balkrishna industries ltd_group 9

NIIT UNIVERSITY

CONFIDENTIAL

Date: 04.01.2013

CREDIT NOTE

BALKRISHNA INDUSTRIES LIMITED

04/01/2013

GROUP NO– 9

P301411CMG155 Yogesh Nivangune

P301411CMG156 Sudhir Prajapati

Balkrishna Industries Ltd

BALKRISHNA INDUSTRIES LIMITED

1. Rating Rationale

2. Company details

3. Exposure details

4. Assistance details

5. Share market data

6. Background and business description

7. Physical performance

8. Financial Performance

9. Comments on financials (Historical)

10. Contingent liabilities

11. Projections

12. Key assumptions about the projected numbers

13. Cash flow analysis (Historical and projected) and comments

14. Proposal

a. Assistance details b. Assessment of limits (Fund and Non-fund based) c. Salient terms and conditions

15. CMA form V


RATING RATIONALE:

RATING RATIONALE

Borrower: Balkrishna Industries Ltd Industry : Tyres

Internal Rating : NA Borrower Group : Dharaprasad Poddar Group

Migration history : NA Rating date : 29-Dec-2012

External rating / (Agency): AA- (STABLE) Risk weight : NA

Transaction classification : Reaffirmed on

March 14, 2012 Country of Risk: INDIA

RATING STATEMENT:

Rating for the company Balkrishna Industries Ltd (BIL) is reaffirmed as “AA-(stable)”. The rating is

based on audited financials of the company for the year ended March 31, 2012 and unaudited

financials as at September 30, 2012.

The Rating draws comfort from following factors:

a) Favorable operating efficiency

b) Adequate financial risk profile

c) Healthy cash flows, moderate gearing, and comfortable gearing position.

The Rating is constrained by following factors:

a) Exposure to risks related to volatility in raw material prices

b) Marginal improvement in global market share

c) Implementation of the on-going 120,000 tonne per annum-(tpa) off-highway tyres (OHT)

project in Bhuj (Gujarat).

Outlook: Stable

According to CRISIL report BIL will continue to benefit over the medium term from its good brand

image and favorable operating efficiencies. Rating can be revised to ‘Positive’ if company increases

its global market share in the OHT segment on completion of its ongoing project and reports

steady and strong growth in turnover, while maintaining a healthy operating margin. Conversely,

the outlook may be revised to ‘Negative’ if company generates small cash accruals, or reports time

and cost overruns during project implementation, or lower-than-expected utilization levels in the

plant thereafter, which would adversely impacting its gearing and debt protection metrics.


COMPANY DETAILS:

Group / Sponsor : Dharaprasad Poddar Group

Risk Counter-party : Counter-party 1 Balkrishna Industries Ltd

: Counter-party 2 -

Industry : Tyres

Credit Rating : NA

Rating Migration : NA

External Rating

: Domestic: A1+ (Short term) and AA-/Stable (Long term)

(CRISIL)

International: NA

PROPOSAL:

Exposure at (04/01/2013) (including the proposed limits):

Counterparty 1 Counterparty 2 Borrower Group

(₹ in millions) Limit Outstanding Limit Outstanding Limit Outstanding

Amount 3247.3 - - -

As a % of capital

funds at April 01,

2011

- - - - - -

Long tenor exposure

(Project loan) - - - - - -

Long tenor (non-

project) - - - - - -

ICICI Group - - - - - -

Arrears/ irregularities in existing facilities (at December 04, 2012)

The current proposal is for sanction of:

1. Letters of Credit facility of ₹ 2352.1 million with Bank Guarantee as sub limit ₹ 290 million

2. Derivatives limits of ₹ 895.2 million.


RISK ANALYSIS:

Industry risk: Medium

Tractor industry registered a growth of 18.3% in FY2011, which has resulted in robust

demand for tractor tyres.

Domestic sales volumes growth of tractors has been declining for the past three years from

32% y-o-y in FY2010 to 11% y-o-y in FY2012. However, as the base has increased the

replacement demand has also increased simultaneously.

The three major segments of the tyre industry are original equipment (OE, 46%),

replacement (48%) and exports (6%). However, performance of the industry is influenced by

the replacement segment due to a larger share of truck tyres (67%) in the product mix.

Raw materials price volatility remains key concern for the industry as variation in prices

directly impact EBITDA margins.

Rubber accounts for around 30% of the tyre cost. Although rubber prices have soften in first

half of FY2013, cost of other raw materials like steel tyre cord, carbon black, rubber

chemicals have increased.

Business risk: Low

BIL operate in the segment of off highway tires. Around 94% of revenues are derived from

Agriculture (65%) and Earthmoving OTR (29%) space. It has market presence in more than

120 countries and earns 90% of its revenues through exports.

BIL has state of the art three manufacturing units and one mould shop located in North and

Western Province of India. To provide tyre as per customer's requirements BIL has

strategically located warehouses at each plants. All the warehouses are equipped with

modern storage facilities for better tyre storage and handling.

During FY2012, the company has incurred capital expenditure of ₹ 150 crores (approx.) on

account of increase in small production capacity at all the three plants through de-

bottlenecking and regular maintenance capex at all three plants.

The company also incurred capital expenditure of ₹ 531 crores (approx.) in connection with

its upcoming green field tyre project at Bhuj in the State of Gujarat which is progressing as

per schedule (1,20,000 MTPA)

Total estimated capital outlay for the expansion is ₹ 12,000 million which is likely to be

funded through debt and internal accruals in the ratio of 65:35.

BIL has incremental opportunity to develop the “Earth Moving Tyres” (OTR) markets and

take advantage of the shift from bias to radial tyres, which is picking up rapidly. In this

pursuit, the company has already set up an all-steel OTR Radial tyre plant at its Chopanki


location and thereby become the first company in India to set up such plant.

At the global level, the market share of the company in OHT arena has increased marginally

from 1.5% in FY2007 to more than 3% in FY2012. Company has been able to achieve this by

de-bottlenecking and increasing production capacities.

Financial risk: Medium

BIL achieved robust growth in revenues during FY2011 and FY2012 of 39.4% and 45.8%,

respectively. Europe its one of the key geographical segment, which contributes around

46% of the company’s total revenues, has performed considerably well as compared to

other geographical segments. Its Indian segment has seen a moderate growth in revenues

given the competition from the Chinese imports.

During the same period company also pursued capacity additions which were in tandem

with the aggressive growth achieved by the company.

Profitability came under pressure due to increase in non-operating miscellaneous expense

and rise in raw material prices. However, going forward with softening natural rubber prices,

profitability is likely to come on track.

Gearing ratio came under pressure in FY2012 on account of rise in term debt during FY2011

and FY2012, which was used for capacity expansion project. In future with healthy growth

prospects and likely increase in cash accruals gearing ratio is expected to improve.

The company generates 90% of its revenue from exports and has 3% global market share in

the OTR segment.

BIL has strong global network with over 200 distributors in more than 120 countries, which

has enabled it to capture growing replacement market. BIL derives 80% of its revenues from

replacement market which fetches higher margins which are in the range of 18-20%.

BIL has healthy Return ratios as compared to industry with ROE & ROCE pegged at 25% and

22% respectively.

Management risk: Low

BIL is a flagship company of Siyaram-Poddar group.

The success story of BIL, begun in 1995 when it entered into production of cross ply off-

highway tyres, with the help of persistent and intensive market research coupled with ever

expanding production capabilities, BIL has made its mark in the niche segments like

Agricultural, Construction, Industrial, Earthmover, ATV (All Terrain Vehicle) and Turf care

applications.

BIL is continuously developing its production base and has expanded its product range

significantly. With three manufacturing plants and one in-house hi-tech mould-

manufacturing facility at different locations in India, BIL is very well equipped to feed the


ever-growing demand of its worldwide customers.

R&D is always at the forefronts of BKT and it spends about 5-6% of its revenue on research

and development. BKT has a dedicated team of professionals, who carryout design and

development of new products, as per specific customer needs.

The Company is fully compliant with the Corporate Governance norms in terms of

constitution of the Board. The Chairman of the Board was Non-Executive Chairman and is a

Promoter of the Company. The number of the Independent Directors is 50% of the total

number of Directors and the number of the Non-Executive Directors is more than 50% of

the total number of Directors. The Chairman Shri Dharaprasad Poddar resigned w.e.f 29th

May, 2012. Shri Arvind Poddar, Vice Chairman & Managing Director is re-designated as

Chairman & Managing Director of the Company w.e.f. 30th May, 2012. Shri Anurag Poddar,

the Executive Director resigned w.e.f. 29th May, 2012. Smt. Vijaylaxmi Poddar has been

appointed as Executive Director w.e.f. 30th May, 2012

Project risk: Medium

BIL currently has a production capacity of 144,000 tpa which has aided company to garner a

market share of about 3 per cent globally. Company has embarked on a project at Bhuj in

Gujarat to increase its capacity by 120,000 tpa. The total project cost is estimated to be Rs

18 billion (70 per cent through ECB). BIL received ECB of USD 175 million in June 2011.

However given the big size of the project completion of project on time and cost overrun

would be key areas of look out.

Structure risk: Medium

Working Capital Loans from banks repayable on demand is secured by first pari-passu

charge by way of hypothecation of inventories, receivables and other movables and further

secured by second charge by way of hypothecation on all present and future movable and

immovable fixed assets of company on pari-passu basis.

Term Loam of company is secured by first pari-passu charge over all present and future

movable fixed assets by way of hypothecation and in case of 2nd Term loan is further

secured by second charge by hypothecation of inventories, receivables and other movables

on pari-passu basis.

The company has given Bank Guarantee to statutory authorities like custom and excise

authorities.

Critical compliance matters (Internal/ RBI related):

Nil


ASSISTANCE DETAILS:

(₹ in millions)

Facility

Current Proposal

Existing Limit Proposed

Total O/s at

04/01/2013 Renewal Additional

Rupee Term Loan - - - - -

ECB - - - - -

Rupee Term Loan - - - - -

One Time Short Term

Loan* - - - - -

Cash Credit - - - - -

WCDL - - - - -

EPC / EBD - - - - -

PCFC - - - - -

FUB / FBD / FBP - - - - -

Buyers Credit – As a sub

limit of secured LC - - - - -

Buyers Credit – As a sub

limit of unsecured LC - - - - -

CMS - - - - -

Sub Total - A - - - - -

LC – secured - 2352.1 - 2352.1 -

LC - unsecured - - - - -

Bank Guarantee – sub limit

of secured LC - 290 - 290 -

Bank Guarantee – sub limit

of unsecured LC - - - - -

Stand-by LC^ - - - - -

Derivatives - 895.2 - 895.2 -

Sub Total - B - - - - -

Total (A+ B) - 3247.3 - 3247.3 -


BENCHMARKING:

Companies (₹ in millions)

Principal Business Segment Apollo Ceat MRF JK Tyres BKT

For the Year Ended March 31st '12

Price Earning (P/E) 22.54 43.36 4.52 37.42 7.94

Price to Book Value ( P/BV) 1.96 0.46 1.22 0.55 2.54

Price/Cash EPS (P/CEPS) 11.02 3.91 3.23 3.15 6.28

Market Cap/Sales 0.45 0.06 0.26 0.06 0.85

PBIDT/Sales (%) 7.75 5.65 11.6 4.63 17.9

Sales 89065 48248 106370 61485 28446

Sales/Net Assets 2.12 2.5 2.32 2.19 0.98

PBDIT/Net Assets 0.16 0.14 0.27 0.1 0.17

PAT/PBIDT(%) 26.26 2.77 50.18 3.86 52.73

Net Assets/Net Worth 2.06 2.94 1.99 4.45 2.7

ROE(%) 9.21 1.49 17.47 1.57 28.09

Debt-Equity Ratio 1.03 1.73 0.91 2.45 1.19

Long Term Debt-Equity Ratio 0.54 0.78 0.74 1.1 0.49

Current Ratio 0.72 0.76 1.54 0.83 1.23

Turnover Ratios

Fixed Assets 2.46 2.42 2.95 2.28 2.54

Inventory 7.92 8.41 8.07 9.11 6.38

Debtors 31.35 8.83 10.04 7.81 7.08

Interest Cover Ratio 2.04 1.07 6.14 1.07 13.67

ROCE (%) 12.59 11.49 14.98 7.24 18.06

RONW (%) 9.21 1.49 17.47 1.57 28.09

Comments:

BIL as compared to its peers has low market share and turnover which in lead by MRF at ₹ 106,370

Million. But BIL deals in niche products like Off-Highway Specialty Tyres with 90% of production

being exported, which gives better margins as evident from two ratios PBIDT/Sales (%), PAT/PBIDT

(%) at 17.9 and 52.73. BIL does have some concern about the lowest inventory turnover ratio 6.38

as compared to the peers. The interest cover ratio is the best in the industry at 13.67 which reflects

good cash flow. Along this return on net worth is highest amongst all major industry players.


Share-market Data:

Last traded price at 01/04/2013 ₹ 288.55

52 week High / Low ₹ 153.00/ ₹ 307.50

Market capitalization at 01/04/2013 ₹ 27890.8 million

Promoter holding (%) 54.37%

COMPANY BACKGROUND AND BUSINESS DESCRIPTION:

BIL is the world's premier manufacturer of pneumatic tyres for special applications. Company was

incorporated on November 20, 1961. The company operates mainly in the business segment of

tyres. They focus on the production of range of off-highway tires that includes agricultural,

industry, material handling, forestry, lawn and garden, construction and earth moving tyres. The

company has a worldwide distribution network ensuring extensive reach and penetration. Agri

Max, Agri Max force, Agri Max fortis, Agri Max Teris, Earth Max, Fores Tech, Multi Max, Ride Max

are different varieties of product under BKT brand.

During the year FY2003, the company acquired the Auto tyre Plant of Govind Rubber Ltd at Bhiwadi

in Rajasthan. During the financial year FY2005, the company launched Tractor Radial Tyres. The

company expanded the production capacity in Bhiwadi unit and Waluj unit to 42000 tpa and 18000

tpa respectively. They also installed five MW Wind-Farm near Jaisalmer in Rajasthan for captive

usage.

In February, FY2005, the company has set up a 100% subsidiary company in UK under the name of

BIL (Europe) Ltd to promote sales and marketing of the products of their tyre division in Europe

which commenced their business activities on April 1, 2005. The company expanded the

production capacity in Bhiwadi unit by 3000 tpa to 45000 tpa.

In August 30, 2006, the company incorporated BIL Europe srl in Italy as a wholly owned subsidiary

company and in January FY2007 they incorporated BIL Exim Ltd as a wholly owned subsidiary.

Also they incorporated Balkrishna Paper Mills Ltd and Balkrishna Synthetic Ltd in March FY2007 as

wholly owned subsidiary companies to facilitate the transfer of their paper and textile processing

business respectively.

During the year 2006-07, the company increased the production capacity in Bhiwadi unit from

45000 tpa to 48000 tpa and Waluj unit from 18000 tpa to 22000 tpa. Also, the company introduced

the product 'Premium Super Chromo Board' in the market.

The company has three business activities namely tyre, paper and textile processing. The tyre

business is a focused business activity of the company that constitutes more than 80% of

company's total business and becomes their core business. In order to pay more attention to their

various business activities, the company transferred their Paper business and Textile Processing

business to their wholly owned subsidiaries, Balkrishna Paper Mills Ltd and Balkrishna Synthetic Ltd

respectively with effective from April 1, FY2007.

During the year FY2008, BKT Tyres Pvt Ltd became the subsidiary of the company. Also BIL

(Europe) Ltd and BKT Europe srl ceased to be the subsidiaries of the company due to the

disinvestment by the company.


The company is in the process to set up a new green field Tyre plant into special economic zone to

increase the production capacity. Also the company plans to set up storage facilities at different

locations to store finished goods and raw materials.

Year - Milestone Events:

1988 - First Manufacturing unit was established at Aurangabad in Western India, with full-fledged

in- house R & D department.

1992 - A range of Light Commercial Vehicle tires launched in the international market.

1995 - Identified a niche segment for International Market, commenced production of Off Highway

Segment.

1996 - Commenced exports to Europe & North American markets with Agricultural Range of tires.

Based on initial success in the International markets, a massive production expansion program was

undertaken

2000 - More than 500 SKUs developed in Agricultural application segment since FY1996.

2001 - Started production of Flotation & MPT tires and further expanded the production capacities

and capabilities.

2002 - Second Manufacturing unit was established at Bhiwadi in Northern part of India, thereby

doubling the production capacity. Awarded with prestigious ISO 9001:2000 certificate for Quality

Management System by KPMG, Netherlands.

2003 - Launch of Earthmover tires, All Terrain Vehicle (ATVs), Lawn & Garden tires.

2004 - Launch of Radial Agricultural tires. First company from India to introduce Radial Agricultural

tires sub branded as AGRIMAX.

2005 - In house mould shop established.

2006 - Third Manufacturing unit commissioned at Chopanki in Northern India Opened European

office at Milan, Italy Launched Floatation Radial tires

2007 - Introduced 65 series and 90 Series AGRIMAX range of tires Port application tires & Row crop

tires.

2008 - Launch of All Steel Radial OTR tires.

2009 - Launch of Radial MPT Range of tires.

2010 - Introduced Radial Harvester tires sub branded as AGRIMAX TERIS Radial extra-large tires

sub branded as AGRI MAX FORTIS Introduced Steel belted Forestry tires sub branded as

FORSTECH also introduced steel belted ROADMAX range of tires.

2011 - 4th Plant; a Greenfield project. Work commenced.


Infrastructure Details:

BKT has state of the art three manufacturing units & one mould shop located in North and Western

Province of India. To provide tyre as per customer's requirements BKT has strategically located

warehouses at each plants, a huge ware house in between the two manufacturing units in Northern

Province and a centralized warehouse near the Port. All the warehouses are equipped with all

modern storage facilities for better tyre storage and handling.

1. Bhiwadi Factory

1. Located in Northern Province of India. Around 100 kms from national capital New Delhi.

2. Plant features manufacturing Radial Agricultural tires

3. Other range manufactured are Bias Agriculture & Industrial tires

2. Chopanki Factory

1. Located in Northern Province, 13 kms away from the Bhiwadi plant, plant was

commissioned in FY2006.

2. Plant boast of manufacturing All steel Radial OTR tires

3. Other range manufactured Bias OTR , Industrial & construction tires

4. Plant has one the most modern machineries used in the world for tyre manufacturing.

3. Waluj Factory Aurangabad

1. Located in Western Province of India, around 250 kms from commercial capital Mumbai

2. This was the first plant of BIL commissioned in FY1988.

3. Range manufactured in this plant includes material handling, floatation, Industrial & OTR

tires.

4. Dombivali Mould Plant

As part of backward integration, BIL has in-house mould manufacturing unit which caters to

designing and development of all moulds requirements. Mould shop is equipped with latest and

most modern designing and carving technologies.


Share Holding Pattern as on 30/09/2012

No. Of Shares % Holding

Promoter’s Holding

Indian Promoters 52551510 54.37

Sub Total 52551510 54.37

Non Promoter’s Holding

Institutional Investors

Mutual Funds and UTI 19241516 19.91

Banks Fin. Inst. and

Insurance 15895 0.02

FII's 10406761 10.77

Sub Total 29664172 30.69

Other Investors

Private Corporate Bodies 2533159 2.62

NRI's/OCB's/Foreign Others 242036 0.25

Others 100 0

Sub Total 2775295 2.87

General Public 11667618 12.07

Total 96658595 100

PHYSICAL AND FINANCIAL PERFORMANCE:

Physical Performance:

For the year ended March 31 2010 2011 2012

1. Tyres

Installed capacity (million pieces) 39400000 41020000 42630000

Production (million pieces) 18833860 24502720 27819910

Capacity utilization (%) 47.8 59.73 65.26

Sales (million pieces) 19254730 24901780 27897290

Gross Sales (₹ in millions) 13475.1 18830.3 27923.1

Avg. Sales realization (₹ per piece) 699.8 756.2 1000.9

2. Tyre Flaps

Installed capacity (million pieces) 3790000 3790000 3790000

Production (million pieces) 807270 961950 468240

Capacity utilization (%) 21.3 25.38 12.35

Sales (million pieces) 1602270 1938570 1814590

Gross Sales (₹ in millions) 25.7 34.1 40.1

Avg. sales realization (₹/unit) 16.0 17.6 22.1

3. Tubes

Installed capacity (tones) 0 0 12440000

Production (tones) 0 0 371830

Capacity utilization (%) 0 0 2.99


Sales (tones) 1638550 2281480 2167310

Gross Sales (₹ in millions) 120.7 190 231.1

Avg. Sales realization (₹ per tones) 73.7 83.3 106.6

4. Power-Wind Mill

Installed capacity (tones) 50 50 0

Production (tones) 70299840 54937840 61972180

Capacity utilization (%) 0 0 0

Sales (tones) 0 0 0

Gross Sales (₹ in millions) 0 0 0

Avg. Sales realization (₹ per tones) 0 0 0

Comment on Physical Performance: BIL approx. 95% revenue is generated from Tyres segment, under this capacity utilization is around 65%, which is decided on the basis of order book and inventory maintenance cost. As per the projection if company revenue would increase by 15% than capacity utilization would go up to 85% by FY 2014


Financial Performance:

Year Ended March 31, 2010 2011 2012 Unaudited

₹ in million Actuals Actuals Actuals Actuals

No of months 12 12 12 3

Total operating income (TOI) 13,869.6 19,341.4 28,199.6 8,871.0

EBIDTA 3,899.4 3,051.6 5,650.8 1,872.4

EBIDTA/TOI (%) 28.11% 15.78% 20.04% 21.11%

Interest 186.6 206.6 277.5 61.0

Depreciation 662.2 744.4 831.4 254.2

Operating Profit (OP) 3,050.7 2,100.5 4,541.9 1,557.2

Net of non-operating income / expenses 62.7 648.8 (559.8) 259.0

PBT 3,113.3 2,749.4 3,982.2 1,557.2

PAT 2,087.3 1,855.6 2,685.2 1,237.1

PAT/TOI (%) 15.05% 9.59% 9.52% 13.95%

Net Cash Accruals (NCA) 2,614.1 2,464.6 3,371.6

Net fixed assets 6,737.5 7,296.8 12,766.0

Tangible Networth (TNW) 6,607.8 8,299.7 10,786.6

Exposure in subsidiaries /Group Cos. 807.3 322.4 322.4

· Investments 807.3 322.4 322.4

· Loans and advances 0.0 - -

Adjusted TNW (ATNW) 5,800.5 7,977.3 10,464.3

Long term debt (LTD) 883.3 4,496.7 11,358.1

Short term debt (STD) 3,540.3 2,080.4 3,540.3

Working Capital Bank Finance 3,290.1 3,645.9 3,951.9

Guarantee* - - -

Total Debt 7,713.6 10,223.1 18,850.3

Total Debt /ATNW 1.33 1.28 1.80

LTD/ ATNW 0.15 0.56 1.09

Total Current Assets 8,172.6 8,714.5 15,378.9

Total Current Liabilities 8,226.4 8,160.8 10,256.7

Net working capital (53.8) 553.6 5,122.2

Current ratio 0.99 1.07 1.50

ROCE (%) 25.93% 15.36% 18.13%

Interest cover 15.74 13.58 13.67

Total debt/ EBIDTA 1.98 3.35 3.34

Total debt/ NCA 2.95 4.15 5.59

DSCR 20.90 14.77 20.36

Note: Unaudited figures are for Q2 2013


Comment on financials:

Total Income: Total operating income registered significant growth rate of 45.80% in FY2012 vis-à-

vis 39.45% in FY2011. International sales increased by 51% in FY2012 whereas domestic sales

increased by only 6% in FY2012. Company major revenue contribution is from outside India

(majorly from Europe).

Profitability: EBITDA margins have increased from 15.78% in FY2011 to 20.04% in FY2012. This

was primarily due to reduction in manufacturing cost from 84% to 79.9% (as % of total revenue)

SGA has also reduced from 2.7% to 2.5 of total cost which was due to reduction in the professional

expenses.

The profit before tax for FY2012 was ₹ 3982.2 million against ₹ 2749.4 million for the twelve months

ending March 31, 2011. PAT margin slightly decreased from 9.59% in FY2011 to 9.52% in FY2012.

The profit after tax for FY2012 was ₹ 2685.2 million. The increase in PAT is commensurate with the

increase in top line of the company.

Interest: Interest part has been increased for the company due to significant increase in borrowing

cost and interest expense. Interest part has increased from 10.7% in FY2011 to 34.3% in FY2012.

Non-operating income and expense: In FY2012, non-operating expenses were higher than non-

operating income and it has come down by 186% in FY2012, it was mainly due to high misc.

expenses, loss of foreign exchange fluctuations and writing off of fixed asset.

Net cash accruals: Due to significant increase in profit net cash accruals have increased by 37% in

FY2012. Company has paid 5.4% in the form of dividend out of its net profit in FY2012.

Net fixed assets: Company has purchased plant and equipment of ₹ 1196.95 million during FY2012.

Net fixed asset increased by 8% in FY2011 and 75% in FY2012.

Tangible Net worth: The physical worth of the company increased to ₹ 10786.6 million as on March

31, 2012 from ₹ 8299.7 million as on March 31, 2011 due to increase in general reserves by ₹ 4500

million.

Adjusted Tangible Net worth: Robust performance in revenues and growth in retained earnings has

led to an increase in ATNW from ₹ 7977.3 million in FY2011 to ₹ 10464.3 million in FY2012.

Net working capital: Net working capital gap has gone up from ₹ 553 million to ₹ 5122 in FY2012.

Rationale for low current ratio: Company is having high cash balance which leads to increase in

current asset in comparison of current liability, which further leads to current ratio of 1.5. Current

ratio increased from 0.99 in FY2010 to 1.5 in FY2012. Deatisl of current asset and current liability in

FY2011 and FY2012 is given below -


Leverage: The outstanding debt as on March 31, 2012 was ₹ 18850.3 million, which include WC

bank finance of ₹ 3951.9 million, STD of ₹ 3540.3 and LTD of ₹ 11358.1. The total debt has

increased by 84% in March 31, 2012. Company has set up a new plant at Bhuj and this project was

funded through ECB of USD 175 million which increases the debt level of the company

substantially.

Non-current assets:

The non-current assets of the company as at March 31, 2012 were ₹ 12780 million (₹ 7296 million in

the previous year). The non-current assets mainly comprised of advances to supplier of capital

goods and contractors of ₹ 3929.2 million. During the year, the company has incurred capital

expenditure of ₹150 crores (approx.) to increase production capacity at all the three plants through

de-bottlenecking and regular maintenance capex. The company also incurred capital expenditure

of ₹ 531 crores (approx.) for its upcoming green field tyre project at Bhuj in the State of Gujarat.

Contingent Liabilities

The contingent liabilities of the company are detailed in the following table:

(₹ in millions)

Particulars FY2011 FY2012

Guarantees undertaken 6615.6 15959.1

Disputed Income Tax 138.8 79.0

Disputed Excise Duty 136.4 140.4

Others 0.0 0.0

Total 6890.8 16178.5

(₹ in million)

Cuurent Asset 2011 2012

Cash and Bank Balances 109.9 3574.0

Sundry Debtors 3242.4 4796.1

Inventory 4103.8 4810.7

Advances to Supplier 323.0 1037.5

Advance payment of taxes 561.9 912.4

Other CA 373.6 248.1

Total Current Asset

Current liability 2011 2012

Short term borrowing 5726.3 7492.2

Sundry Creditors 1249.1 2157.9

Provision for tax and div payable 187.9 206.7

Installment payments 89.3 102.3

Other CL 908.2 297.5

Total Current Liability 8160.8 10256.7


Foreign currency risk:

BIL took an ECB loan of USD 175 for capex for its tyre project at Bhuj. Additionally, 90% of the

company’s total revenues are earned via exports. 80% of the total raw materials are imported. In

FY2012 total foreign exchange earned and used were in the tune of 25700 million and 17190

million, respectively. Also BIL incurred the loss of ₹ 179.7 million in FY2012. Hence, due to huge

exposure to foreign currency and fluctuations and volatility in foreign currency BIL faces huge

foreign currency risk.

Statutory auditor’s comment:

Messers Jayantilal Thakkar & Co., Chartered Accountants, is the current auditor of Balkrishna

Industries Limited. According to annexure given to auditor’s report in Annual report nothing found

out discrepant. Company is regular in payment of dues of borrowing, service tax and custom duty.

Only some disputes which are currently pending under various statute.

Details are mention below (₹ in millions)

Name of

Statute

Nature of

Dues Amount

Period to which

the Amount

Relates

Forum where dispute

is

pending

Income

Tax Act

Income Tax(Including

Interest and Penalty

19.0

2004-2005 Commissioner

2006-2007 (Appeals)

2.2 2007-2008 Assessing Authority

Sales Tax

Acts

Sales Tax(Including

Interest and Penalty)

0.3 2004-2005 High Court

18.8


2002-2006 (Appeals)

Central

Excise Act

Excise Duty(Including

Interest and Penalty)

2.0 2002-2006 High Court

42.3 2003-2011 Tribunal

6.2


2005-2011 (Appeals)

29.0 1994-2004 Assessing Authority

Total 144.6


2011 2012

Operating Activities

PBT 2,749.4 3,982.2

Depreciation 629.4 764.6

Interest Paid 206.6 277.5

Income tax paid (893.8) (1,297.0)

Change in Work ing Capital (895.7) (1,410.5)

Interest/dividend received (68.9) (22.9)

Cash Flow from Operating Activities 1,727.0 2,293.9

Investing Activities

Interest/dividend received 68.9 22.9

Capital Expenditures (1,188.7) (6,233.8)

Investment Expenditure (4,133.3) 689.0

Additions to Goodwill / Intangibles (18.1) 3.8

Due from director (5.4) 0.4

Cash Flow from Investing Activities (5,276.6) (5,517.6)

CASH FLOW AVAILABLE FOR FINANCING ACTIVITIES (3,549.6) (3,223.7)

Financing Activities

Interest Paid (206.6) (277.5)

Proceeds from / (Repayment of) Revolver

Proceeds from / (Repayment of) Long Term Debt 3,613.4 6,861.3

Issuance / (Repurchase of) Equity

Dividends (157.2) (168.5)

Issue of Work ing capital loan 355.9 306.0

Income from other sources 11.6 (33.5)

Cash Flow from Financing Activities 3,617.1 6,687.8

Effects of Exchange Rates on Cash

Net Change in Cash 67.6 3,464.1

Beginning Cash Balance 42.3 109.9

Ending Cash Balance 109.85385 3,574.0

Cash flow analysis

(₹ in millions)

*

As per audited cash flow statement


Projections (Cash Flow table): (₹ in millions)

2012 2013 2014

Operating Activities

PBT 3,982.2 4,835.3 5,485.4

Depreciation 764.6 1,061.8 1,540.9

Interest Paid 277.5 277.5 277.5

Income tax paid (1,297.0) (1,574.8) (1,786.5)

Change in Working Capital (1,410.5) (795.3) (1,115.6)

Interest/dividend received (22.9) (22.9) (22.9)

Cash Flow from Operating Activities 2,293.9 3,781.5 4,378.7

Investing Activities

Interest/dividend received 22.9 22.9 22.9

Capital Expenditures (6,233.8) (1,076.1) (1,540.9)

Investment Expenditure 689.0 - -

Additions to Goodwill / Intangibles 3.8 - -

Due from director 0.4 - -

Cash Flow from Investing Activities (5,517.6) (1,053.1) (1,517.9)

CASH FLOW AVAILABLE FOR FINANCING ACTIVITIES (3,223.7) 2,728.3 2,860.7

Financing Activities

Interest Paid (277.5) (277.5) (277.5)

Proceeds from / (Repayment of) Revolver

Proceeds from / (Repayment of) Long Term Debt 6,861.3 (1,500.0) (1,500.0)

Issuance / (Repurchase of) Equity

Dividends (168.5) (242.2) (273.5)

Issue of Working capital loan 306.0 - -

Income from other sources (33.5) (0.0) -

Cash Flow from Financing Activities 6,687.8 (2,019.8) (2,051.0)

Effects of Exchange Rates on Cash

Net Change in Cash 3,464.1 708.6 809.7

Beginning Cash Balance 109.9 3,574.0 4,282.6

Ending Cash Balance 3,574.0 4,282.6 5,092.3


Key assumptions about the projected Cash Flow numbers: Depreciation rate: Historically assets have been depreciated considering the useful life of asset in the range of 11-12 years. Hence in the projected years depreciation rate is used taking useful life assets as 12 years. Capex: For the projected year the current capex and the previous year’s work in progress is used to calculate the cash flows. Also the maintenance capex at the rate of 9 % is considered. Working capital changes: Considering the growing market share the bargaining for BIL is assumed to have increased in FY2012. So during the projected years the payable days have been kept at high of FY2012. While in case of current assets given the softening of raw material prices and better management of stock the inventory days are kept at reduced levels of 77.5 days (FY2012) for the projected period. In case of the accounts receivable, given the fact that maximum revenues are generated from Europe and export sales, and taking into consideration the tightness in money supply in those economies the accounts receivable days are kept at increased levels of 62.1 days(FY2012) for the projected period. With rise in revenues and net cash accruals advance payments of taxes are kept at increase level of 3.2% of the Net sales of the company. Assuming that further loan is not taken by the company the interest expense in kept at levels of ₹277.5

million over the projected period. Dividend distribution rate: There is no constant dividend distribution rate for the company observed in the past. Hence for the projected period the dividend distribution rate is kept as an average of past three year’s dividend distribution rate and the dividend tax is calculated as a effective dividend distribution tax rate of the previous year. Income tax rate: It was observed that for the previous three years company has paid tax at an effective tax rate of 32-33%. Hence for the projected period the tax rate was assumed to be at 32.57%. Term Loan Repayment: With healthy cash flows we have projected that company would repay its term liability by ₹ 1,500

million in the first year and ₹ 1,500 million in the second year of projection.


DETIALED PROPOSAL:

The current proposal is for sanction of:

1. Letters of Credit facility of ₹ 2352.1 million with Bank Guarantee as sub limit ₹ 290 million

2. Derivatives limits of ₹ 895.2 million.

ASSESSMENT OF LIMITS: Fund based limits:

(₹ in millions)

Computation of Assessed Bank Finance

Year ended / ending March 31, FY2012 FY2013 FY2014 Actual Projections Projections

Sales (Net) 28,445.7 32,712.6 38,600.8

Total Current Assets (TCA) 11,062.4 14,489.9 18,423.5

Current Liabilities (other than bank

borrowings) 6,304.7 7,375.8 8,777.5

Working Capital Gap 4,757.7 7,114.1 9,646.0

Net working capital 5,122.2 8,126.1 11,551.5

Assessed Bank Finance (ABF) (364.6) (1,012.0) (1,905.5)

Net Working Capital Analysis

Year ended / ending March 31, FY2012 FY2013 FY2014

Actual Projections Projections NWC / TCA 0.46 0.56 0.63

ABF / TCA -0.03 -0.07 -0.1

Sundry Creditors & Other Current

Liabilities / TCA 0.57 0.51 0.48

As per the above table, going forward there is no requirement of fund based assessment.

Assessment of Non-Fund Based Limits:

Letter of Credit:

The company requires letter of credit for procurement of raw material both imported and domestic.

The letter of credit is required for import/purchases of raw materials like steel tyre cord, carbon

black, rubber chemicals. Assessment details is given in table below -


Bank Guarantee:

Particulaors (₹ in million) FY 2013

1] Opening Balance as on 01st April 141.7

2] Guarantees required: 150.0

a) Earnest Money Deposits :

b) Security Deposits : -

c) Advance Payment Guarantees :

d) Retention / Maintenance Guarantees :

e) Guarantees on account of Sales Tax, Commercial Tax and Excise Duty payments 150.0

Total : (1 + 2) 291.7

3] Less : Bank Guarantees expected to be expired during the year -

4] Bank Guarantees Limit required 291.7

5] Bank Guarantees Limit recommended for sanction 290.0

Particulars FY2013

Raw materials consumption

- Imported (rounded off) 16,189.9

- Indigenous (rounded off) 4,048.6

Procurement through L/C

Imported - A1 8,095.0

Indigenous - A2 2,429.2

Sub-Total (rounded off) – A 10,524.1

Imported

Lead time (30 days) + Average usance (90 days) - B1 120.0

Limit turnover (365/B1) - C1 3.0

Requirement (Imports) (A1/C1) - D1 2,661.4

Indigenous

Lead time (15 days) + Average usance (90 days) – B2 105.0

Limit turnover (365/B2) - C2 3.5

Requirement (Indigenous) (A2/C2) - D2 698.8

Total Requirement (D1 + D2) 3,360.2

Proposed total (70% of total requirement) 2,352.1

Additional LC limit required -

Total LC Limit proposed from ICICI Bank Limited 2,352.1

Limit to be tied (10%) 235.2


Forex/ Derivative Products:

The total derivative limit required for the company has been assessed in the table below:

(`₹ in millions)

Derivative Products

Particulars Amount

Loan Amount in (USD Million) 175.0

Exchange Rate 51.2

Loan Amount in (₹ million) 8,952.4

Conversion factor 0.1

Limits required (₹ million) 895.2

Forex Products

Particulars Amount

Forward Cover limit (USD million) 899.7

Credit conversion factor (%) for 1 year 0.1

Loan equivalent value (USD million) 90.0

Exchange Rate 51.2

LEV – INR (₹ in million INR) 4,602.4

Salient terms and conditions:

Facility 1: Letter of Credit

Principal amount 0

Stipulated interest rate 0.75% pa

Stipulated front end fee/ commission/renew al fee NIL

Security Subservient Charge

Validity of facility 12 Months

Average maturity (for ECB facilities) NA

Repayment schedule NA

Terms and Condition

Facility 2: Bank Guarantee Terms and Condition

Principal amount ₹ million 290

Stipulated interest rate % per annum 0.5

Stipulated front end fee/ commission/renewal fee NA

Security NA

Validity of facility Years 1

Average maturity (for ECB facilities) NA

Repayment schedule NA


Facility 3: Forex/ Derivative Products

Principal amount (₹ million) 8,952.4

Stipulated interest rate N.A.

Stipulated front end fee/ commission/renewal fee As per treasury rates

Security Subservient Charge

Validity of facility 12 months

Average maturity (for ECB facilities) N.A.

Repayment schedule N.A.

Terms and Condition - Derivative Products


PROJECTIONS

(₹ in million)

Year Ended March 31, 2012 2013 2014

₹ in million Actuals Estimates Projections

No of months 12 12 12

Total operating income (TOI) 28,199.6 32,429.5 38,266.9

EBIDTA 5,650.8 6,153.3 7,282.6

EBIDTA/TOI (%) 20.04% 18.97% 19.03%

Interest 277.5 277.5 277.5

Depreciation 831.4 1,061.8 1,540.9

Operating Profit (OP) 4,541.9 4,814.0 5,464.2

Net of non-operating income / expenses (559.8) 21.2 21.2

PBT 3,982.2 4,835.3 5,485.4

PAT 2,685.2 3,260.5 3,698.8

PAT/TOI (%) 9.52% 10.05% 9.67%

Net Cash Accruals (NCA) 3,371.6 4,113.8 5,004.4

Net fixed assets 12,766.0 12,780.3 12,780.3

Tangible Networth (TNW) 10,786.6 13,804.8 17,230.2

Exposure in subsidiaries /Group Cos. 322.4 322.4 322.4

· Investments 322.4 322.4 322.4

· Loans and advances - - -

Adjusted TNW (ATNW) 10,464.3 13,482.5 16,907.9

Long term debt (LTD) 11,358.1 9,858.1 8,358.1

Short term debt (STD) 3,540.3 4,141.7 4,928.8

Working Capital Bank Finance 3,951.9 3,951.9 3,951.9

Guarantee* - - -

Total Debt 18,850.3 17,951.7 17,238.8

Total Debt /ATNW 1.80 1.33 1.02

LTD/ ATNW 1.09 0.73 0.49

Total Current Assets 15,378.9 17,953.9 21,281.0

Total Current Liabilities 10,256.7 11,327.8 12,729.5

Net working capital 5,122.2 6,626.1 8,551.5

Current ratio 1.50 1.58 1.67

ROCE (%) 18.13% 18.50% 20.32%

Interest cover 13.67 16.57 19.88

Total debt/ EBIDTA 3.34 2.92 2.37

Total debt/ NCA 5.59 4.36 3.44

DSCR 20.36 22.17 26.24

Note: Unaudited figures are for Q2 2013


Key assumptions with respect to fin note: Revenue growth rate: BIL showed robust growth in revenues during FY2011 and FY2012. Considering the bigger base and economic pressure in Europe its biggest segment, the revenue growth is moderated at 15% for FY2013 and increased marginally to 18% in FY2014. Raw material prices: Prices of natural rubber which forms 30% of the tyre cost are expected to soften going forward with marginal increase in supply. However, prices of other raw materials are expected to remain firm over the medium term. Also, rupee is likely to appreciate in short term which will reduce the import burden of the raw materials. Considering above assumptions raw material cost is expected to remain at moderate levels and thus aid operating margins of the company. Power and fuel cost: With like fall in crude prices power and fuel cost is assumed to reduce marginally. Other manufacturing expenses: with maintenance and de-bottlenecking capex done recently on all the three factories other manufacturing expenses are also expected to soften marginally during the projected period.


1 Facility Limit for Derivative transactions for:

Business purpose other than ECB linked transactions/Buyer's credit

2 Limit Existing Limit- LEV (Loan Equivalent Value ) of ₹ 0.00

Proposed Limit- LEV (Loan Equivalent Value) of ₹ 895.2 million only

3 Interchangeability NIL

4 Purpose

To enter into forwards, swaps, options or other derivatives ("Contracts") with

ICICI Bank to hedge interest rate or currency risk

5 Validity period 12 months from the date of sanction

6 Tenor 12 months

7 Security Security template for working capital facilities.

8 Cash Margin Nil

9 Functional Currency INR, USD

10 Pricing As per treasury rates.

11

Margining Clause is

Applicable

No

12

Break Clause is

Applicable

No

13 Nature of Limit Credit Backed Limit

14 Documentation

The facility is subject to the terms and conditions contained in the standard

International Swaps and Derivatives Association (ISDA) Agreement

The company shall execute the ISDA Agreement in a form and manner

satisfactory to ICICI Bank before entering into any Contract under the facility.

In addition to the above, ICICI Bank may ask the Company to furnish the

following documents from time to time:

· Proof of underlying transaction/declaration of underlying exposure,

required by ICICI Bank from time to time.

· Duly executed Confirmation for every transaction in a format prescribed by

ICICI Bank.

· Board Resolution in a format prescribed by ICICI Bank.

· List of Authorized Signatories

· Any other documents as required by ICICI Bank from time to time

·Underlying documents shall be collected at the time of deal. In case the

underlying documents are not submitted on time, ICICI Bank reserves the

right to withold the payouts and terminate the transaction at the cost and

expense of the company

Covenants

TERMS AND CONDITIONS:


1 Facility Bank Guarantee

2 Type Performance guarantees (PBG)

3 Proposed Limit ₹290.0 million ( as a sublimit of LC )

5 Sublimits Nil

6 Interchange-ability

Full interchangeability between Inland Bank Guarantees and Foreign currency Bank and Letter

of Credit.

For meeting the working capital requirements

Towards bid bond, security deposit, earnest money deposit, contract performance/

performance guarantees, advance payment and retention money purposes; Customs, central

excise, sales tax, electricity, insurance purposes.

8 Validity 12 months from the date of Credit Arrangement Letter

9 Security Security template for working capital facilities.

Guarantees covering disputed liabilities – 100%

Performance guarantees – Nil

11 BG Tenor

For Performance guarantee - Maximum period of BG (excluding claim period, if any) to be

restricted to 60 months.

The Borrower shall pay to the Bank commission as follows:

Advance Payment Guarantee: 0.5% p.a. (all inclusive)

PBG: 0.5% p.a. (all inclusive)

In case of foreign currency bank guarantees, the following charges will be additional:

· SWIFT/communication charges – ₹ 500.0 per guarantee

· Correspondent bank charges, if any, shall be charged on actuals.

· Other Charges – NIL

The bank guarantees to be issued shall be as per the format acceptable to the Bank.

In case of bid bond/EMD/advance payment/retention money guarantees stipulated under

project exports, Bank shall obtain counter guarantees from ECGC at the expense of the

If the guarantees to be issued come under EPCG scheme, bank will obtain counter guarantee of

ECGC at the expense of the company.

To issue Bank guarantees with URDG clause after taking the required indemnity from the

To issue BG without the NWC clause or with modified NWC clause to PSU and public sector

undertakings BG after taking required indemnity from the company.

At the beginning of each quarter in advance

Covenants

15 General

7 Purpose

10 Cash margin

12 Commission

14Commission Collection

frequency


KEY RISKS AND MITIGANTS

Mitigants

Industry Medium

Robust domestic and export growth. Also recent USFDA approvals

will allow the company to penetrate into the regulated markets.

Business Low Significant presence in different countries.

Structure Medium

Secured by first pari-passu charge over all present and future

movable fixed assets and WCDL secured through hypothecation of

inventories.

Financial flexibility Medium High capacity addition, Strong global netwrok, healthy return ratios.

Promoters/Manageme

nt

Low

Highly experienced and focussed promotors, and is fully compliant

with the Corporate Governance norms.

Project risk (If any) NA NA

Others, if any NA NA

Risks


CMA form V

COMPUTATION OF MAXIMUM PERMISSIBLE BANK FINANCE FOR WORKING CAPITAL

(₹ in millions)

Last Year Last Year Last Year Next Year Next Year

First Method of Lending Actuals Actuals Actuals Estimates Projections

Year 2010 2011 2012 2013 2014

1. Total Current Assets (Form-IV-9) 6,009.9 5,796.3 11,062.4 14,489.9 18,423.5

2. Other Current Liabilities (other than

bank borrowings (Form-IV-14) 4,936.3 4,514.9 6,304.7 7,375.8 8,777.5

3. Working Capital Gap (WCG) (1-2) 1,073.6 1,281.4 4,757.7 7,114.1 9,646.0

4. Min. stipulated net working capital:

(25% of WCG excluding export receivables) 268.4 320.4 1,189.4 1,778.5 2,411.5

5. Actual / Projected net working capital (Form-III-45) (53.8) 553.6 5,122.2 8,126.1 11,551.5

6. Item-3 minus Item-4 805.2 961.1 3,568.2 5,335.6 7,234.5

7. Item-3 minus Item-5 1,127.3 727.8 (364.6) (1,012.0) (1,905.5)

8. Max. permissible bank finance (item-6 or 7, whichever is lower) 805.2 727.8 (364.6) (1,012.0) (1,905.5)

9. Excess borrowings representingshortfall in NWC (4 - 5) 322.2

Second Method of Lending

1. Total Current Assets (Form-IV-9) 6,009.9 5,796.3 11,062.4 14,489.9 18,423.5

2. Other Current Liabilities (other than

bank borrowings (Form-IV-14) 4,936.3 4,514.9 6,304.7 7,375.8 8,777.5

3. Working Capital Gap (WCG) (1-2) 1,073.6 1,281.4 4,757.7 7,114.1 9,646.0

4. Min. stipulated net working capital: (25% of total Current Assets excluding export receivables) 1,502.5 1,449.1 2,765.6 3,622.5 4,605.9

5. Actual / Projected net working capital (Form-III-45) (53.8) 553.6 5,122.2 8,126.1 11,551.5

6. Item-3 minus Item-4 (428.9) (167.7) 1,992.1 3,491.6 5,040.1

7. Item-3 minus Item-5 1,127.3 727.8 (364.6) (1,012.0) (1,905.5)

8. Max. permissible bank finance (item-6 or 7, whichever is lower) (428.9) (167.7) (364.6) (1,012.0) (1,905.5)

9. Excess borrowings representingshortfall in NWC (4 - 5) 1,556.2 895.4

balkrishna industries ltd_group 9

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