Post on 04-Jun-2018
8/14/2019 Balkrishna Industries 131031 Indsec Initiating Coverage.pdf
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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 KUMARshaileshk@indsec.co.in+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
8/14/2019 Balkrishna Industries 131031 Indsec Initiating Coverage.pdf
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8/14/2019 Balkrishna Industries 131031 Indsec Initiating Coverage.pdf
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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.
Source:Company,IndsecResearch
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
Source:Company,IndsecResearch
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
Source:Company,IndsecResearch
CorporateStructure
8/14/2019 Balkrishna Industries 131031 Indsec Initiating Coverage.pdf
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INDSEC
INDSEC SECURITIES AND FINANCE LTD.4
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.
Source:Company,IndsecResearch
RawMaterialCompositionVolumewise
Source:Company,
Indsec
Research
48%
27%
16%
6% 3%
Rubber CarbonBlack Chemicals Fabric BeadWire
TrendinNaturalRubberPricesTOCOMRubberIndexUSD
Source:TOCOM,IndsecResearch
8/14/2019 Balkrishna Industries 131031 Indsec Initiating Coverage.pdf
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INDSEC SECURITIES AND FINANCE LTD.5
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.
8/14/2019 Balkrishna Industries 131031 Indsec Initiating Coverage.pdf
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INDSEC SECURITIES AND FINANCE LTD.6
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)
Source:Industry,IndsecResearch
16.1
4.1
0. 2
1.511.7
11.2
9.0
Road Rail Port Airport
Power Wate r Te lecom
8/14/2019 Balkrishna Industries 131031 Indsec Initiating Coverage.pdf
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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
8/14/2019 Balkrishna Industries 131031 Indsec Initiating Coverage.pdf
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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
Source:Company,IndsecResearch
TrendinOperatingandNetProfitGrowth TrendinSalesandProfitGrowth
INDSEC SECURITIES AND FINANCE LTD.8
Source:Company,IndsecResearchSource:Company,IndsecResearch
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INDSEC SECURITIES AND FINANCE LTD.
9
INDSECSWOTAnalysis
Source:Company,IndsecResearch
8/14/2019 Balkrishna Industries 131031 Indsec Initiating Coverage.pdf
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INDSEC SECURITIES AND FINANCE LTD.
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
Source:Industry,IndsecResearch
MarketSegment:UserProfile
OEM,5.1,30%
Replaceme
nt, 11.9,70%
Source:Industry,IndsecResearch
OTRMarketHighlights
OHT/OTRMarketSizeCY12(USDBn)
SpecialtyTyreMarketSales(USDBn)&MarketShare(%)
OTRMarketSize:USDBn
Source:Industry,IndsecResearch
KeyPlayersinLarge/UltraLargeOTRTyresMarketShareUSDBn
Source:Industry,IndsecResearch
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
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INDSEC SECURITIES AND FINANCE LTD.11
INDSECLongTermOutlook
PopulationandFooddemandgrowth(CY19632030)
Source:FAO,IndsecResearch
CropProductionGrowthSources(%)
Source:FAO,IndsecResearch
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
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INDSEC SECURITIES AND FINANCE LTD.12
INDSECNearTermOutlook
TrendinUSFarmEconomy
Source:USDA,IndsecResearch
CropProductionTrendEU
Source:EUShorttermAgriOutlook201314,IndsecResearch
EUAgroCommodityY/YPriceChange(%) September2013
Source:EuropaCommoditypricedashboardSept13,IndsecResearch
AgricultureTyreDemandCY09=100,Base
Source:Michelin,IndsecResearch
MiningOTRTyreDemandCY09=100,Base
Source:Michelin,IndsecResearch
Infra.OTRTyreDemand(EU&N.America)CY09=100,Base
Source:Michelin,IndsecResearch
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.
8/14/2019 Balkrishna Industries 131031 Indsec Initiating Coverage.pdf
13/19
INDSEC SECURITIES AND FINANCE LTD.
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
Source:Company,IndsecResearch
Source:Company,IndsecResearch
Source:Company,IndsecResearch
BKTTyresVolumeVsRealizationTrend
8/14/2019 Balkrishna Industries 131031 Indsec Initiating Coverage.pdf
14/19
INDSEC SECURITIES AND FINANCE LTD.14
INDSEC
ReturnratiostoimprovefromFY15due
tobettercapacityutilization
Volatilityinrubberpriceshasimpacton
operatingmarginsq/q.
QuarterlyMarginTrend
Source:Company,IndsecResearch
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.
Source:Company,IndsecResearch
TrendinLeverageandReturnRatios
8/14/2019 Balkrishna Industries 131031 Indsec Initiating Coverage.pdf
15/19
INDSEC SECURITIES AND FINANCE LTD.
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
8/14/2019 Balkrishna Industries 131031 Indsec Initiating Coverage.pdf
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INDSEC SECURITIES AND FINANCE LTD.
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
8/14/2019 Balkrishna Industries 131031 Indsec Initiating Coverage.pdf
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INDSEC SECURITIES AND FINANCE LTD.
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
8/14/2019 Balkrishna Industries 131031 Indsec Initiating Coverage.pdf
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
INDSEC SECURITIES AND FINANCE LTD.18
8/14/2019 Balkrishna Industries 131031 Indsec Initiating Coverage.pdf
19/19
CONTACTDETAILS
Foradditionalinformationpleasecontact:research@indsec.co.in,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 ngupta@indsec.com 02261146101/02
ResearchTeam SectorsCovered ContactInformation
MilanWadkar Cement,Auto&MidCaps milanw@indsec.co.in 02261146105
RohitNatarajan EPC,Infra,CapitalGoods&MidCaps rohitn@indsec.co.in 02261146118
DivyaSankaranarayanan ResearchAssociate divyas@indsec.co.in 02261146109
InstitutionalSales
Team
Contact
Information
NileshMistry nileshm@indsec.co.in 02261146125
PradnyaPotdar pradnyap@indsec.co.in 02261146134
Parag Shah parags@indsec.co.in 02261146133
ShaileshKumar Banking&MidCaps shaileshk@indsec.co.in 02261146139