.

Threat of substitute products
(Low)
 No major substitutes for
Replacement demand.
 Cheap Products from China, but
Quality is suspect.


Balkrishna Industries – Low Cost Structure

• India is one of the countries where labour cost is low which helps Balkrishna Industries to maintain a low cost
structure and gain pricing Arbitrage over its global peers.
• Balkrishna Industries labour cost in FY13 was 3.94% as against 20%+ for its international competitors. This cost
advantage helps the company to maintain a strong hold on its cost which has been a major decisive factor.
• Due to its low cost structure in India the company’s R&D cost is about 0.03% of sales which again is in the region of
3-5% for international peers.
• This cost competitiveness has helped Balkrishna Industries to pass on any rise in input cost as the company
supplies its tyres at a discount of about 30% than its international peers.


Growth from Discounted Pricing

• Balkrishna Industries has performed better than its international peers even in a difficult market situation as
evident in earnings during FY10.
• Balkrishna Industries is a company with a total focus on OHT segment while for their international players the
segment forms a small part of their revenues, which results in their peers unwilling to cut down on prices while
Balkrishna Industries has a flexibility to price their product at a discount to peers.
• Balkrishna Industries follows a discount pricing strategy with regard to pricing to keep realizations strong and
allows the company to enhance prices even in a tough pricing environment.


Capacity expansion to drive growth
• Balkrishna Industries is aiming to
increase its global market share to
10% through capacity expansions.
It has set up a green field capacity
at BHUJ in Gujarat with an annual
capacity of about 1,20,000 MT at a
cost of about Rs.1800 Cr which will
effectively increase its total
capacity to 2,76,000 MT by FY15.
• Balkrishna Industries has also
completed upgradation and debottlenecking the existing
capacities with an additional
capacity of 12,000 MT a year.
• Around 60% of the BHUJ facility
will cater to manufacturing radial
tyres which enjoy about 10%
higher margins compared to crossply tyres.
• The new plant at BHUJ will result
in reduction of logistics cost and
power and fuel cost as they are
located close to the Mundra port.


High Entry Barrier – Capex + R&D Expertise

• OHT business is capital intensive in nature which makes it a high entry barrier segment and the gestation period of
setting up a plant is very long. Overall, the business is fairly difficult for new players in terms of achieving substantial
scale and it would take a long time frame to get a foothold in the Industry.
• With exposure to different types of surfaces, OHTs require different levels of soil compaction for farm applications
and surface-gripping requirements for industrial and mining applications. Thus, it is a high-customization lowvolume business requiring large SKU’s to be competitive.
• Continued focus on R&D activities has helped the company to develop an impressive product portfolio of 2200
SKUs spanning across the entire OTH segment i.e. tractors, trailers, earthmovers, farm equipments, etc. The strong
in-house R&D team develops 150-160 new SKUs each year which is far ahead of the industry standard of 50-60
SKUs leading to growing Moat.


Rising share in Global Replacement Market

• Balkrishna Industries has strong presence in the North American agricultural market. Since Agriculture contributes
about 63% of its revenues it is less prone to economic cycles associated with other industries.
• Balkrishna Industries strong performance in the US market is likely to continue as the company has presence
mainly in the replacement market while other major OHT manufacturers have their presence mainly in the OEM
segment. Incremental market share is huge for BKT.
• We expect the company to concentrate on the Replacement demand and its business model of Distributor taking
orders for production is well suited for this market.


Increasing market share in US Market
• Balkrishna Industries has
expanded its market share
significantly from a meager 8% in
CY09 to about 40.5% in
replacement bias tyres.

• Company has been able to
establish a strong foothold in the
World’s biggest market – USA
through a solid distribution
network spread across.
• We expect the company to
gobble up market share in the US
further more considering its
strong positioning in this Market.
• In the US small farm
replacement segment Balkrishna
Industries is expected to increase
its market share from the current
4% to about 16.5%.


Strong Replacement Demand
• Balkrishna Industries currently derives
around 81% of its revenues from the
replacement segment while the
contribution from OEM companies
stands around 15% .
• While this is expected to shift up in
favor of OEM, we still believe that the
company would continue to be a
Replacement tire maker with strong
focus on growing its market share in the
highly profitable replacement market.

• The significant contribution of the replacement segment insulates the company from any slowdown in the
economy apart from providing it the necessary pricing power.
• Though the proportion of OEM’s is expected to go up in the future it will not be margin dilutive as the
company supplies its products at about 25% of its peers which places it in a sweet spot.
• The enhanced contribution of OEM’s will provide the company order book clarity and enhances goodwill
and brand visibility.


Lower Raw Material prices to expand margins

• Raw material cost accounts for approximately 70% of the industry’s turnover with Natural Rubber (NR) being the
key raw material. Natural Rubber, which constitutes 43% of the total raw material consumption, is available in the
form of Ribbed Smoked Sheets (RSS).
• Although India is the fourth largest natural rubber producer in the world, there is a significant demand supply gap
in the country. Hence, Imports are an usual phenomenon in the industry.
• While the domestic tyre industry depends on the domestic rubber market ,Balkrishna Industries can access rubber
from overseas markets as it is entitled to duty free imports.
• Balkrishna Industries plants is situated near to rubber markets like Thailand, Indonesia and Malaysia which not
only reduces its logistics cost but also provides for better planning and Inventory control.


Rising Revenues & Realization Trend
Particulars

Sales (In MT)
Sales(In Rs.Cr)
Realization Per MT

FY10

FY11

Capacity Utilization(%)

FY13

FY14E

FY15E

84454

111543

133039

138339

142875

161625

1544.05

2157.75

3049.32

3432.65

3757.92

4506.14

182827.3

193445.6

229205

248133.2

263021.2

278802.5

5.81

18.49

8.26

6

6

126000

144000

166000

178000

190500

215500

67.03

77.46

80.14

77.72

75

75

Realization Per MT(% Chg)
Capacity(In MT)

FY12

• Balkrishna Industries has seen a consistent rise in sales both in value as well as metric tonne which shows
the strength of the company’s fundamentals.
• Balkrishna Industries realization per MT has consistently increased over the years and we expect the
company’s realizations to grow by 6% in FY14 & FY15. With stable input cost, any rise in realizations will give
a big boost to the bottom line of the company.

• Balkrishna Industries capacity utilization has improved from 67.03% in FY10 to about 77.72% in FY13. We
expect Balkrishna Industries capacity utilization to be around 75% in FY14 & FY15. This Capacity utilization is
robust considering the utilization is achieved on an expanded capacity which signifies the demand and
potential for the company’s products.


Consistently high Operating margins
• Balkrishna Industries has been able to
consistently maintain a strong operating margins
which is much higher than the industry peers.
• Balkrishna Industries has been able to maintain
strong EBIDTA margins by passing on Increased
costs. But there is a lag effect of around 3-6
Months which can impact the short term
earnings as seen during FY-09.
• Balkrishna Industries proportion of radial tyres
currently stands at 30% and with capacity
additions in Bhuj the radial capacity is likely to
move to 37%. Given higher margins in the radial
tyres we believe the company will be able to
maintain its strong operating performance.
• The international prices of rubber has
corrected by about 40% and rubber prices are
expected to be stable which will further
strengthen the company’s strong operating
performance.


Superior performance in comparison to other Indian Tire manufacturers
Particulars

Balkrishna Industries

MRF

Apollo Tyres

Good Year

3 Year CAGR Sales Growth(%)

30.49

28.29

16.36

13.38

3 Yr CAGR Profit (%)

16.84

32.94

0.09

-8.22

EBITDA Margin (%)

19.84

10.9

12.33

7.6

Net Profit Margin (%)

10.31

4.84

4.79

3.8

1.52

0.64

0.89

0

27.41

22.48

19.71

16.95

1.42

1.43

1.49

1.33

Debt to Equity Ratio (x)
Return on Equity (%)
Current Ratio (x)

• Balkrishna industries is though valued alongside other Indian tire manufacturers, a look into their financials
will show the superior business of Balkrishna.
• Balkrishna Industries has grown at a CAGR of 30.49% in the last three years which is better than its peers.
• Balkrishna Industries has a strong EBITDA margins of 19.84% which is way ahead of its peers which shows
the strong operational efficiency of the company.
• Balkrishna Industries has a net profit margin of 10.31% which is almost twice that of its peers .
• Balkrishna Industries has the highest ROE at 27.41% which is the highest among peers.


Hedging Policy

• Balkrishna Industries BKT generates ~90% of its revenue from foreign market out of which the company has
nearly 50% US dollar denominated revenues and 50% Euro denominated revenues. The company has a natural
hedge as it imports almost all of its natural rubber requirement in US dollar.
• Balkrishna Industries hedges its exposure against EUR. The company hedged its exposure at the exchange rate of
~Rs 70/EUR for FY13 and at Rs 73-74/EUR for FY14 using forward covers.
• The company imports most of the raw materials requirement however, the softening in raw material
prices would be negated by depreciating Rupee against USD. To minimize such risks, Balakrishna Industries enters
into medium-term forward exchange contracts and also adopts the policy of “Buy and Stock” large quantities during
the lean period.


Future Growth Roadmap


Financials


Earnings Projection
Particulars
Net Sales
% Chg

• Balkrishna Industries revenues
FY10
FY11
FY12
FY13
FY14E FY15E
are expected to grow by 11%
and 19.91% in FY14 & FY15
1563.6 2192.09 3016.27 3393.93 3757.92 4506.14 driven by improved economic
scenario in the developed
11.68 40.20 37.60 12.52 10.72 19.91 markets and capacity expansion.

Total Expenditure 1169.89 1827.88 2556.37 2760.99 3043.91 3695.04 • Balkrishna Industries has
EBITDA margins in the range 16% Chg
0.91 56.24 39.85
8.00 10.25 21.39 18%. We estimate EBITDA
margins of about 19% and 18%
EBITDA
393.71 364.21 459.9 632.94 714.00 811.11
in FY14 and FY15.
EBITDA
Margins(%)
25.18 16.61 15.25 18.65
19
18 • Balkrishna Industries is likely to
Interest

19.33

22.34

29.2

Depreciation

68.64

77.34

86.39

PBT

327.54 288.21

PAT

219.04 194.63 268.94

EPS

22.67

20.14

report PAT of Rs.367.60 Cr in
FY14 and 410.60 Cr in FY15 with
112.2 131.53 157.72 an EPS of Rs.38.03 and Rs.42.48
in FY14 and FY15 respectively.
27.37

33.82

40.56

400.4 497.88 548.65 612.83

27.82

• Balkrishna Industries EPS is
349.9 367.60 410.60 likely to record a growth of
about 5.06% and 11.70% in FY14
36.2 38.03 42.48 and FY15 respectively.

Specialists in discovering Multibagger stocks “

Balance Sheet
Balance Sheet
Share Capital
Reserves & Surplus
Net Worth
Total Debt
Total Liabilities
Fixed Assets
Investments
Net Current Assets
Total Assets

FY10

FY11

FY12

FY13

FY14E

FY15E

19.33
662.06
681.39
475.59

19.33
842.02
861.35
621.48

19.33
1090.75
1110.08
1696.28

19.33
1423.67
1443
2146.6

19.33
1774.73
1794.06
2245.09

19.33
2166.85
2186.18
2478.38

1156.98

1482.83

2806.36

3589.6

4039.14

4664.55

715.18
61.7
380.1

885.68
13.76
583.39

1349.79
2.45
1454.12

2347.88
3.32
1238.4

2696.7
3.32
1339.12

2826.3
3.32
1834.93

1156.98

1482.83

2806.36

3589.6

4039.14

4664.555

• Balkrishna Industries investment in Fixed Assets saw a huge jump in 2013 with Fixed Assets being
Rs.2347.88 Cr as against Rs.1349.79 Cr in 2012. Since most of the assets are capitalized in FY13 there is
unlikely to be any upmove in the gross block in FY14 and FY15. Some Rupee fluctuations have also been
capitalized and hence there would be higher depreciation going forward.
• Balkrishna Industries debt has moved up in FY13 to cater to its Capex which was sourced through ECB
route at a cost competitive rate. It’s cost of debt is sill far lower than other Indian tire manufacturers.
• Balkrishna Inventory days is likely to move up from 49 days in FY13 to about 53 and 57 days in FY14 and
FY15 respectively as the Demand environment is expected to be challenging.


Concerns & Reasoning
1.) Adverse fluctuation in rubber prices :
Raw material prices constitute 60% of the total operating cost and rubber cost accounts for 76% of the raw
material cost. Any significant increase in the cost of rubber will affect its profitability. Further, synthetic
rubber, carbon black and nylon cord are the by-products of the petrochemical industry. Steep increase in
crude oil prices will impact the margins of the company. However, since Balkrishna Tyres derives 90% of its
revenues from exports the company gets a import duty waiver.
2.) Currency Fluctuation :
At present over 90% of the revenues of the company is from exports which are subject to risks in the forex
market. Any adverse movement in the exchange rate can impact the profitability of the company. The
company hedges its Euro revenues while import of raw materials act as a good hedge for USD revenues.
However, forex volatility can affect profitability on account of timing differences in revenue receipts and
expenditure payouts.
3.) Geographic Concentration :
Balkrishna Industries derives 70% of its revenues from US and Europe and any slowdown in these markets
could adversely affect the profitability.
4.) Imposition of Antidumping duty :
Balkrishna Industries derives 90% of its revenues from exports making it vulnerable to the imposition of
anti-dumping duty by any target market.


Price Chart

Share Holding
%

Jun
2013

Mar
2013

Dec
2012

Sep
2012

Promoters

58.30

58.30

54.37

54.37

FII

10.60

10.27

9.67

10.77

DII

19.67

19.75

19.97

19.93

Others

11.43

11.68

15.99

14.93

• Balkrishna Industries had been volatile during the past 2

years and had hit a high of Rs.313.95 before correcting over
the last year.
• The stock has been range bound, while the structural
trend from the charts points to further upside.

• Balkrishna’s promoters have increased their stake by over
4% over the last year indicating their confidence about the
business growth.


Conclusion
The company’s strong Export based Business model in the OHT industry is its biggest strength and we
believe that the company would continue to perform well for many more years going forward on this Core
strength. The recent Rupee depreciation while may impact short term results because of MTM losses and
higher Foreign currency debt, the inherent Earnings potential of the business has gone up substantially
because of this depreciation.

Considering the fact that the Management has a strong track record and have been transparent in
communicating to Investors, Investors can certainly trust them to navigate the company during a tough
phase. Moreover with the negatives being priced in to a large extent, we believe that the risk if bought at
lower prices is not significant.
The recent deal of Allianz tire with KKR and the value creation for Warburg Pincus, is a clear indication of
the more Institutional money coming into the sector and capitalizing on the huge opportunity which is there.
With Allianz and Balkrishna being the two most competitive companies in this segment, Balkrishna
Industries will be a big beneficiary. Balkrishna Industries is well poised with its large capacities and with
possibilities of further Brownfield expansion to take care of growth, for many more years.
Investors are initially advised to take a small Allocation to this stock and then add more of it, incase of
a correction. With the replacement cost of setting up BKT’s capacity in itself would be around 4400 Crs, we
are certainly not overpaying for its strong Business model. Investors can enjoy strong returns, if there is
more attraction towards good Quality Export manufacturing companies as we envisage. But that would be
only an Icing on the cake.


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Balkrishna industries - Good Long Term Bet

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