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SP Tulsian

Investment Advisor

12.00 AM Aug 23rd 2013

Balkrishna Ind



PEAK FROM RECO 1351.20 537.36%

CURRENT PRICE 1301.10 513.73%

Balkrishna Industries is India's leading manufacturer of Off Highway Tyres with one of the most comprehensive product portfolio of over 2,000 SKUs for wide applications. Share at 212 is recommended for a buy, as it can move to 260 in next 6 months

Siyaram-Poddar Group's Balkrishna Industries is India's leading manufacturer of Off Highway Tyres (OHT) with one of the most comprehensive product portfolio of over 2,000 SKUs (stock keeping units) for wide applications:

Agriculture - tractors, trailers, farm equipment under 'Agrimax' brand, accounting for 62% of FY13 sales volume

Off-the-road (OTR) - industrial, construction, earthmoving tires under 'Earthmax' brand, , accounting for 34% of FY13 sales volume

Others - sports and utility vehicles, all terrain vehicles, port use.

The company has 4 manufacturing plants (2 in Rajasthan and 1 each in Maharashtra and Gujarat) and 1 hi-tech mould manufacturing facilities at Dombivli, Maharashtra, with aggregate capacity of 1.66 lakh MTPA. Since the company operates in the niche tyre making space, its moulding facility become critical, which is the differentiating factor vis-ŕ-vis peers Apollo, MRF, Ceat and JK.

1.2 lakh MTPA greenfield expansion is underway in Bhuj, Gujarat, for which Rs. 1,720 crore has been spent till June 2013. Of this, 10,000 MTPA capacity has been added in FY13 while another 50,000 MTPA is expected to come on stream in FY14 with balance in FY15. Thus, ongoing capex will raise company's capacity significantly to 2.76 lakh MTPA.

The company exports almost 90% of its production to over 120 countries, across Europe, North and South America, Middle East, Africa, Australia and Asia. FY13 geographical mix stood at 48:23:14:15, comprising of Europe, America, Asia and rest of the World respectively.

In FY13, the company's sales stood at 1.38 lakh MTPA, up 4% YoY by volume, of which, about 96% were under its ‘BKT' brand (81% via 200+ distributors and 15% to OEMs such as Volvo, John Deere, CNH, CAT and JCB) while only balance 4% was off-take by global tyre manufacturers under their respective brands. The 200+ strong distributor network strengthens the company's reliance on the higher-margin and relatively-immune-to-slowdown replacement market.

For FY13, on a consolidated basis, company revenue was Rs. 3,394, up 12% YoY, with PAT of Rs. 350 crore, up 30% YoY, due to strong improvement in EBITDA margin to 19.8% from 17.1% a year ago. Decline in raw material cost aided this margin expansion, which, as a percentage of sales reduced to 56% in FY13 from 61% in FY12.

Company's double digit net margins (10.3% for FY13 on consolidated financials and 11.2% on standalone financials) are very healthy on a peer comparison, which stands below 5% for the industry. For FY13, consolidated EPS stood at Rs. 36.2, of which Rs. 1.50 was declared as dividend.

For Q1FY14, company has published standalone financial performance, with revenue of Rs. 816 crore and PAT of Rs. 102 crore. Thanks to raw material cost falling to 52% of sales, EBITDA margin expanded to a whopping 24%. Net margin stood at 12.6% and EPS at Rs. 10.6.

The depreciating rupee (against USD and EUR) only acted as ‘fuel to the fire' with average USD/INR exchange rate being 55.7 in the April-June 2013 quarter, as the decline started post mid-May (average rate in FY13 stood at 54.3). For the current quarter, the average USD/INR rate till date has been at 60.5, which just goes to how positive the Q2FY14 margins are likely to be.

Company's equity is only Rs. 19.33 crore (face value Rs. 2 each), with book value of close to Rs. 149 (31st March 2013). As of 30th June 2013, promoters' stake is 58.30%, while domestic and foreign institutional investors hold 30.28%, predominantly by mutual funds (HDFC holds 8.59% through 4 of its funds). Balance, approximately 11.42% stake is held by about 10,000 public shareholders, resulting in low public float for the stock.

For FY14, company has guided sales of 1.45-1.50 lakh MTPA, which leads to expected topline and EPS of close to Rs. 4,000 crore and Rs. 42.50 respectively. This discounts the current share price by PE multiple of 5.0x, while on historic basis, share is ruling at PE of 5.9x.

Larger peers such as MRF and Apollo are ruling at PE of 9.5x and 5.1x respectively, JK and Ceat are ruling in the range of 2-3x, while Goodyear trades at 13x due to the underlying delisting hopes. But the company is best placed in the industry on account of its strong brand, enviable market share, export-oriented geographic mix, niche product portfolio, consistent growth in financial performance coupled with on-going expansion.

In April 2013, PE giant KKR acquired 90% stake in Allianz Tyres from Warburg Pincus at EV/Sales of about 1.3x, in a deal reported to be worth US $ 500 million. Allianz Tyres, acquired by former CEO of Balkrishna Industries Yogesh Mahansaria in 2007, is similar to Balkrishna, as both cater to exports and OHT segment. Balkrishna's EV/Sales on FY13 financial is 1.15x, while based on FY14 expected sales, it is 0.97x. Thus, both on transaction and trading multiples, the stock valuation is favourable.

Currently, price has correctly sharply, which is a good entry point. 

Thus, share at 212 is recommended for a buy, as it can move to 260 in next 6 months.

Disclosure: No holding in the stock

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