Recommendation From Auto Tyres & Rubber Products Sectors

Balkrishna Industries
ON A ROLL ON THE BACK OF IMPROVEMENT IN DEMAND 

Balkrishna Industries (BKI) operates mainly in the business segment of tyres. BKI is India’s leading player in the global ‘Off Highway Tyre (OHT)’ market, which includes agricultural, industry, material handling, forestry, lawn and garden, construction and earth moving tyres. The company caters to demand in over 130 countries through distribution network in Americas, Europe and the rest of the world.  

The management has indicated demand improvement across geographies and segments, especially in the US, since the growth forecast in the US has been revised upwards on the back of tax cuts and stronger than expected activity in 2017. The company’s manufacturing base comprises plants at Aurangabad, Bhiwadi, Chopanki and Bhuj. The company is investing Rs 1.5 billion to set up 60,000 MT p.a. carbon black plant (at its Bhuj plant) to improve supply chain in terms of quality and timing. The company plans to commence operations by the end of FY19. BKI recently inaugurated its R&D centre that will allow the company to work closely with OEMs with deeper penetration, thus increasing its market share.The continued demand for tyres for farming equipment in Europe is expected to lend more credence to volume visibility at BKI as it derives nearly 63 per cent of its sales from farm equipment machinery. The company’s sales volume for the quarter was 49,553 metric tonnes, growing 23 per cent YoY, its highest in at least 18 quarters. This was on the back of35 per cent rise in business from farm equipment manufacturers in Europe and 17 per cent growth in Off-the-Road (OTR) tyres in the mining sector. The company has guided for volume growth of 11-13 per cent to 190,000-195,000 tonnes for the current fiscal, which looks achievable given the traction in demand for OHT tyres  

The buoyancy in demand can be gauged from revenue growth of other leading global OHT companies like Michelin, Trelleborg and Titan International, which have been witnessing decent improvement in revenue growth. 

BKI is gradually increasing its presence in the OTR segment. In order to tap mining segment, it has launched mining tyres larger than 39-inch using its own R&D. The product has been wellaccepted in both the OEM and replacement markets. 

BKI’s standalone revenue for the quarter stood at Rs 1161 crore, showing a growth of 26 per cent YoY. The standalone EBITDA for the quarter was at Rs 352 crore, showing a growth of 14 per cent YoY. The operating margins in December 2017 dropped to 30.3 per cent from 33.4 per cent a year ago due to one-off expenditure on shifting of plant and machinery to Bhuj plant from Waluj. The company’s profit after tax for the quarter stood at Rs 189.50 crore, an increase of 2.25 per cent YoY. 

On the valuation front, the company has a PE ratio of 31.54x. The company’s return on equity (RoE) and return on capital employed (RoCE) stood at 22.35 per cent and 24.70 per cent, respectively. Its debt-to-equity ratio stands at 0.38x. We recommend a BUY on the stock.