Balkrishna, a good specialty-tyre bet

Balkrishna Industries, a leading player in off-highway tyre (OHT) solutions, is set to benefit from steady demand for its niche products with capacity expansion providing for strong revenue growth and easing rubber prices aiding its operating margins.

Business: Balkrishna Industries, a flagship of Siyaram Poddar Group, is engaged in manufacturing and sales of off highway specialty tyres, tubes and tyre flaps. The company is a pure-play OHT producer having a product portfolio of over 1,900 stock-keeping units that find application in niche segments such as agriculture, forestry, mining, construction, material handling, golf, lawn and gardens and sports. The company has three manufacturing plants in India with the current installed production capacity of 126,000 metric tonne (mt). It derives almost 90% of its standalone revenues from exports as it has strong presence in over 120 countries across America, Europe, Asia Pacific and the rest of world (ROW). 

The company sells almost 80% of tyres under its own brand through its network of about 200 distributors catering to replacement market while almost 14% of revenues in fiscal 2011 came from sales to original equipment manufacturers such as Volvo, John Deere, Bomag, JCB and Ferrari.

It is also supplier to leading global tyre manufacturers with almost 6% of revenues coming from ‘off-take sales’.

Investment rationale: Balkrishna is one of the few specialised pure-play OHT manufacturers with strong research and development capabilities and diversified product portfolio, catering to low volume, high variety applications. It derives close to 65% revenues from agricultural segment while off the road tyres (earthmoving) segment and ATV tyres contribute 30% & 5% to sales, respectively.  The company, being largest manufacturer of full range of radial tractor tyres, would benefit from replacement demand in Europe and Americas and growing trend of mechanisation in developing countries.

Balkrishna would also benefit from increased focus on mining and infrastructure development in developing regions that would drive demand for off the road tyres for earthmoving and construction equipment.

The company enjoys low-cost advantage over its global strong competitors such as Bridgestone, Michelin and Titan International and has shown a 30% compounded annual growth in revenues over last five years. Balkrishna would benefit from steady replacement demand and continued focus on core infrastructure and mining sectors even in case of slowdown in automobiles.

The company is increasing its focus on Russian and CIS market to further increase its revenues. It would also benefit from expansion that will almost double its installed capacity in two years.

The company has undertaken brownfield expansion for increasing capacity to produce premium products like agri radials and OTR radials that command better margins. This would increase its existing installed capacity to 140,000 mtpa by September 2011.

Balkrishna has also taken up greenfield expansion project at Bhuj that is expected to increase the capacities by further 90,000 mtpa by September 2012. 

The company’s current order book of close to 65,000 mt provides volume visibility for the next six months and with additional capacities coming on line, the company would be able to overcome capacity constraints currently faced in the wake of steady demand for its products.

On the input side, prices of natural rubber that constitute almost 47% to raw material volumes seem to be peaking out and this would help to improve its operating margins over next few quarters.

Concerns: Any adverse movement in prices of major raw materials like natural rubber and crude-based derivatives would impact its margins. However, the company has room to pass on some of these additional costs through price hikes to its customers.

Also, with majority of its sales coming from exports, the company faces foreign exchange currency fluctuation risk. Any delays in capacity expansion plans would also affect expected production volumes.

Valuations: Driven by stable volume growth from original equipment manufacturers and replacement market along with increased capacities coming on line, the revenues are expected to grow at a CAGR of over 22% over FY11-13 while the net profits are expected to rise at similar pace during this period.

At current market price of Rs167, Balkrishna Industries trades at 6.52 times its expected earnings per share in fiscal 2012 and 5.57 times its expected fiscal 2013 earnings.

Investors can consider the stock on declines to get decent returns from medium- to long-term perspective.

Disclaimer: The writer does not hold any shares in the company