Balkrishna Industries Limited (BKT)

Summary

Balkrishna Industries Limited (BKT) started its Off-Highway tyre business in 1987. For over 30 years, BKT has successfully focused on specialist segments such as agricultural, construction and industrial as well as earthmoving, port and mining, ATV, and gardening applications.

About Company

Balkrishna Industries (BKT) is a leading manufacturer in the off-highway tyre market. It has successfully focused on specialist segments such as agricultural, construction and industrial vehicles as well as earthmoving, port and mining, all terrain vehicle and gardening applications.

The company has transformed itself into a global player in the off-highway tyre industry with a 4%-5% market share (as on March 2021). The company has a wide range of product profile and sells in more than 130 countries. Presently, the company has four subsidiaries in Europe and North America assisting its head office in sales and marketing activities: BKT Europe in Italy, BKT Tires USA Inc in USA, BKT Tires Canada and BKT Tires Inc, in Tennessee.

It also has 5 state of the art production sites in Aurangabad, Bhiwandi, Chopanki, Dombivali and Bhuj in India.

Products Segment

Segment Revenue

Volume Sales

BKT's Resiliant Business Model

• Gross Cash and Cash equivalents of Rs. 2,078 Cr as on 30th September 2022.
• Diversified Product Portfolio, spread across Agriculture, Industrial, Construction, Earthmoving, Mining, Port, Lawn and Garden and ATV tires.
• Self Reliant in Carbon Black along with Multiple sourcing arrangements for other Raw Materials.
• Ongoing Capex

Key Focus Area

BKT's Customer Base

BKT's Manufacturing Locations

Consistent Performance over the last 10 years

Growth story of the company is still align (Q2FY23)

BKT's Management

Arvind Poddar - Chairman & MD

Industry Overview

• India is the fourth-largest market for tires globally after China, Europe and the United States.
• The Indian market is currently being witnessing increasing radialisation of tires, especially in buses and trucks The demand for tires is primarily catalysed from two end user segments - OEMs and the replacement segment. The replacement market currently dominates the tire market accounting for most of the total sales.
• ICRA estimates, the domestic demand growth in volumes for the Indian Tire industry is expected to be around 13-15% for in fiscal year 2021-22 and is expected to maintain a growth rate of 7-9% between 2022-2025 period.
• Tire exports have witnessed a noticeable increase in the current year, owing to increased acceptability of Indian tires in abroad markets, and healthy demand from destinations such as the United States and European countries.
• The industry is further expected to witness a capex of over Rs 20,000 Crores between 2022-2025 period owing to increasing offtake across both Indian and global markets.
• Leading players in Indian Tire space includes Balkrishna Industries, MRF, CEAT, Apollo Tyres, JK Tyre & Industries etc.

Sector Outlook

Auto Industry:
The auto industry demand softened during FY15-20. This was a result of overall macroeconomic factors, increasing urban congestion, growth of shared mobility, increase in vehicle prices due to addition of multiple features and implementation of regulations mainly in the area of safety and emission.

In FY21, the Indian auto industry sales volume witnessed a significant de-growth of 13.6% to 18.62 million. This was mainly due to Covid-19 pandemic that struck the global economy at the beginning of the fiscal. According to Society of Indian Automobile Manufacturers (SIAM), the FY21 was one of the worst years for the industry that reported sales in each segment touching multiyear lows.

Tyre Industry:

The increase in tyre makers in India is leading to a rise in the competitiveness within the players. BKT generates most of the revenues from the export market which gives the company a competitive edge as compared to the other players as it is able to divert itself from high competition.

The recent restrictions on imports of tires by the government is expected to aid the domestic tyre manufacturers. According to Automotive Tyre Manufacturers Association (ATMA), China accounted for ~40% of truck & bus radial tyre imports to India. The import ban would help to pave the way for domestic production while accelerating exports.

The carbon black, crude oil and natural rubber are the primary raw materials for manufacturing tires.

BKT's Investment Thesis

Diversified revenue profile and geographical presence:

The company has diversified revenue profile and caters to agricultural as well as industrial segments (which includes tyres for mining and construction activities, etc). In FY22, nearly 66% of the revenue was derived from the agricultural segment (PY: 64%) and 31% of the revenue was derived from the other OTR segment (PY: 32%). The company has presence in both the original equipment manufacturer (OEM) and replacement segments. The replacement segment generally offers higher margins. In FY22, nearly 69% (PY:70%) of the revenue was derived from the replacement segment. The company also has well-diversified geographical presence with over 50% of the revenue coming from Europe. The company caters to over 160 countries worldwide with over 3,200 Stock Keeping Units (SKUs). The diversification across categories and geographical areas insulates the company to an extent from the vagaries of economic cycles and political scenario.

Improvement in the TOI and strong operating margins aided by backward integration of carbon black:

In FY22, the company reported improvement in the total operating income (TOI) by 47% aided by 27% volume growth over FY21 and balance through price hikes taken in response to commodity inflation. Currently, the company continues to enjoy around 5.5% market share in the global specialty market, which is expected to increase over the next four to five years through capacity expansion and more penetration in global markets. The company has robust operating margins due to the backward integration of carbon black. Backward integration of carbon black not only helps in reducing the input cost but also transportation cost. In FY22, although the margin deteriorated due to commodity inflation, high power and freight costs; it continued to be strong at 26.40%.

BKT's Robust performance:

3Y Sales Growth: 17%. 3Y profit growth: 23%.
5Y Sales Growth: 17%. 5Y profit growth: 17%

Strong outlook by management:

Management retained the sales guidance at 3.2-3.3 lakh MTPA for FY23.
Management has given the CAPEX guidance of ~900 which is in line with their previous commentary.

Risk

• Global macro headwinds
• Europe energy crisis
• Currency volatility