balkrishna industries 131031 indsec initiating coverage.pdf

8/14/2019 Balkrishna Industries 131031 Indsec Initiating Coverage.pdf

1/19

Incorporated in 1961,Balkrishna Industries Ltd is the flag

ship company of Siyaram Poddar Group and is the largest

manufacturer and exporter of Off Highway Tyres (OHTs)

fromIndia.

InvestmentRationale:

Off

Highway

Tyres

Niche

Segment

with

long

term

growth Potential: Off Highway Tyres (OHT) is a niche

segmentcomprising910%oftotaltyremarketglobally.

Total size of Global Tyres market is pegged at USD

180bn which means OHT market size stands at approx

USD1618bn. Lackofmanpoweravailability,highcost

of available labor and higher productivity requirementarethekeydriversofmechanizationofallkindsofproduction (Agriculture/Mining/Infrastructure etc) activitieswhichinturnpropelsdemandforOffHighwayTyres(OHT). We believe, these trends are irreversible and

thus longtermdemandforOHTsaresecular innature.

The incremental OHT demand of USD 480640mn per

annumitselfpresentsgoodgrowthopportunity(double

digit) to Balkrishna Industries (which currently holds

marginalshare

of

4%

of

global

OHT

market)

over

next

fewyears.

Cost leadershipprovides competitive edge: BKT man

powercostcomesatlessthan4%ofsalesvisavis25%

forgloballeaderMichelinduetoproductmixandplantlocation.BKT produces tyres against firm order bookagainstpracticeofholdinginventorybyglobaltyrema

jorswhichsavesitinventorycarryingcostaswell.Combineddifferenceof2530% ispassedontodistributors

which keep a portion to themselves and pass the re

mainingto consumers.ThismakesiteasyforBKTtosell

its products against stronger brands in the global mar

ketplace.

CapacityexpansionatBhuj,agamechanger:BKTisin

the process of commissioning a tyre manufacturing

plant at Bhuj in Gujarat with capacity of 1,20,000

MTPA with capital outlay of Rs 18bn. On successful

commissioningBhujplantwilltaketotaltyrecapacityto2,76,000MTPAandwilloffermultiplegrowth leverstoBKT.Bhujcapacity will bedistributedbetweenAgriculture and Non Agriculture tyres in the ratio of 55:45 ,whichwillalterconsolidatedcapacity betweenAgriand

Non Agri in the ratio of 60:40 from current level of

65:35. Almost 40,000 MTPA capacity at Bhuj will be

Large/Ultra large(>51)allsteelradialtyres tocaterto

miningsectorwheredemandismorerobust.Bhuj plant

aftercommissioning

will

allow

the

company

to

target

OEMswhereitwillbeabletogarner25%oftotalrevenueovernext3years fromcurrent levelof18%.BhujplantsproximitytoKandlaPort willalso leadtosome

reductionintransportationcostforBKT.

Outlookand Valuation:

GoingbyEV/EBITDA trend in last18months thecompany

hasbeentradingaround 5.25xTrailingEV/EBITDA(between

4.56x) Maintaining thehistoricalvaluationtrend,whenwe

valueBKTat5.25xFY15PEV/EBITDAbasis,weget18months

targetofRs343whichgivespotentialupside of22% from

currentlevel.

WeRecommendACCUMULATE on the stockwith upward

biastoourtargetprice.

BSECode 502355

NSECode BALKRISIND

MarketCap(Rsmn) 27076

Sector AutoTyres&RubberProducts

YearEnd March

52w.High/Low 318/199

Listedon BSE/NSE

SharesinIssue(mn) 96.7

BSESensex 21058

NSENifty 6256

STOCKDETAILS

Avg.DailyTurnover(Rsmn) 46.3

Balkrishna Industries BIL IN)- Initiating CoverageINDSECCMP 280 Rating Accumulate

Target 343 Upside 22%

CONSOLIDATEDFINANCIALS

Rsinbn FY12 FY13 FY14P FY15P

Revenue 30.2 33.9 36.5 40.6

EBIDTA 5.1 6.7 7.0 8.4

EBIDTA(%) 17.0 19.7 19.3 20.7PAT 2.7 3.5 3.2 3.7

EPS

27.8

36.2

33.1

38.4

P/E(x) 10.1 7.7 8.5 7.3

SHAILESH [email protected]+91 22 61146139

INDSEC SECURITIES AND FINANCE LTD.OCTOBER31, 20131

% Sept2013 June2013

Promoter 58.3 58.3

FII 10.7 10.6

DII 19.7 19.7

Others 11.3 11.4

SHAREHOLDINGPATTERN

Source:Company,IndsecResearch


2/19


3/19

Incorporatedin1961,BalkrishnaIndustriesLtdistheflag

shipcompanyofSiyaramPoddarGroupand isthe largest

manufacturer and exporter of Off Highway Tyres (OHTs)

fromIndia.

Ithasachievableproductioncapacityof166000TPAason

March

31,2013

from

5

different

plants

situated

across

Northern and Western India (Gujarat, Maharashtra & Ra

jasthan) and 90% of the production is exported to more

than120countriesacrosstheglobe.

Companys products are sold under the brand name of

AGRIMAX (Agricultural Tyres), EARTHMAX (Mining Tyres),

MULTIMAX, RIDEMAX (Radial Transport Tyres) & FOR

ESTECH(ForestryTyres).

INDSEC

INDSEC SECURITIES AND FINANCE LTD.3

Product Profile: The company operates mainly into Off Highway Tyres (OHT) segment however, through its subsidiaries

(BalkrishnaPaperMillsandBalkrishnaSynthetics) ithasexposuretootherbusinessesofPaperBoards (CoatedandUncoated),

SyntheticTextilefabricandMarketingsupportservices,thoughtheycontributearound4%tothecompanystopline.


SegmentwiseSalesContributionFY13

CompanyBackground

62%

34%

4%

Agriculture OTR Others

The company is present across most categories of Off

Highway Tyres (OHTs) viz Agriculture, Mining, Industrial,

Construction, Earthmovers, Port, ATV (All terrain Vehicles

andTurfcareApplicationTyres;however,majorityofreve

nuealmost62%comesfromAgriculturetyres.

Company

has

more

than

2000

SKUs

and

tyres

are

sold

through200distributorsacross120countries.

GeographywiseSalesContributionFY13

14%

43%18%

25%

India Europe NAmerica Others


ManufacturingFacility

PlantLocation Product OperationalSince Capacity

(MT)

Status

Bhiwadi,Rajasthan AgricultureTyresBias&Radial,IndustrialTyresBias CY2002 79500 Operational

Chopanki,Rajasthan PTRBias,Industrial&ConstructionTyres CY2006 43000 Operational

OTRTyres AllsteelRadial CY2008 11500 Operational

Waluj,Maharashtra MaterialHandling,Floatation,Industrial&OTRTyres CY1988 22000 Operational

Dombivili,Maharashtra MouldforTyres CY2005 NA Operational

Bhuj,Gujarat TobefullyoperationalbyFY15E 120000 UnderConstruction


CorporateStructure


4/19

INDSEC


BusinessModel

ManufacturingandSales

BrandcreationhasbeenthekeyfocusareaforBalkrishna

Industriesasthere isfirmbeliefthatastrongbrand ises

sential to attract customer loyalty and command pricing

power. Based on this belief, almost 9596% of revenue

comes

fromin

house

brands

while

remaining

4

5%

reve

nue comes from contract manufacturing where company

manufacturesTyresforleadinginternationalbrands.

Global brands have offered the company to utilize its full

production capacity for contract manufacturing under

Take or Pay route on cost plus basis. However, the

companyhasdeliberatelyresistedthetemptation.Further,

under its own brand sales, almost 81% comes from re

placement market while 15% sales comes from OEMs.

Catering to replacement market helps in brand building

andhelpsgainacceptability amongenduserswhichactas

launchingpadtocatertoOEMs.

Volvo,BOMAG,JohnDeere,JCB,Ferrari,CNH&L&TCASE

aresomeoftheGlobal/LocalOEMstowhichBKTcatersto

fortheirtyresrequirement.

ChannelwiseRevenueFY13

81%

15% 4%

Distributors OEMs Offtake

RawMaterialSourcing

Rawmaterialcost accountsfor almost60%oftotalsales

andNaturalrubberisthelargestcomponentofRawmate

rial constituting 48% in volume terms (As seen from the

attacheddiagram).

Rubberpriceshavebeenveryvolatileoverperiodoftimes

fluctuating

widely.

To

tide

over

this

price

volatility,

thecompany enters into medium term supply contract with

both domestic as well as international rubber producers

andalsokeepsrubberinventoryforcoupleofmonths.

Pricing

The company enjoys decent pricing power due to

recognized brand and quality of its products and is

normally inapositiontopassonanyhike inrawmaterial

cost.However,thepassoncomeswithsometimelagand

isgradual.


RawMaterialCompositionVolumewise

Source:Company,

Indsec

Research

48%

27%

16%

6% 3%

Rubber CarbonBlack Chemicals Fabric BeadWire

TrendinNaturalRubberPricesTOCOMRubberIndexUSD

Source:TOCOM,IndsecResearch


5/19


INDSECManagementProfile

Name Designation Profile

Mr.ArvindPoddar,

B.Com

Chairman&

ManagingDirector

Mr. Arvind Kumar Mahabirprasad Poddar, B.Com has been Managing Director of Bal

krishna IndustriesLtd.sinceAugust1,2006.HehasbeenaNonExecutive&Non Inde

pendentDirectorofSiyaramSilkMillsLtd.sinceMay29,1992.HeservesasaDirectorof

TeloijanTeaCo.Ltd.,GRLInternationalLtd.,S.P.Investrade(India)Ltd.,VishalFurnish

ingsLtd.,

Balkrishna

Paper

Mills

Ltd.,

BKT

(EXIM)

Ltd.

and

Siyaram

Polycote

Ltd.

Mr.RajeevPoddar,

PG(BM),KingstonUniversity,

London

ExecutiveDirector Mr.Rajiv.A.PoddarservedasanExecutiveofBalkrishnaIndustriesLtd.sinceSeptember

16, 2006.Hehasbeen an ExecutiveDirectorofBalkrishna IndustriesLtd.sinceJanuary

22,2009.

SmtVijaylaxmiPoddar,

B.Com

ExecutiveDirector Mrs. Vijaylaxmi A. Poddar has been an Executive Director of Balkrishna Industries Ltd.

sinceMay30, 2012.SheservedasanExecutiveDirectorofSiyaramSilkMillsLtd.from

October 23, 1999 to May 30, 2012. She has rich industry experience & led Siyaram's

forayintothereadymadegarmentindustry.

Mr.RameshKumarPoddar ExecutiveDirector Mr. Rameshkumar Dharaprasad Poddar has been a Non Executive NonIndependent

DirectorofBalkrishnaIndustriesLtd.sinceJuly31,2006.Mr.PoddarservedasanAddi

tionalDirectorofBalkrishnaIndustriesLtd.sinceAugust1,2006.

Mr.SubhashChandMantri,

ACA

IndependentDirector Mr.SubhashChandraB.MantriservesasaNonExecutiveIndependentDirectorofBal

krishnaIndustriesLtd.

Mr.

SachinNath

Chaturvedi,

Btech,FCA,MBA

IndependentDirector

Shri.

Sachin

Nath

Chaturvedi

is

Non

Executive

Independent

Director

of

Balkrishna

Indus

tries Limited since July 31,2006. He is Director of Jai Corp Limited, Jai Realty Venture

Limited.BalkrishnaPaperMillsLimitedandNRAgarwalIndustriesLimited.

Mr. LaxmiDasMerchant NonExecutive

IndependentDirector

Shri.MerchanthasbeenaNonExecutiveIndependentDirectorofBalkrishnaIndustries

Ltd. since January 2009. He serves as the Chairman and Director of Reliance Ventures

PrivateLimited.HeservedasaDirectorofRelianceCommunicationsLtd,RelianceNatu

ralResourcesLtd.andRelianceEnergyVenturesLtdaswell.

Mr. SanjayAshar,

BCom,FCA,LLB

NonExecutive

IndependentDirector

Shri.SanjayK.AsherisNonExecutiveIndependentDirectorofBalkrishnaIndustriesLtd

SinceAug2010.He isapartner in lawfirmCrawfordbayley&Co.SolicitorsandAdvo

cates andhasbeenlegalcounseltoGoIinvariousdivestmentmatters.Heholdsdirec

torship in Ashok Leyland; Bajaj Allianz General Insurance & Life Insurance; Mandhana

Industries;

Repro

India;

Shree

Renuka

Sugars;

Tribhovandas

Bhimji

Zaveri;

Innoventive

Industries &SanghviMovers.

Mr.AshokSaraf NonExecutiveDirector Mr.AshokM.SarafhasbeenaNonExecutiveIndependentDirectoratBalkrishnaIndus

triesLtd.sinceMay29,2008.

Mr.KhurshidDoongaji,

BA(Eco)LLB

IndependentDirector Mr.DoongajiservesasaNonExecutiveIndependentDirectoratBalkrishnaIndustries

Ltd.Mr.Doongajihasover40yearsofexperienceinprojectandcorporatefinance,legal,

operationsandcorporatelawswithICICILimited.HehasbeenassociatedwithJAICorp.

Ltd.since1999.

MrVipulShah,

ACS

Director Shri.VipulR.ShahservesastheComplianceOfficerofBalkrishnaIndustriesLtd.andhas

beenitsCompanySecretarysinceFebruary11,2012.


6/19


INDSECInvestmentRationale:GlobalPopulationsettogrowto8.2bnbyCY30from

6.5bninCY07.

Thiswillcreateadditionaldemandfor652MTPAof

cerealsbyCY30.

Thiswillrequire 7%increaseinarablelandandequal

increasein

cropping

intensity

by

CY

30.

1.4bnincreaseinGlobalurbanpopulationbetween

CY13CY30 willrequireUSD53.8Trninvestmentto

wardsurbaninfrastructurecreationi.eUSD3.5Trn

Pa.

Thiswillleadtogrowthinminingoperationby2.5%

3.0%paoverCY12CY30.

ThesefactorscollectivelywillleadtoOHT/OTRde

mandgrowthof3.04.0%overtheforeseeablefuture

whichmeansincrementaldemandforUSD480640mn

OHT/OTRtyrespa.

1.OffHighwayTyres:NicheSegmentwithlongtermgrowthPotential:

Off Highway Tyres (OHT) is a niche segment comprising 810% of total

tyremarketglobally.TotalsizeofGlobalTyresmarketispeggedatUSD

180bn which means OHT market size stands at approx USD 1416 bn.

The OHT segment is characterized by low quantity high customization

levelwhich

means

high

labour

and

capital

cost.

This

peculiar

nature

of

industryactsasnaturalentrybarrier.TheIndustryispeggedtogrowat

5% per annum over next 5 years though short term hiccups are seen

currentlyduetoweakeconomicscenarioworldwide.Lackofmanpower

availability,highcostofavailablelabourandhigherproductivityrequire

ment are the key drivers of mechanization of all kinds of production

(Agriculture/Mining/Infrastructure etc) activities which in turn propels

demandforOffHighwayTyres(OHT).Webelieve,thesetrendsareirre

versibleandthuslongtermdemandforOHTsaresecularinnature.The

incrementalOHTdemandofUSD480640mnperannum itselfpresents

good growth opportunity (double digit) to Balkrishna Industries (which

currently holds marginal share of 4% of global OHT market) over next

fewyears.

Populationand

Food

demand

growth

(CY

1963

2030)

Source:FAO,IndsecResearch

InfrastructureInvestmentUSDTrn(betweenCY1330)

Source:Industry,IndsecResearch

Hardcommoditydemand(CY1230)CY12=100 asbase

Source:RioTinto,IndsecResearch

OHT/OTRdemand(USDbn)


16.1

4.1

0. 2

1.511.7

11.2

9.0

Road Rail Port Airport

Power Wate r Te lecom


7/19

INDSEC SECURITIES AND FINANCE LTD.

7

INDSEC

BKTmanpower cost comesat less than4%

of sales vis a vis 25% for global leader

Michelinduetoproductmixandplantloca

tion.

BKT producestyresagainstfirmorderbook

against practice of holding inventory by

global tyremajorswhich saves it inventory

carryingcostaswell.

Combined savings of 2530% inproduction

anddistribution

cost

is

passed

on

to

dis

tributors which keep a portion to them

selvesandpass the remaining to consum

ers.

Thismakes iteasyforBKT to sell itsprod

ucts against stronger brands in the global

marketplace.

2.Costleadershipprovidescompetitiveedge:

As discussed earlier, Off Highway Tyres is a labour intensive business

characterized by low volume and high variety of products as per cus

tomers needs. Thus, labour cost is a key determinant of product pric

ing.. Global Players like Michelin's Manpower cost accounts for 25% of

sales (inCY12and24.2% inCY11) while the same forBalkrishna Indus

triesisaround3.9%.Therearetwokeyreasonsbehindthiswidegapin

manpowercost.

First

is

product

mix

and

second

is

plant

location.

Mich

elinhasderived83%revenueinCY12fromNonSpecialtyTyreSegment

whichareverycommoditizedinnature(havinghighvolumelowmargin)

whereoperatingmarginfallsinmidtohighsingledigit(69%)whereas

in specialty tyres segment it commanded operating margin of 26% in

CY12vs21.5%inCY11.Thus,itisundercompulsiontokeepmarginshigh

in specialty segment to accommodate other low margin businesses. As

farasemployeelocationisconcerned,Michelinhasgot80%of0.113mn

workforce located at high cost location of Western Europe and North

America where wages are almost 45 times higher than those in India.

Story issimilarwithotherbiggies likeGoodyear,Bridgestoneandalike.

ComparedtothisBKTderives94%ofrevenuefromSpecialtyTyresseg

mentand100%oflabourforcesislocatedinIndia.Thisexactlyexplains

low

manpower

cost

for

BKT.

This

80%

difference

in

Manpower

cost

pro

vides20%costadvantagetoBKTwhichitpassesontodealersandcon

sumers to successfully compete with Market leaders. Needless to say,

dealersaretoohappytopushtheproducttoendconsumer.Themove

also helps consumers experience the quality of BKT products which is

comparable with the best. This will help the company successfully tap

theOEMmarketincomingyears.

BKTvs.MichelinComparison(FY13)

MichelinSegment

wise

Margin

Trend

Source: ARBKT(FY13),ARMichelin(CY12),IndsecResearch

Source:ARMichelin(CY12),IndsecResearchSource:ARMichelin(CY12),IndsecResearch

94.0 100.0

3.9

19.917.0 20.0 25.0

11.3

SpecialityTyres

revenue

contribution

Manpoweratlow

costlocation

Manpowercost OPM

BK T(% ) Mich el in(%)

Michelin

Segment

wise

Sales

(%)

CY12

52%

31%

17%

PassengerCar/Lighttruck Truck Speciality

9.3

6.6

26.0

11.309.4

3.5

21.5

9.4

PassengerCar/Lighttruck

Truck Special ity Mi che lineGroup

OPM(%)FY1 2 OPM(%)FY11


8/19

INDSEC

BKTisintheprocessofcommissioning a tyremanu

facturingplantat BhujinGujrat with capacityof

1,20,000MTPAwithcapitaloutlayofRs18bn.

Bhujcapacity will bedistributedbetweenAgriculture

andNonAgriculture tyresintheratioof 55:45,

whichwillalterconsolidated capacity betweenAgri

andNonAgri intheratioof60:40fromcurrentlevel

of 65:35.

Almost40,000MTPAcapacityatBhuj willbeLarge/

Ultralarge(>51)allsteelradialtyres tocaterto

miningsectordemandwheredemandismorerobust.

Bhujplant aftercommissioningwill allowthecom

panytotarget OEMswhereitwillbeableto garner

25%oftotalrevenueovernext3yearsfromcurrent

levelof18%.

BhujplantduetoitsproximitytoKandlaPort will

also leadtosomereductionintransportationcostfor

BKT.

3.CapacityexpansionatBhuj,couldbeagamechanger:

BKTcurrentlyoperatesthrough4plantsandhashit90%levelofcapacity

utilizationandwas undertaking debottleneckingto increaseproduction

incrementally.However,tocapturegrowthopportunitiesfully,thecom

panyhasembarkeduponmassivecapacityexpansionplanatBhujwhere

freshcapacityof1,20,000MTPA isbeingaddedwithcapitalexpenditure

ofRs18bn.WhencommissionedfullybyFY15EBhujPlantwilltaketotal

installedcapacity

of

BKT

to

2,76,000

MTPA.

Successful

commissioning

of

BhujplantwillprovideBKTwithadditionalgrowthlevers.Currently,BKT

derives 65% of revenue from Agriculture OHT tyres which are facing

someslowdown.Managementhasindicatedthat,Bhujcapacitywillbe

dividedbetweenAgriandNonAgri(OTR)intheratioof55:45.Thiswill

effectivelychangeoverallmixbetweenAgriandNonAgrityresto60:40.

Companys focus is on production of Large /Ultra Large All steel Radial

miningtyreswhicharestillclockinghighergrowthduetoshortsupply.

These tyres also command higher margin compared to OHT. The com

panyalsointendstoenhanceitsshareofOEMrevenuewhichcurrently

standsat18%(15%ayearago)andtargetstotakeitto25%overnext3

years time. In case of delay in recovery of demand, company has the

optiontoutilizetheexcesscapacityforcontractmanufacturingwhichit

has

deliberately

avoided

so

far.

Wehavebeenveryconservativeinourprojectionofcapacityutilization

andareprobablyfactoring intheworstcasescenario.Inspiteof11.5%

CAGR volume growth over FY1316 & 11.3% CAGR in topline, the bot

tomlineisgrowingby8.5%CAGRonly.8%averagepricecutinFY14and

higherdepreciationand interestoutgo insubsequentyearsarethekey

factors keeping bottomline suppressed. Any improvement in capacity

utilizationcanalterthisequationsignificantlyandyieldhigherPAT.

CapacityUtilizationandMarginProjection


TrendinOperatingandNetProfitGrowth TrendinSalesandProfitGrowth


Source:Company,IndsecResearchSource:Company,IndsecResearch


9/19


9

INDSECSWOTAnalysis



10/19


10

INDSEC

Specialitytyreaccountsforalmost910%ofTotalGlobaltyremarket sizeofUSD181bn(Industrydata)whichmeansitssize

standsatUSD1618bn.

Bridgestone/Firestone, Micheline & Goodyear are top 3 players

(Categorised

as

tier

1players)

in

both

Agriculture

and

OTR

tyre

segmentswithmorethan70%globalmarketshare,thoughspeci

alitytyrebusinessislessthanonesixthoftheirconsolidatedgross

turnover.

Specialtytyres:SectorView

KeyGlobalPlayersintheSpecialtyTyreMarket

3.64,21%

3.7,22%2.73,16%

1.82,11%

5.11,30%

Micheline Bridgestone Goodyear

TitanInternational Others

Source:CompanyAnnualReport,IndsecResearch

MarketSegment:ProductProfile


MarketSegment:UserProfile

OEM,5.1,30%

Replaceme

nt, 11.9,70%


OTRMarketHighlights

OHT/OTRMarketSizeCY12(USDBn)

SpecialtyTyreMarketSales(USDBn)&MarketShare(%)

OTRMarketSize:USDBn


KeyPlayersinLarge/UltraLargeOTRTyresMarketShareUSDBn


Highlightsof Large/UltraLargeOTRTyreSegment

Bridgestone, Micheline & Goodyear (Tier 1 players) com

mand95%marketshareofLarge/UltraLarge(5763)OTR

segmentandarepreferredplayerduetostrongbrandand

ultimate reliability of the product and their products per

form100%asperexpectation.

Yakohama,Titan International&Belshinaareconsideredas

tier2playersinthissegmentandtheirproductperformance

is5075%ofexpectationandcompeteonpricing.

Some Chinese Players Like Triangle, Shifeng, Taishan and

others (Tier 3) players are basically into 57 category and

planning

to

gain

foothold.

Their

performance

has

been

poor

sofar(2050%ofexpectation).

9.84,82%

2.16,18%SmallTyres(51''&Lower) Large/ULTyres(57''&63'')

0.86,40%

0.86,40%

0.32,15% 0.11,5%Bridgestone Micheline Goodyear Others


11/19


INDSECLongTermOutlook

PopulationandFooddemandgrowth(CY19632030)


CropProductionGrowthSources(%)


TractorUnits/1000farmers

Source:WorldBank,IndsecResearch

UrbanPopulationGrowthCY0030(mn)

Source:UnitedNations,IndsecResearch

InfrastructureInvestmentUSDTrn(betweenCY1330)

Source: Industry,IndsecResearch

Hardcommoditydemand(CY1230)CY12=100 asbase

Source:RioTinto,IndsecResearch

Worldpopulationwilladdaround1.7bnpeople betweenCY0730whichrequires652mnTonpaadditionalcerealsto feed itresulting

intohighcropproductionrequirement.FoodandAgricultureOrganization,aUNbodysuggeststhatthisproductionincreasewillrequire

additionalarablelandandincreaseincropfrequencybesidesimprovingcropyieldto meetfoodrequirementoftheworld.Further,Mc

KinseyGlobalInstituteforecasts urbanpopulationtogrowby1.4bnbetweenCY1330whichwillrequireUSD3.2Trninvestmentperan

numleadingtototalinvestmentof USD53.8TrnbyCY30.Thiswillleadtomininggrowthof2.53.0%paoverCY1230.

Duetocombinedimpactofallthesefactors,longtermglobalincrementaldemandforOHT/OTRtyresisexpectedtogrowby3.04.0%pa

whichmeans

incremental

demand

of

USD

480

640mn

pa.

16.1

4.1

0.2

1.511.7

11.2

9.0

Road Rail Port Airport

Power Water Tel ecom


12/19


INDSECNearTermOutlook

TrendinUSFarmEconomy

Source:USDA,IndsecResearch

CropProductionTrendEU

Source:EUShorttermAgriOutlook201314,IndsecResearch

EUAgroCommodityY/YPriceChange(%) September2013

Source:EuropaCommoditypricedashboardSept13,IndsecResearch

AgricultureTyreDemandCY09=100,Base

Source:Michelin,IndsecResearch

MiningOTRTyreDemandCY09=100,Base


Infra.OTRTyreDemand(EU&N.America)CY09=100,Base


CropproductionandareaundercultivationinbothUSandEUisexpectedtoregistergrowth inCY1314overpreviousyearasperfore

castsofUSDAandEurope,thoughrealizationaredownonY/Ybasis.ThusdemandforAgriMachineryisexpectedtogrowinhighsingle

digitswhich augurswell for AgricultureTyre demandbut farmers propensity to spend on machinery due to lower realization of Agri

producewillkeepdemandsubduedinnearterm.AtbestAgriTyredemandcanbemaintainedatlastyearslevelwithlowtomidsingle

digitgrowthduetogrowthinSouthAmericanMarket. Intheminingsector,Globalmajors(BHPBilliton,RioTinto,Vale)Q3FY13produc

tionhasgoneupbuttheyallareonstrictcostcontrolmode(whichdoesnotaugurwellforMiningequipmentsales.Thisisdefinitelybad

news

for

OEMs

however,

replacement

sales

of

OTR

should

recover

on

the

back

of

high

wear

and

tear

due

to

high

production.

Overall,

shorttermoutlookforbothOHT/OTRiscautiouslyoptimisticonthebackof replacementmarketdemand.


13/19


13

INDSEC

Inspiteof11%volumeCAGRbetweenFY1316,Top

lineisgrowingat12%CAGRonlymainlydueto Non

improvementinrealizationinINRterms duetoex

pectedappreciation

of

INR

against

USD.

BKTisturningFCFpositivebyFY15duetocompletion

of Bhujcapexandnonmoremajorcapexisplanned

thereafter.

InspiteofimprovementinleveragefromFY13on

wards,returnratioswouldimprovefromFY15on

wardsmainlyduetoimprovementincapacityutiliza

tionfromFY15only.

FinancialPerformanceAnalysis

SalesandMarginsTrendYearly

MovementofFCF,BVandEPS




BKTTyresVolumeVsRealizationTrend


14/19


INDSEC

ReturnratiostoimprovefromFY15due

tobettercapacityutilization

Volatilityinrubberpriceshasimpacton

operatingmarginsq/q.

QuarterlyMarginTrend


PeerComparisonCompany BKT Apollo

Tyres

JK

Tyres

Bridgestone

Corp

Sales(Rs.bn) 33.94 127.94 75.20 2362.82$

EBITDA(%) 19.90 11.38 8.71 14.54

NPM(%) 10.41 4.79 2.69 9.37

NetWorth(Rs.bn) 14.43 33.90 9.06 1029.59

DebtEquity 1.10 0.89 3.03 0.45

ROCE(%) 17.32 19.65 13.71

ROE(%) 24.25 19.71 24.62 10.58

DivYield

(%)

0.59

0.74

3.43

1.60#

FY14PE 4.50 5.16 1.75 9.51@

PATCAGR(%)(FY1215E) 17.89* 12.70 22.47 12.70

FY14EV/EBITDA 5.32 3.54 4.02 4.93

Michelin,

France

1712.00

15.97

7.32

711.19

0.89

18.48

10.23

4.72

4.88

CEAT

Tyres

53.05

7.99

1.99

7.82

1.63

20.53

18.49

2.69

3.21

2.45

40.71

Source:Bloomberg, IndsecResearch

$BridgestonenumberbelongstoFY12endingDecember,andconvertedfromYENtoINR.#betweenFinancialyearendingDec13andDec15.@becauseofmajorlosses,networthhasgonedownconsiderably.

*The CAGR number is for FY1416 while the same for FY1316 comes at8.50%asFY14EPSisshowingdeclineoverFY13andrecoveryexpectedfromFY15onwards.

Whencompared

to

peers

,BKT

has

the

Best

operating

and

Net

Margin

and

secondbestROE.CurrentvaluationofBKTstandsatpremiumcomparedtopeers andjustifiably so since even in the worst of the scenario , BKT hasbetter margins compared to peers and there is high entry barrier due tolaborintensiveandcustomizednatureofbusiness,thuslimitedcompetition.


TrendinLeverageandReturnRatios


15/19


15

INDSECValuationandRecommendation :

Going byEV/EBITDA trend in last 18 months the company has been

tradingaround 5.25xTrailingEV/EBITDA(between4.56x) Maintaining

the historical valuation trend, when we value BKT at 5.25x FY15p EV/

EBITDAbasis,weget18monthstargetofRs343whichgivespotential

upside of22%fromcurrentlevel.

WeRecommendACCUMULATEonthestock.

Risktocall:

WehavebeenReasonablyconservativeinprojectingfuturerevenuefor

BKThowever,therearecertain inherentrisksassociatedwithourcall.

Fewofthemasarefollows.

We have assumed 12% Y/Y improvement in volume and 7% Y/Y

improvementinrealization(inUSDterms)whilerawmaterialcost

(In USD terms )assumed to go up by 5% Y/Y in FY15E which we

believe to be reasonable assumption in given scenario. Our Vol

ume/Realization/rawmaterialcostassumptionissubjecttofluc

tuation which may impact the Topline/Bottomline for the said

period.However,upsideriskismorelikelythanthedownsideone.

Huge unexpected volatility in raw material price may have nega

tiveimplicationforprojectedmarginofthecompanyasitisafter

sometime lagthatthecompany isabletopassonthe increased

rawmaterial

cost

to

the

end

consumers.

After commissioning of Bhuj Plant, Interest and Depreciation

charges will start flowing through P&L and thus company will be

hard pressed to maximize capacity utilization. It may so happen

that , itstartspushing itsproducts inthemarketby furthercom

promisingonmarginorbygivingliberalcredittermstoitsdealers.

Further,companyinitsefforttoenhanceexposuretoOEMsmayit

might have to sacrifice the discipline of margin and receivables.

This will have negative impact on future margins, cash flow and

earnings.

Source: IndsecResearch

BKT18monthsEV/EBITDATrend


16/19


16

INDSECFinancialStatements

SUMMARYINCOMESTATEMENT

inmn FY11 FY12 FY13 FY14E FY15ENet

Revenues

21,322.1

30,166.4

33,939.3

36,511.6

40,622.2

CostOfRevenues(inclStockAdj) 16,538.5 22,580.9 24,289.6 26,495.5 28,877.9

GrossProfit 4,783.6 7,585.5 9,649.7 10,016.1 11,744.3

SellingGeneral&AdminExp. 1,696.8 2,112.4 2,615.6 2,766.8 3,106.3

OtherOperatingExpenses 141.5 173.7 200.8 218.6 239.1

EBITDA 3,757.7 5,119.6 6,688.6 7,030.6 8,398.9

OtherIncome 112.0 40.4 45.1 43.0 47.0

EBITDA,includingOI 3,869.7 5,160.0 6,733.7 7,073.6 8,445.9

NetInterestExp. 215.0 292.0 273.7 346.6 566.6

Depreciation 773.4 863.9 1,122.0 1,825.0 2,195.0

EBT

2,881.4

4,004.2

5,338.0

4,902.0

5,684.3

Taxes 936.1 1,314.8 1,839.0 1,702.7 1,967.8

TaxRate 0.3 0.3 0.3 0.3 0.3

NetIncome 1,945.3 2,689.4 3,499.0 3,199.3 3,716.5

NIExclExtraItems 1,945.3 2,689.4 3,499.0 3,199.3 3,716.5

NIInclExtraItems 1,945.3 2,689.4 3,499.0 3,199.3 3,716.5

BasicEPS(INR) 20.1 27.8 36.2 33.1 38.4

SharesOutstanding 96.7 96.7 96.7 96.7 96.7

FiscalYearEnding

SUMMARYBALANCESHEET

(inmn) FY11 FY12 FY13 FY14E FY15EAssets

TotalCash 122.5 3,698.4 2,779.7 1,250.1 4,764.8

CurrentInvestments 113.2 0.1 2.0 2.0 2.0

TotalReceivables 3,358.1 4,900.2 5,196.7 5,716.4 6,459.5

Inventory 4,229.9 4,985.4 4,567.4 5,024.2 5,777.8

OtherCurrentAssets 1,291.2 2,215.8 2,573.1 2,773.0 3,070.9

TotalCurrentassets 9,114.9 15,800.0 15,119.0 14,765.7 20,075.0

TotalPayables(incshorttermloan) 8,202.0 10,397.4 9,145.6 8,792.9 8,908.8

Provisions 187.0 206.0 224.3 232.8 265.5

TotalCurrentLiabilities 8,389.0 10,603.5 9,369.9 9,025.6 9,174.3

NetCurrentAsset 725.9 5,196.5 5,749.1 5,740.0 10,900.7

NetBlock 7,247.9 8,729.9 13,352.7 20,027.7 23,182.7

CWIP 563.5 4,767.4 10,125.5 7,895.5 3,045.5

OtherNonCurrentassets 4,822.5 4,081.9 2,909.4 924.4 842.2

Goodwill 0.6 0.6 0.6 0.6 0.6

TotalAssets 13,360.3 22,776.3 32,137.3 34,588.2 37,971.8

Liabilities

TotalDebt 357.4 9,398.3 15,666.5 15,666.5 15,666.5

EquityCapital 193.3 193.3 193.3 193.3 193.3

Reserves 8,420.2 10,907.5 14,236.7 17,316.4 20,890.7

OtherLiabilities 832.6 1,013.6 2,036.2 1,406.5 1,214.8

LongTerm

Provisions

3,556.8

1,263.6

4.6

5.6

6.6

TotalLiabilities 13,360.3 22,776.3 32,137.4 34,588.2 37,971.8

FiscalYearEnding


17/19


17

INDSECSUMMARYCASHFLOWSTATEMENT

(inmn) FY11 FY12 FY13 FY14E FY15EPBT&Extraordinary 2,881.4 4,004.2 5,338.0 4,902.0 5,684.3

Depreciation 773.4 863.9 1,122.0 1,825.0 2,195.0

OtherNonOperating(Income)/Exp (80.7) (14.1) (66.1) 76.7 53.9

OPbefore

WC

adjustments

3,574.1

4,853.9

6,393.9

6,803.7

7,933.2

(Inc)/DecinWorkingCapital (2,069.9) (2,836.2) 295.5 (934.5) (1,281.8)

Taxes&Others (914.9) (1,560.9) (1,447.1) (1,728.1) (1,993.3)

CashfromOps. 589.3 456.8 5,242.3 4,141.0 4,658.1

FixedAssets(purchase)/sale (2,159.2) (7,747.9) (10,548.8) (4,900.8) (692.1)

InterestReceived 15.6 26.0 16.1

DividendReceived 32.1 9.2 3.5

Sale/PurchaseofInvestments 479.4 113.1 (8.7) (1.3) (2.5)

CashfromInvesting (1,632.1) (7,599.7) (10,537.9) (4,902.1) (694.6)

ShorttermLoans 3,759.8 1,828.5 (1,765.0) (598.7) (279.2)

LongTermLoans (2,443.7) 9,040.8 6,268.2

Dividend (157.7) (157.7) (168.8) (169.9) (169.6)

Cashfrom

Financing

1,158.4

10,711.7

4,334.4

(768.5)

(448.8)

Extraordinaryreceipts/payment (46.7) 5.2 42.2

NetChangeinCash 68.9 3,573.9 (918.9) (1,529.6) 3,514.7

BFCash 53.7 122.6 3,696.5 2,779.5 1,250.1

ENDCash 122.6 3,696.5 2,779.5 1,250.1 4,764.8

FiscalYearEnding

SUMMARYRATIOS

FY11 FY12 FY13 FY14E FY15E

Profitability

ReturnonAssets(%) 8.9 8.1 8.4 7.3 7.9

ReturnonCapital(%) 22.3 18.7 17.3 15.1 16.3

Returnon

Equity

(%)

22.6

24.2

24.2

18.3

17.6

MarginTrend

GrossMargin(%) 22.4 25.1 28.4 27.4 28.9

EBITDAMargin(%) 17.6 17.0 19.7 19.3 20.7

Net Margin(%) 9.1 8.9 10.3 8.8 9.1

Liquidity

CurrentRatio 1.1x 1.5x 1.6x 1.6x 2.2x

QuickRatio 0.6x 1.0x 1.1x 1.1x 1.6x

DebtorDays 49.7 49.3 53.6 53.8 54.0

InventoryDays 54.1 55.0 50.7 47.3 47.9

CreditorDays 12.8 20.7 26.0 27.8 27.4

Working

Capital

Days 19.3 35.3 58.1 56.6 73.7

Solvency

TotalDebt/Equity 0.0x 0.8x 1.1x 0.9x 0.7x

InterestCoverage 13.9x 14.6x 20.3x 15.0x 10.9x

ValuationRatios

EV/EBITDA 7.2x 6.4x 6.0x 5.9x 4.5x

P/E 13.9x 10.1x 7.7x 8.5x 7.3x

P/B 3.1x 2.4x 1.9x 1.5x 1.3x

FiscalYearEnding


18/19

BUY:Expectedtotalreturnofover25%withinthenext12months.

ACCUMULATE:Expectedtotalreturnbetween10to25%withinthenext12months.

REDUCE:Expectedtotalreturnbelow10%withinthenext12months.

SELL:Expectedtotalreturnisbelowthemarketreturnwithinthenext12months.

NEUTRAL: Noinvestmentopiniononthestockunderreview.

ThisreporthasbeenissuedbyIndsecSecuritiesandFinanceLimited(ISFL),whichisaSEBIregulatedentity.

Thisdocumentisforinformationalpurposesonlyandisnotintendedasanofferorsolicitationforthepurchaseorsaleofsecurity.

Thisdocumenthasbeenpreparedandissuedonthebasisofpubliclyavailableinformation,internallydevelopeddataandothersources

believedtobereliable.However,wedonotguaranteeitsaccuracyandtheinformationmaybeincompleteandcondensed.Notehow

everthat,

we

have

taken

meticulous

care

to

ensure

that

the

facts

stated

are

accurate

and

opinions

given

are

fair

and

reasonable,

neither

theanalystnoranyotheremployeeofourcompanyisinanywayresponsibleforitscontents.TheCompanysresearchdepartmenthas

receivedassistancefromthesubjectcompany(ies)referredtointhisdocumentincluding,butnotlimitedto,discussionswithmanage

mentofthesubjectcompany(ies).Allopinions,projectionsandestimatesconstitutethejudgmentoftheauthorasofthedateofthis

documentandthese,includinganyotherinformationcontainedinthisdocument,aresubjecttochangewithoutnotice.Pricesandavail

abilityoffinancialinstrumentsalsoaresubjecttochangewithoutnotice.Whilewewouldendeavortoupdatetheinformationhereinon

reasonablebasis,weareundernoobligationtoupdateorkeepthe informationcurrent.Also,theremayberegulatory,compliance,or

otherreasonsthatmaypreventusfromdoingso.

Securitiesrecommended inthisdocumentaresubjectto investmentrisks, includingthepossible lossoftheprincipalamount invested.

Anydecisiontopurchase/salesecuritiesmentionedinthisdocumentmusttakeintoaccountexistingpublicinformationonsuchsecurity

oranyregisteredprospectus.Theappropriatenessofaparticularinvestment,decisionorstrategywilldependonaninvestor'sindividual

circumstancesand

objectives.

The

securities,

instruments,

or

strategies

discussed

in

this

document

may

not

be

suitable

for

all

investors,

andcertaininvestorsmaynotbeeligibletopurchaseorparticipateinsomeorallofthem.Eachrecipientofthisdocumentshouldmake

suchinvestigationsasitdeemsnecessarytoarriveatanindependentevaluationofaninvestmentinthesecuritiesofcompaniesreferred

tointhisdocument(includingthemeritsandrisksinvolved).

Thisreportisnotdirectedorintendedfordistributionto,oruseby,anypersonorentitywhoisacitizenorresidentoforlocatedinany

locality,state,countryorotherjurisdiction,wheresuchdistribution,publication,availabilityorusewouldbecontrarytolaw,regulation

orwhichwouldsubjectthecompanytoanyregistrationorlicensingrequirementwithinsuchjurisdiction.Thesecuritiesdescribedherein

mayormaynotbeeligibleforsaleinalljurisdictionsortocertaincategoryofinvestors.Personsinwhosepossessionthisdocumentmay

comearerequiredtoinformthemselvesofandtoobservesuchrestriction

Thecompanymaytradeinsecurities,whicharethesubjectofthisdocumentorinrelatedinstrumentsandmayhaveactedupon,useor

usedtheinformationcontainedinthisdocumentortheresearchortheanalysisonwhichitisbased,beforeitspublication.Thecompany

oritsdirectorsmayhaveapositionorbeotherwiseinterestedintheinvestmentstrategyreferredtointhisdocument.Thecompanymay

be involved in any other transaction involving such securities and earn brokerage or other compensation or act as advisor or lender/

borrowertosuchcompany(ies)orhaveotherpotentialconflicts.ofinterestwithrespecttoanyrecommendationandrelatedinformation

andopinions.Thisisjustasuggestionandthecompanywillnotberesponsibleforanyprofitorlossarisingoutofthedecisiontakenby

thereaderofthisdocument.Anycommentsorstatementsmadehereinarethoseoftheanalystanddonotnecessarilyreflectthoseof

thecompany.Nomattercontainedinthisdocumentmaybereproducedorcopiedwithouttheconsentofthecompany.Anyunauthor

ized use,duplication, redistribution or disclosure isprohibited by law andwill result in prosecution. The information contained inthis

documentisintendedsolelyfortherecipientandmaynotbefurtherdistributedbytherecipient.TheCompanyacceptsnoliabilitywhat

soeverfortheactionsofthirdparties.

Theresearchanalyst(s)ofthisreportcertifiesthatalloftheviewsexpressedinthisresearchreportaccuratelyreflecttheirpersonalviews

about

those

issuer(s)

or

securities

and

that

no

part

of

his/her/their

compensation

was,

is,

or

will

be,

directly

or

indirectly,

related

to

the

specificrecommendation(s)orview(s)expressedbythatresearchanalystinthisresearchreport.

AnalystsholdinginthestocksmentionedintheReport: NIL

INDSECINDSECRatingDistribution

Disclaimer



19/19

CONTACTDETAILS

Foradditionalinformationpleasecontact:[email protected],orvisitusatwww.indsec.co.in

IndsecSecurities&FinanceLtd,301/302,"215Atrium","A"Wing,AndheriKurlaRoad,Chakala,Andheri(East),Mumbai 400093Telephone:+912261146114/61146100,Fax:+912261146180/86

INDSEC

ManagingDirector ContactInformation

NandkishoreGupta [email protected] 02261146101/02

ResearchTeam SectorsCovered ContactInformation

MilanWadkar Cement,Auto&MidCaps [email protected] 02261146105

RohitNatarajan EPC,Infra,CapitalGoods&MidCaps [email protected] 02261146118

DivyaSankaranarayanan ResearchAssociate [email protected] 02261146109

InstitutionalSales

Team

Contact

Information

NileshMistry [email protected] 02261146125

PradnyaPotdar [email protected] 02261146134

Parag Shah [email protected] 02261146133

ShaileshKumar Banking&MidCaps [email protected] 02261146139

balkrishna industries 131031 indsec initiating coverage.pdf

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