A quality report by JainMatrix Investments

Balkrishna Industries The Tyres Roll Faster

Small Cap Mkt Cap 2,300 crores. Advice: Buy (the target is for Subscribers Only).

06 Sept 2013 CMP: Rs 238

BKT is a fast growing tyre manufacturer with Revenues, EBITDA and PAT up 25%, 28% and 44% CAGR in 6 years. It is poised to double capacity by FY15. The tyres sell to a very large global market, are a high quality products. BKT can maintain its margins, and will gain from the INR weakness. Today with the PE of 6.6 times, it is available at the lowest valuations in the last 6 years. BKT is a Buy. Risks to this investment are: Global conflicts and economic uncertainties, Natural rubber price rise and a Promoter group restructuring.

Business Snapshot:
Balkrishna Industries (BKT) is a Mumbai based firm that makes off-highway tyres (OHT) for agriculture, mining and earth moving vehicles. It derives 90% of revenues from exports. The consolidated Revenues are 3,394 cr with Profits 350 cr (FY13). These tyres are manufactured at four mfg units (Bhiwadi & Chaupanki in Raj., Aurangabad, Mah., and Dombivili, Mumbai. The new greenfield unit at Bhuj, Guj. is partially operational. BKT currently has a capacity of 1,44,000 tonnes a year. The company is on an expansion program for both de-bottlenecking the existing facilities, as well as a Rs 1,800-crore greenfield factory at Bhuj, which will expand the companys capacity to 2,70,000 tonnes by FY15.

Fig 1 Business Segments at BKT, in % (JainMatrix Investments) Tyres are exported from Mundra Port through 200 distributors to 120 countries, see Fig 1. It supplies to companies such as Volvo, John Deere, Ferrari and JCB across the world. Around 90% of revenue is exports. BKT imports some raw materials (Rubber), but is a net exporter. It has about 4% market share globally in the OHT business. The Promoter/ CMD is Arvind Poddar, who has been at the helm of BKT since 2006.

JainMatrix Investments BKT

Sept 2013

BKT makes a range of Off-Highway Specialty tyres for Agricultural, Industrial, Material Handling, Construction, Earthmoving (OTR), Forestry & Garden Equipment and All-Terrain Vehicles (ATV). Current shareholding is of Promoters 58.3%, MF/ DII/ FII 30.3%, Individuals 8% and Others 3.4%.

Pricing Snapshot
(Content for Subscribers Only) Fig 2 Price History The available 6-year view of the share price of BKT in Fig 3 shows us: BKT share has been somewhat volatile. Today it is at 25% below the Jan 2013 high of 317. Investors have been rewarded with steady dividends and a stock split in 2010 (FV10 to FV2). At CMP, it has given shareholders 15% annual appreciation so far.
Annual Revenues in Crores 4,000
3,500 3,000 2,500
20.6 30.8 Revenues EBITDA % PAT % EPS P/E 20.1 27.8

Balakrishna Ind. Financials

36.2

EBITDA, PAT in (margin %), EPS in Rs and P/E 40 35 30 25 20

22.7

2,000 1,500 1,000 500 0 FY08 FY09 FY10 FY11 FY12 FY13
11.6 7.7 10.5 11.8 8.6 6.6

15 10 5 0

Fig 3 Consolidated Financials Snapshot

Financial Snapshot
Growth has been steady with Revenues, EBITDA and PAT up by 25%, 28% and 44% CAGR in 6 years. In FY11, there was a compression in margins due to an increase in international Rubber prices. Even though this was handled well by the firm, and profits increased, the P/E (ttm) has rapidly fallen from 30.8 times (FY09) to 6.6 times currently, see Fig 3. The firm is in an investment phase for the Bhuj plant, but the D/E is at a fair 1.49 times. The capital investments are from a combination of debt and internal cash flows. Return on Capital Employed is 15.63% while Return on Net Worth is 24.24%. Equity Share Capital has remained unchanged for 7 years at 19.33 cr., indicating corporate stability. Dividend yield is a low 0.6%. PEG based on 1 year projection is at 0.22 indicates a very undervalued stock.

Cash Flow
(Content for Subscribers Only) Fig 4 Free Cash Flow

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JainMatrix Investments BKT Financial Projections

(Content for Subscribers Only) The financials for BKT are projected till FY15. Fig 5 Two year Financial Projections

Sept 2013

Strengths and Opportunities

BKT is in a business segment that requires the production of a large range but low volumes of tyres. This makes BKT somewhat insulated from the competition, which focuses on high volumes. BKT focuses on the tyre replacement market (80% of sales) rather than on direct sale to manufacturers. This is a steadier market than OEM. The margins here are also higher. BKT hedges its forex receivables, to reduce fluctuations. Thus the recent rupee depreciation against the USD by 20% may not immediately benefit it, but this benefit should kick in over the next 1 year. The Bhuj factory is already partially commissioned, so it is already boosting production. The Bhuj location will help BKT reduce on logistics costs with its proximity to Mundra Port for raw materials imports as well as exports. With market-share at a low 4% of global OHT segment, there exists large room to grow volumes. BKT develops over 150-160 new tyre sizes every year, with a very fast turnaround time of 8-10 weeks for new product development. This is a powerful competitive edge. In FY13 it had net forex earnings of >1000cr in USD & Euros. BKT will gain from rupee depreciation. BKT has a low cost structure, compared to global competition/ peers. Radialisation is gaining momentum in the OHT industry, and BKT has allocated a large proportion of the new capacity at Bhuj plant for Radials, to ride this trend.

Risks and Concerns

(Content for Subscribers Only)

Opinion, Outlook and Recommendation

BKT has been a steady performer in the last few years in terms of Revenues, Margins and Profits. It is poised to double capacity by FY15. It is catering to a very large global market, and is seen as a high quality product, and can maintain its margins. In addition it will gain from the INR weakness. Today the BKT valuations are very low. With the PE of 6.6 times, it is available at the lowest valuations in the last 6 years. BKT is a Buy. (The target is for Subscribers Only).

Disclaimer
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