balkrishna industries

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 “

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. “ Specialists in discovering Multibagger stocks “

Our Research Desk’s views on the Stock Idea

Our Research Desk’s views on the Stock Idea 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.


Our Research Desk’s views on the Stock Idea 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. “ Specialists in discovering Multibagger stocks “

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 Accumulation Range :- 210-230 Rs

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 :

BKT is a Good Export based manufacturing company which has been able to build strong competitive advantages on its Brand, Distribution, Cost structure and Product library. It is also available at cheap valuations and is not receiving its deserved premium when compared with commoditized Tire companies.

Current Market Price – Rs. 239 Current Dividend Yield – 0.66% Bloomberg / Reuters Code – BIL.IN/ BLKI.BO BSE / NSE Code – 502355/ BALKRISIND 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 Promoter’s Holding - 58.30% FII - 10.60% DII - 19.68 % 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


Threat of new entrants

(Low)

High capital requirement.

Labor Intensive business.

Existing players have huge

moats making it difficult.

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

Bargaining Power of Buyers

(Moderate)

Numerous Options for buyers.

No Switching Costs.

Price a major factor for Buying.

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 de-bottlenecking 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 cross-ply 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 low-volume 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


• 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.

• 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.

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


• 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.

Particulars FY10 FY11 FY12 FY13 FY14E FY15E

Sales (In MT) 84454 111543 133039 138339 142875 161625

Sales(In Rs.Cr) 1544.05 2157.75 3049.32 3432.65 3757.92 4506.14

Realization Per MT 182827.3 193445.6 229205 248133.2 263021.2 278802.5

Realization Per MT(% Chg) 5.81 18.49 8.26 6 6

Capacity(In MT) 126000 144000 166000 178000 190500 215500

Capacity Utilization(%) 67.03 77.46 80.14 77.72 75 75

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


• 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.

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

Debt to Equity Ratio (x) 1.52 0.64 0.89 0

Return on Equity (%) 27.41 22.48 19.71 16.95

Current Ratio (x) 1.42 1.43 1.49 1.33

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 • Balkrishna Industries revenues are expected to grow by 11% and 19.91% in FY14 & FY15 driven by improved economic scenario in the developed markets and capacity expansion.

• Balkrishna Industries has EBITDA margins in the range 16-18%. We estimate EBITDA margins of about 19% and 18% in FY14 and FY15.

• Balkrishna Industries is likely to report PAT of Rs.367.60 Cr in FY14 and 410.60 Cr in FY15 with an EPS of Rs.38.03 and Rs.42.48 in FY14 and FY15 respectively. • Balkrishna Industries EPS is likely to record a growth of about 5.06% and 11.70% in FY14 and FY15 respectively.

Specialists in discovering Multibagger stocks “

Particulars FY10 FY11 FY12 FY13 FY14E FY15E

Net Sales 1563.6 2192.09 3016.27 3393.93 3757.92 4506.14

% Chg 11.68 40.20 37.60 12.52 10.72 19.91

Total Expenditure 1169.89 1827.88 2556.37 2760.99 3043.91 3695.04

% Chg 0.91 56.24 39.85 8.00 10.25 21.39

EBITDA 393.71 364.21 459.9 632.94 714.00 811.11

EBITDA Margins(%) 25.18 16.61 15.25 18.65 19 18

Interest 19.33 22.34 29.2 27.37 33.82 40.56

Depreciation 68.64 77.34 86.39 112.2 131.53 157.72

PBT 327.54 288.21 400.4 497.88 548.65 612.83

PAT 219.04 194.63 268.94 349.9 367.60 410.60

EPS 22.67 20.14 27.82 36.2 38.03 42.48

Balance Sheet


• 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.

Balance Sheet FY10 FY11 FY12 FY13 FY14E FY15E Share Capital 19.33 19.33 19.33 19.33 19.33 19.33

Reserves & Surplus 662.06 842.02 1090.75 1423.67 1774.73 2166.85 Net Worth 681.39 861.35 1110.08 1443 1794.06 2186.18

Total Debt 475.59 621.48 1696.28 2146.6 2245.09 2478.38

Total Liabilities 1156.98 1482.83 2806.36 3589.6 4039.14 4664.55

Fixed Assets 715.18 885.68 1349.79 2347.88 2696.7 2826.3

Investments 61.7 13.76 2.45 3.32 3.32 3.32

Net Current Assets 380.1 583.39 1454.12 1238.4 1339.12 1834.93

Total Assets 1156.98 1482.83 2806.36 3589.6 4039.14 4664.555

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

• 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.


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

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

Business

cost of manufacturing

large manufacturing

higher market share

global market share

large market

replacement market

global market peers