The company’s superior margins, coupled with efforts to better the product mix, bodes well.

Investors with an appetite for risk and a two-to-three year perspective can buy the stock of Balkrishna Industries (BKT), a tyre manufacturer. While concerns about a slowdown in the domestic auto industry have been weighing on most stocks in the auto space, BKT appears shielded.

For one, the company focuses on selling tyres in the export market, from which it derives about 90 per cent of its revenues. Hence, BKT is one of the few companies that will benefit from a depreciating rupee.

Two, the company specialises in the sale of tyres for vehicles used in agriculture, construction and mining industries (called OHT or off-highways tyres), making it a niche play. It has about 5 per cent market share globally in this business, with a network in over 100 countries.

Its superior margins coupled with efforts to better the product mix add in BKT’s favour.

At the current market price of Rs 253, the stock trades at a price-to-earnings ratio of nine times its trailing 12-month earnings.

Given the unique business model of the company, there are no comparable peers in the listed space. However, BKT’s valuation is lower than bigger competitors in the global markets such as Bridgestone, which trades at 14 times.

Global play

Agricultural tyres form about 65 per cent of the total sales (in volume terms) for BKT. Demand from big and mechanised farms and the use of larger sized farm-equipment in its key markets in Europe and the Americas are the main growth drivers. In FY12, the company’s top line grew by 48 per cent to Rs 2,785 crore.

About 20 per cent of this growth in sales came from volume growth and the rest from prices/product mix. Profits grew by 45 per cent to Rs 268 crore.

A supporting factor for the growth, despite the slowdown in these continents, is the company’s focus on the tyre replacement markets, rather than on direct sale to manufacturers.

Going forward, a few factors will continue to favour the company. One, its efforts to de-risk by reducing exposures to Europe. From over 60 per cent of the total volumes a few years ago, the share of Europe has already come down to 45 per cent now.

While Asia and the rest of the world currently bring in 30 per cent of the total volumes, the company is making further inroads into the CIS countries and Russia. Demand from emerging economies in this area and from Latin America is expected to keep volume growth and revenues trickling in.

Better product mix

A second factor is the effort to improve its product mix by focusing on high-value industrial tyres, used in construction and mining.

While this forms only about 30-35 per cent of the total revenues now, the company expects it to be evenly spread with agricultural tyres in two-three years from now. This will also help BKT penetrate further into existing and new markets and improve its market share.

This is because, globally, industrial tyres constitute two-thirds of the demand for OHTs, while agriculture tyres form only one-third. Towards this end, the company is dedicating about 25 per cent of capacity in its upcoming facility at Bhuj, for specialty industrial tyres.

Apart from this, the new plant will also have capacities to manufacture radial OHTs, which would provide further boost to realisations. While this plant will start operations by September 2012, it is expected to reach full capacity utilisation by FY15.

Superior margins

Unlike tyre manufacturers focused on the domestic markets, BKT enjoys much higher margins. For the year ended March 2012, operating margins came at around 18 per cent and has remained at these levels in the past too.

This advantage comes from its focus on exports, where margins are higher than domestic sales.

This apart, BKT caters to the tyre replacement markets abroad, which again gives them more pricing power.

Besides, these exports act as a natural shield against any escalation in import prices of raw materials such as natural rubber and other crude oil derivatives. . A softening of rubber prices in the last few months may help margins move up further.

(This article was published on June 30, 2012)
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