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Company Background

Balkrishna Industries Limited is a leading manufacturer in the off-highway tyre market. It is focused on manufacturing a range of off-highway specialty tyres, which are used in agricultural, industrial, material handling, construction, earthmoving, forestry, lawn and garden equipment and all-terrain vehicles. The Company serves both original equipment manufacturers (OEM) and the replacement
market. It has four subsidiaries in Europe and North America and sells products in 130 countries worldwide. In India it has five production sites in Aurangabad, Bhiwadi, Chopanki, Dombivali and Bhuj.

Investment Rationale

l BIL derives ~85% of revenues from exports primarily to Europe and US markets and has around 6% market share in the global off-highway tyre industry. The market share is likely to increase in coming years due to cost advantage, variety of products and strong brand equity.

l.. As per France-based Michelin, the world’s biggest tyre maker, growth is returning to mining and tyres sales to the industry may rise 10-15% in the current year and
25-30 % by 2020 from the 2016 base. The better volume outlook for the off-highway tyre segment should drive volume growth at Balkrishna Industries.

l.. BIL enjoys strong margins as its products are competitive due to lower labour costs in India. Labour costs form ~6% of revenue. Lower labour cost is helping BIL to position its product at a discount vs. peers, thereby gaining market share.

l.. BIL outstanding long term debt stood at $125 mn with $92 mn to be repaid in H1FY18, the repayment would help in lowering of finance cost. Management’s consistent effort of lowering debt through internal accruals should help in increasing the margins.

l.. For FY18, the management has guided volume growth of ~10% (~190,000 MT). With pick up in mining and construction the volumes might see further growth. Moreover the commencement of the Bhuj facility provides BIL with incremental ~40,000 MT capacity towards mining.

l.. The company has taken price hike in the range of 3-4% from April 1, 2017 compared to its global peers, which have taken price hikes in the range of 8-10%. This leaves further room for hikes if required.

l.. With gradual improvement in replacement demand and improved prospects of the user industry like mining and construction the company is poised to grow faster than the industry. Deleveraging of balance sheet, increased capacity, lower costs, healthy return ratios justify the valuations when compared to other tyre stocks. At CMP of `1640, the stock is trading at 15.18x FY19E EPS of `108.04. We recommend steps to “Accumulate” the stock with a target of `1835 in the next 9-12 months.