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Balkrishna Industries: Off-Highway Tire King


Company Name – Balkrishna Industries Ltd (Balkrishna Industries)


Current Share Price – INR 2,131 (December 30, 2022)


Market Cap – INR 41,201 cr


 

1. What is interesting about the stock?

Balkrishna Industries Limited (BIL), is engaged in the manufacturing of specialty tires, known as ‘Off-Highway Tires’ (OHT) which caters to Agriculture, Industrial, Construction, Earthmoving, Mining, Port, Lawn & Garden, and All Terrain Vehicle (ATVs) Tires with over 3,200 SKUs.


The Company primarily caters to over 160 counties in the export markets of Europe, America, Asia, and Australia. The company has five tire manufacturing plants in India at Waluj (Maharashtra), Bhiwadi, (Rajasthan), Chopanki, (Rajasthan) and Bhuj, (Gujarat) and a carbon black manufacturing facility at Bhuj, (Gujarat), and a molding plant in Dombivli, (Maharashtra). Post brownfield capex, the achievable capacity of tire plants will stand at 360,000 MTPA. Furthermore, the company also has backward integration for its carbon black requirements; additionally, it is also sold in the market.


In FY22, around 82% of revenue came from export, with Europe and America accounting for 54% and 12%, respectively.


The Company operates in a segment predominantly known as the “large varieties - low volume segment”, which is not only capital-intensive but also labor-intensive. Company has taken advantage of the peculiarities of the said segment and has developed a large base of SKUs to meet the diverse needs and applications. Balkrishna Industries is witnessing gains in market leadership due to its robust product portfolio:

  • Global share has increased to ~5.5% and the company is targeting to increase this to 10% in the next 5 years

  • Share of the Company in India’s OHT export has increased from 50% to ~60%

Company has a ~15% cost advantage over its competitors. Global players like Bridgestone, Michelin, and Continental dominated with ~50% market share in 2004 but have ceded market share to Asian players due to higher cost and currently have ~30% market share.


Moreover, this segment is neither exposed to any technological obsolescence nor wild fluctuations in demand for its products. Another important feature of Balkrishna Industries’ growth story is that the Chinese have largely stayed away from the market.


Current macro environment is challenging for the Company. Important to note the following management commentary:

  • “The current situation in Europe continues to be challenging and thereby may have an effect on our performance in H2FY23. The demand pattern has been relatively better in North America however recession fears have impacted the growth rates.”

  • “The global economic weakening coupled with sharp uptick in interest rates has also led to a reduction in order placement by the dealers and distributors”

Company has gone through a family dispute. As per Forbes:


In 1993, Yogesh Mahansaria was just 18 when he entered Balkrishna Industries, then a loss-making company manufacturing two-wheeler tires that nobody wanted. He formulated a game plan that over the next decade and more, took BKT global with revenues of Rs 632 crore and profit of Rs 70 crore. And this was the Company he had to bid farewell to because someone else had a claim to the throne.


On July 2006, Mahansaria resigned from his position as executive director of Balkrishna Industries. His father, Ashok Mahansaria, also stepped down from his position as the Company’s vice-chairman and managing director. The duo had put in 12 and 30 years, respectively, at BKT. But they were minority shareholders with a stake of 5.4 percent. The Poddar family, also owners of the Siyaram Group, were the majority shareholders and wanted the Mahansarias out of the way. Arvind Poddar and his son, Rajiv, wanted to take over. The Mahansarias resisted, but they had neither say nor stake. So they walked.


The current situation hasn’t improved – Promoters drew a remuneration of ~ INR 90 cr in FY22 which seems to be quite high:

  • More than 6% of Profit After Tax – typical level is 2-4% (larger companies being closer to 2%)

  • More than 20% of overall employee cost

Management remuneration resolution was opposed by 63% of the institutional investors in the shareholders meeting in July 2021, according to NSE data, but it still sailed through backed by votes from the promoter group and a section of the institutions. Proxy advisory firms had recommended institutions vote against the proposal citing ‘excessive’ remuneration paid to the Poddar family — the promoters of the Company. And this was before the 21% increase in FY22 vs an average increase of 11% for employees other than managerial personnel !!

Why invest in Balkrishna Industries?

  • Market leader in OHT segment – increasing market share

  • Margins expected to increase as raw material prices and freight costs have cooled – key raw material is natural rubber whose price is indirectly linked to crude (synthetic rubber being a substitute)

  • Cash balance of ~INR 2,000 cr as of September 30, 2022

  • ROE north of 20%

2. Key Historical Financials


  • Revenue increased by 43% in FY22 and 28% in Q2FY23 on a YoY basis – better product mix and volume growth

  • However, the EBITDA margin has been under pressure due to higher raw material prices and freight costs. EBITDA margin has been around 16-17% in H1FY23 vs 25-26% in FY19/20

  • Cash conversion days increased from 93 in FY21 to 130 in FY22 as Company increased inventory level at dealers to counter COVID-related supply chain risks. This led to a poor CFO/EBITDA ratio in FY22

  • Healthy ROE/ROCE at 22/24% in FY22

3. What is my view on company valuation?


The share price has jumped ~2x in the last 3 years with a ~1.5x increase in the profit implying multiple expansions.


Balkrishna Industries trades at a P/E (TTM) multiple of 29x vs a long-term P/E multiple of 25x.


Domestic players like MRF, Apollo Tyres, CEAT, and Goodyear India trade at EV/EBITDA multiples of 18x, 9.5x, 12x, and 12x respectively with the Company’s EV/EBITDA multiple of 19x.


On an overall basis, the stock looks expensive at the current level and can be evaluated at a P/E (TTM) of 20x factoring margin of safety and corporate governance risk (high promoter remuneration).


4. What are the risks to the investment analysis?


Risks to the analysis are:

  • Exposure to regulatory risk – import duties by the US or Europe

  • Fluctuation in raw materials price and ability to pass the increasing cost

  • Geo political risk – impact on Europe agriculture; currency depreciation of Euro

 

About the Author


I have over 17 years of experience in equities with a detailed focus on autos, auto components, and media. I am an engineer and have an MBA from a premier institute in India.


Disclosure


I have no stock, option, or similar derivative position in any of the companies mentioned in the last 30 days, and shall not initiate any such positions within the next 5 days. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from SocInvest). I have no business relationship with any company whose stock is mentioned in this article.


I am not a SEBI registered advisor. This article is purely for educational purposes and is not to be construed as investment advice. Please consult your financial advisor before acting on it.


I have used publicly available information while writing this article.

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