Initiating Coverage Balkrishna Industries

Transcription

1 Initiating Coverage Balkrishna Industries ANS Research Desk ARHAM Financial Centre, Harihar Chowk, Rajkot Gujarat Contact Information Telephone No: Date: 10/10/2011

2 Nifty 4940 Sensex Script Details Face Value ` 2 Market Cap ` 1803 Cr 52 Weeks High/Low 186/109 Avg. Daily Volume 6-month Shareholding Pattern As On Jun 11 (%) Promoters 54 Corporate Bodies & 32 Institutions Public 14 Particulars FY11 FY12(E) FY13(E) Consolidated Result (` Crores) Net Sales EBIDTA Net Profit Recommendation: Accumulate Coverage Initiated on: 10 th October, 2011 BSE Code: Bloomberg Code: BIL IN CMP ` 168 NSE Code: BALKRISIND Reuters Code: BLKI.BO Buy between ` Brief Description: Balkrishna Industries is engaged in the manufacturing of OHT Specialized tyres which are mainly used in Agricultural applications, mining related applications etc. The company operates in a Niche market segment and, as such, does not have any pure-play competitor in the Indian domestic market. Investment Rationale: Lower Employee Cost compared to International peers Invested heavily in In-house R&D Major expansion drive planned by the company to increase its market share both domestically and internationally Price differential with International peers will allow the company to increase its prices without any negative consequences Does not face too much Competition on the Domestic front as well as from Chinese companies EPS B.V./Share P/E P/B.V E.V./EBIDTA Div Yield ROE (%) Research Analyst: Pranav Mehta

3 Valuations & Target Price: Particulars Mcap/Net Sales 0.7 (expectation) Net Sale Expected FY 13(E) 2981 Crores Shares outstanding currently Target Price (`) 215 Particulars P/E 8.5 (expectation) EPS FY 13(E) Target Price (`) 209

4 Company Overview Segment wise Breakup 65% 6% 29% Agriculture OTR Others Source: Company Presentation Geographical Breakup Background: Balkrishna Industries Limited (BKT) is the flagship company of Siyaram-Poddar group and was incorporated in It is the holding company of Balkrishna Paper Mills, Balkrishna Tires and Balkrishna Synthetic. Balkrishna manufactures a wide range of Off Highway Tyres (OHT) which is mainly used in Agriculture, Material Handling, Mining Vehicles, Construction & Earth Moving equipments. Balkrishna exports nearly 95% of its tyres under the BKT brand-name. Its main export markets are located in Western Europe, North America and Australasia. Currently the company has 2 plants located in Bhiwadi and Chopanki in Rajasthan (installed capacity of tons each) and 1 plant in Aurangabad (installed capacity of tons). BKT s current achievable capacity (capacity actually used to produce tyres) is 75% i.e. ( tons) and it is currently carrying out upgrading and debottlenecking at its existing facilities which would result in the achievable capacity to increase to tons. The actual capacity utilization is low due to the high variety-low volume nature of the business. The company is also on track to establish a new green-field plant at Bhuj which would have an installed capacity of tons at a cost of nearly Rs crores and would be completed by FY13. After the expansion, achievable production capacity will reach MTPA. 47% 14% 16% 23% BKT has nearly 200 dealers of which 100 dealers are in Europe. It has a product range of over 1900 SKUs. BKT is the main brand-name while sub-brands are Agrimax (Agriculture) and Earthmax (Off the road segment). Worldwide Off highway tyre (OHT) segment is an $ billion industry with major players being Michelin, Goodyear, Continental, Pirelli and Bridgestone (accounting for a combined market share of 55-60%). BKT s market share is nearly 3.5%. Europe America Asia Others Source: Company

5 Sales Channel Breakup The company has been able to grow at a CAGR of nearly 28.5% in Sales and 23.0% in Net Profit between FY06-FY11. FY11. Its ROE has averaged nearly 27% for last 5 years. 80% 6% 14% Distributors OEMs Off-take OEMs served by the company Volvo John Deere CNH BOMAG SAME Ferrari JCB Operating Divisions: 1. Agricultural Tyres: BKT sells its radial tyres for the Agricultural sector under the brand name of AGRIMAX. The tyres are used in Tractors, Trailers and Other farm equipments. In order to cater the expected growth in the agricultural sector in coming years, the company has been increasing its production capacity over last few quarters. 2. OTR/Construction/Industrial Tyres: BKT sells its Industrial steel radial OTR tyres under the brand name of EARTHMAX. These tyres are mainly used in Mining trucks, Loaders & Dozers, Dump trucks and in other such construction related equipments. 3. ATV Tyres: BKT also manufactures tyres for All Terrain Construction vehicles which are equipped with puncture resistance features. Company is also capable of producing specifically designed tyres for SUVs. 4. Lawn & Garden Tyres: BKT produces tyres for Golf Carts as well as Lawn and Garden tyres.

6 Product Portfolio: Segment Type % of share in total sales Particulars Agriculture 65 Tires for Tractors, Trailers, Farm Equipment which are specifically designed as per farm requirements Tractor radial tires sold under brand Agrimax OTR 29 Industrial, Construction & Earth Mover Tires Tires for articulate dump trucks, loaders, underground mines Steel Radial OTR tire sold under brand name Earthmax Others 6 Tires for Sports, Utility vehicles Tires for All Terrain Vehicles(ATV) Source: Company s Investor Presentation The company manufactures a wide variety of tyres (1800 SKUs). It manufactures radial tyres under sub-brand names of Agrimax (for Agricultural use) and Earthmax (for OTR use). Radial tyres attract better margins compared to other types of tyres. The company s in-house research team has successfully launched a number of new tyre types in the past and is expected to do so in the future as well. Company will also be enhancing its product portfolio through manufacturing of steel radial mining tyres and special puncture proof defense tyres.

7 Demand Drivers in Company s Markets: Market % of Total Sales Reasons Europe 47 Large & Mechanized Farms Large Replacement Market Americas 23 Growth in Agriculture & Mining Sector Large Farm-Equipments trends Developing economies of Brazil, Argentina, Colombia, etc. Asia Pacific 17 Agriculture & Infrastructure is growing and will continue to grow Users are moving from traditional to larger sized equipments Source: Company s Investor Presentation Currently Balkrishna Industries earns more than 90% of its revenue via exports mainly to Americas and European regions. Company gets nearly 80% of its total sales from the Replacement market while OEMs forms about 14% of the sales. The replacement cycle for agricultural tires is nearly 2-3 years while tires used in Mining & Construction have replacement cycle of years. Agricultural sector throughout the world is undergoing a change and is expected to grow in the future as well helped by higher commodity prices. On the other hand Infrastructure growth, particularly in developing countries, is expected to keep the demand for tires high. BKT is planning to expand its presence in India through the development of its green field project and is planning to increase its market share. Moreover the company is also planning to expand into Russian and CIS markets as well.

8 Raw Material Composition Demand and Supply of Natural Rubber is balanced internationally and not out of synchronization 48% 27% 16% 3% 6% Rubber Carbon Black Fabric Bead Wire Chemicals Source: Company Presentation Source: Michelin Tyres Annual Presentation February 2011 Natural Rubber production is expected to increase by around 40% by the year 2020 due to new plantations scheduled to occur between by +1 million ha and improved yields expected from the plantations.

9 Trend in Rubber Prices (`/kg) Source: Rubber board of India, ANRPC The rubber prices have remained firm for past year and a half on the back of strong demand from emerging economies of India and China. Another reason for the high prices is the decrease in yield of rubber from major producing companies due to unpredictable climatic conditions. Most of the Rubber plantations were done in 1980s which have now aged thereby leading to a drop in yield production. Indian Government had recently introduced a maximum ceiling of `20.46/kg which resulted in Rubber prices cooling off. India is facing higher prices mainly due to a wide gap between demand and supply and aggregated somewhat by speculation. New plantations done in between would start affecting supplies by 2012 only which might lead to mild reduction in prices (Source: International Rubber Study Group (IRSG)).

10 Investment Rationale Lower Employee Cost and In-house R&D results in higher profit margins for the company Balkrishna has been investing in enhancing its engineering talent which has resulted in better products for its clients. The lead time for coming out with a new product is nearly 8-10 weeks and the company develops around 150 new tyre size every year. The company has shifted its focus towards Radial tyres and has developed in-house capabilities to manufacture Radial OTR and Agricultural OTR. Demand for radial tyres is more than the supply and the profit margins are also higher. In addition, the cheap labor available in the Indian markets also helps the company achieve greater profitability since company s labor costs are about 30% cheaper than its international peers. Company plans to increase its market share in India and also expand into other regions Balkrishna has increased its distributor network in Western countries and is planning to add more distributors going forward. Through its planned capacity expansion the company is also looking to improve its market share in India and wants to increase it from current 10% to 13% of its total sales. The company has also succeeded in keeping its selling & distribution costs lower through the direct distributor model. Company s Sales have shown good resilience during recession in its main markets As can be observed from its financials, BKT has been able to steadily increase its Sales even during the times of Financial Crisis in its Western markets. Company witnessed customers shifting from International Premium brands to more cost effective brands like BKT in order to cut their cost. BKT mainly focuses on Replacement markets which proved to be a useful bet during the last recession of It has also benefitted immensely from shift in Agricultural growth both in the Indian and Western markets. The increasing need of improving agricultural productivity in order to feed the ever growing population will lead to increased demand of Farm Tractors and Other machinery which would ultimately lead to an increased demand of tyres.

11 Moreover, with the consumption of minerals far outstripping their supply, the Mining sector is also expected to grow with a decent rate in the near future thereby leading to increased demand for specialty tyres. Market % of Total Sales Reasons Europe 47 Large & Mechanized Farms Large Replacement Market Americas 23 Growth in Agriculture & Mining Sector Large Farm-Equipments trends Developing economies of Brazil, Argentina, Colombia, etc. Asia Pacific 17 Agriculture & Infrastructure is growing and will continue to grow Users are moving from traditional to larger sized equipments In India also the construction equipment industry is expected to grow significantly due to spending on Infrastructure construction and development. Management expects the industry to grow 5 fold from current USD 2.3 billion to USD billion in coming 3-5 years. BKT is well placed in this space also since it has tie-ups with big players for the OTR segments. Company has been able to pass raw material price increase to its customers and has enough headroom to go for further price increase The Average Rubber cost for the company is nearly$4700 per MT. BKT supplies tyres which are 30% cheaper to their International peers. This gives it ample room to increase its prices and pass on the higher raw material prices to its customers. The company has already taken a hike of about 15% for the current year and Management is confident of taking more hikes in the future if need arises.

12 Management expects prices of raw rubber to remain stable or fall in the coming future which would help the company achieve higher margins Management expects prices of rubber to correct in the near future since they believe that the rise in prices has not been supported by true fundamentals but rather by speculative activities. In addition to this the new rubber plantations done in between would start supplying rubber by next year which might lead to further corrections in the rubber prices. Such price corrections in its major input raw material will definitely help the company reduce its costs and post better profitability in coming few quarters. BKT will not face too much Competition on the domestic front as well as from Chinese companies BKT operates in a niche segment wherein Customization of products and Low volumes are the norm. The company has to give a greater number of choices to their customer which is evident from the fact that company has about 1900 SKU s currently in order to cater to varied demands by customers. This customization proves to be a hindrance for most of the global and local tyre manufacturers who want volume growth and so prefer standardization in their products. Globally there are only few players who are pure play OHT tyre manufacturers while big companies like Michelin, Firestone and Goodyear produce OHT tyres as one of their many products. Domestically also tyre manufacturers have concentrated more on manufacturing Passenger Car tyres as well as Truck and Bus Tyres due to higher volume and growth prospects. The low volume growth prospects and high Customization has also kept away the Chinese tyre manufacturers from entering this segment and this may continue in the near future also due to the same reasons. Chinese manufacturers prefer high volume businesses wherein they can use their enhanced capacities to produce goods cheaply and the OHT segment might not be attractive to them.

13 Investment Risks Higher Input prices may result into lower profitability Although management expects the prices of its key raw materials to come down it is quite possible that the reverse might actually occur if there is a sudden spurt in demand from China and other developing countries. Moreover with interest rates at near zero in U.S. and Western economies struggling with growth there may be a further possibility of Quantitative easing by these economies. If this happens than the extra money printed will flow to commodities, which happened earlier as well, which may result into a rise in commodity prices. If this happens than there is every possibility that company might face pressure on its profitability and margins. However such a negative effect will affect all of its International peers which will somewhat mitigate the risk for the company. Currency fluctuations may result into losses and lower profitability BKT has hedged its receivables position at an average of `45/$ and `64/Euro. So currently they are protected due to depreciation of Indian rupee against both these currencies. However going forward if Rupee appreciates significantly against Euro or Dollar, which according to us does not seem to be a great possibility due to negative domestic factors, the company may face mark to market losses on its hedged positions which may severely affect its financial results. Slowdown in Global Economy is a serious concern There is a very compelling case of the entire Global economy slowing down and the recent happenings in Europe, America and even BRIC countries has further strengthened this thinking. In such a scenario BKT might not be able to show good growth since its main markets are located in Europe and America.

14 Company s concentration on Replacement demand may help it out under this situation but than also there may be a possibility of lower Sales growth. Higher Profitability may draw interest of competitors in the future Currently the company does not face much competition in its niche segment from domestic players due to high level of customization involved in the business and low volume growth. These requirements are one of the reasons that company has been able to command good prices, though well below the prices charged by its International Peers, for its products leading to higher margins and better profitability. However highly profitable industries with medium to low entry barriers always attract new entrants which lead to an overall decrease in margins for the whole industry. Right now there are no major players in the domestic markets but in future some new competitor may arise or some International peer may set shop in India due to cheap labor availability which might lead to a competitive threat for BKT.

15 Q1 FY12 RESULT HIGHLIGHTS PROFIT & LOSS (Q1 FY2012) (STANDALONE RESULTS) (In Crores) Particulars Jun-2011 Jun-2010 % VAR Net Sales Other Income Total Exp Op. Profit Interest Depreciation PBT Tax PAT Adjusted EPS PBIDTM % PATM% Source: ACE Equity, ANS Research

16 FINANCIAL HIGHLIGHTS PROFIT & LOSS (CONSOLIDATED RESULTS) (IN CRORES) Particulars Mar 13 (E) Mar 12 (E) Mar 11 Mar 10 Mar 09 Net Sales Total Exp Other Income EBIDTA Depreciation Interest EBT Tax PAT/ Net Profit BALANCE SHEET (CONSOLIDATED RESULTS) (IN CRORES) Particulars Mar 13 (E) Mar 12 (E) Mar 11 Mar 10 Mar 09 Share Capital Total Funds Total Debts Net Block Net Current Assets Total Assets Book Value/Share Source: ACE Equity, ANS Research Adjusted EPS Div (%) Source: ACE Equity, ANS Research

17 CASH FLOW (CONSOLIDATED RESULTS) (IN CRORES) Particulars Mar 13 (E) Mar 12 (E) Mar 11 Mar 10 Mar 09 EBT Depreciation Working Capital Changes Taxes Cash From Operations Capital Expenditure Free Cash Flow Cash From Investments Cash From Financing Net Cash Inflow/Outflow Opening Cash & Cash Equity Closing Cash & Cash Equiv Source: ACE Equity, ANS Research

18 IMPORTANT RATIOS Particulars Mar 13 (E) Mar 12 (E) Mar 11 Mar 10 Mar 09 EBIDTA Margin (%) Net Profit Margin (%) D/E Financial Leverage (X) Current Ratio Cash Ratio ROANW (%) ROACE (%) P/E P/B.V EV/Sales EV/EBIDTA Profit Plough back (%) Total Asset Turnover (X) Source: ACE Equity, ANS Research

19 Share Price Movement: 5 Years performance of Balkrishna Industries vs. Sensex - Indicates share price performance of Balkrishna Industries - Indicates share price performance of Sensex We have not included NSE data because the stock got listed on NSE just last year only. The big drop in share price of seen at extreme right corner of the chart is due to the splitting of shares from face value of Rs.10 to Rs.2 done last year.

20 Outlook Balkrishna Industries has shown a CAGR growth of 28.50% in Net Sales and 23% in Net Profits between FY period. BKT is the only listed company in India which solely focuses on Niche OTH and Agricultural tyre segment. The company is being backed by a strong management team and has also given good returns to its long term shareholders. Going forward, the major expansion of production capacity being carried out at Gujarat will help the company increase its market share on both domestic and international fronts. The biggest worry for the company has been the record high levels of Raw Rubber prices (its main input material) and this could dampen its margins if the prices continue to remain firm in the coming future. Also any delay in operation streamlining at its new Bhuj (Gujarat) plant may have a negative effect on its cash flows. Valuations We have assumed that revenues are likely to grow by a CAGR of 16% over FY12 (E)- 13(E) period and have kept the EBIDTA margins at 18.5% which are slightly less than its historical average. For this we have used the CAGR modeling for forecasting the company s financial results. At the current market price of ` 168 BKT trades at a trailing PE of We expect FY 12 (E) forward EPS to be ` and FY 13 (E) forward EPS to be ` So at CMP BKT is trading at a one year forward PE of 7.82 and a two year forward PE of 6.82 respectively. From E.V./EBIDTA perspective the company is currently trading at 6.02 and 5.34 of forecasted expectations.

21 Recommendation We think that the stock has potential to go to higher levels and our target price comes to nearly ` 215 (using Mcap/Sales ratio of 0.7 for FY 13(E) Net Sales). Also taking its historical PE multiple of nearly 8.5x for FY 13(E) EPS of we get a target price ` 210. Investors can accumulate this stock in between ` levels with atleast a 2 year perspective. The stock has outperformed the general markets in last 3 years (from ` 26 on March 2, 2009 to ` 169 currently) giving a return of nearly 6.5x. During the same time Sensex has given a return of 1.88x. From October 2010 also, the stock has given a positive return of 20% while Sensex has given a negative return of 19.49%. Hence investors should remain cautious on the near term return performance of the stock. However, the stock is a good long term play on the niche OTH and Agricultural tyre segment and investors can hope to get good returns with a minimum 2 years perspective.

22 Disclaimer: The information being provided to you is compiled from sources we believe to be reliable. ANS Pvt. Ltd cannot and does not take any guarantees about the accuracy, reliability, validity or timeliness of the information and/or data provided/made available to you in this document. The views are purely indicative. Neither ANSPL nor any of its associates, subsidiaries, affiliates, directors, and/or officials become liable or have any kind of responsibility for any loss or damage that you may incur from any decisions taken by you based on our recommendations. None of the information contained herein constitutes a solicitation from ANSPL to Buy and/or Sell securities and/or any Future, Options or Other Financial Contracts. Clients may exercise their own caution and double check or verify the information contained in our recommendations.