Balkrishna Inds Initial (Key Note)
Balkrishna Inds Initial (Key Note)
Balkrishna Inds Initial (Key Note)
In Q2 FY23, rubber prices traded in a range of ~Rs. 155-160 per KG. It is Non- 9.94 16.24 15.87
Institutional
expected that rubber prices will soften due to excess supply in the
international market, which will lead to the normalization of gross margins of BKT vs Nifty
BKT around ~53-55%. In Q2 FY23 gross margins were ~50%.
Industry Overview
The global tyre industry is worth $180Bn, of which the OHT segment
commands a 10% share ($18Bn). Within OHT, 63% are Off-The-Road (OTR)
tyres (such as construction and mining equipment tyres), 33% are
Agricultural tyres (such as tractor & harvester tyres), and rest are others
(such as all-terrain motorcycle tyres). As per Market Research Future, the
OHT industry is expected to grow at ~5% CAGR till 2030.
OTR
~6%
OHT
10%
Agricultural
Passenger Vehicle Tyres ~3%
55% Others
~1%
Source: Company, Industry Data, Keynote Capitals Estimates
1) Mixing: The first step in the manufacturing process is to mix the raw
materials, such as rubber, carbon black, and other chemicals, to create
the tire compound.
16%
48%
27%
3) Tyre building: The green tire is then mounted onto a building drum,
where it is shaped and reinforced with steel or fabric to give it strength and
durability.
4) Curing: The tire is then cured in a press under heat and pressure to
harden the rubber and give it its final shape.
Industry Dynamics
OHT are highly technical and capital-intensive segment, also known as “large
varieties and low volume” segment. Credible players are required to maintain
a large number of SKUs to meet the diverse needs of customers globally and
provide pre-and post-sales customer support services. These aspects create
high entry barriers for a new player to enter the market. These are the
significant factor that explains the absence of a dominant Chinese player in the
industry.
The global OHT industry has witnessed multiple Mergers and Acquisitions
(M&A) due to the inability of companies to compete with low-cost producers.
Currently, a few tyre manufacturers like Michelin, Bridgestone, Pirelli,
Yokohama, and others dominate the industry. These players have been
acquiring regional players to increase their penetration in the market as well
as boost their presence in this segment. A few recent acquisitions include
Yokohama Rubber Company acquired Alliance Tyre Group for $1.2Bn in 2016,
and Michelin acquired Casmo for $1.36Bn in 2018.
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Balkrishna Industries Limited | Initiating Coverage Report
Company Background
Balkrishna Industries Limited (BKT) commenced its business as a 2/3-
wheeler tyre manufacturer. In 1995, Management decided to shift their
focus to specialized tyres (OHT) business. This acted like a pivotal point for
the company. Currently, BKT is one of the world’s leading manufacturers of
OHT tyres with 6% global market share with sales and distribution reach
across 160 countries.
Journey of BKT
Production of ATV,
1987 Started production of 2002 Gardening, and 2004
OHT earthmoving tyres
Commercialized new
replacement plant at Waluj
Announced Capex at Waluj 2020 (Waluj 2) with a capacity of 2022
and Bhuj 30,000 MTPA
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Balkrishna Industries Limited | Initiating Coverage Report
Business Model
BKT's primary product line includes specialty tyres, commonly referred to as
OHT. In 2016, the Company made the strategic decision to integrate backward Primarily Carbon Black is utilised captively
and begin producing a vital raw material known as 'Carbon Black'. This not only and balance is sold in open market
alleviated the issues of scarcity that existed in the market at that time and
ensured the standardization of raw materials available to the company but Steam generated in manufacturing carbon
black is re-used in manufacturing tyres
also resulted in cost savings in terms of transportation and power.
16%
48%
27%
Customers
BKT has a wide range of customers across various industries, including
agriculture, construction, mining, and earthmoving. They are also a supplier
for Original Equipment Manufacturers (OEMs) in the off-highway vehicle
industry. Some of the major customers of BKT are John Deere, Caterpillar,
Case New Holland, JCB, and Kubota.
BKT is increasing its focus on OTR tyres. This change in strategy is aimed at
reducing the volatility in revenue and creating a more consistent demand
for BKT's products.
In order to improve its EBITDA margin, BKT is increasing its focus towards
large radial tyres, which has ~1-3% higher EBITDA margin. Recently, the
Company has started a 5,000 MT manufacturing unit in Bhuj for
manufacturing ultra-large radial tyres.
Agricultural Tyre
OTR Tyre
6
Source: Company, Keynote Capitals Ltd.
Balkrishna Industries Limited | Initiating Coverage Report
Plant Location
BKT’s manufacturing plants are state-of-the-art facilities equipped with the Europe, America, Australasia, and India
latest technology and machinery. In addition to this, BKT also has a research are the primary markets for BKT
and development facility in India where they work on developing new
products and testing & improving existing ones.
Capacity Utilization
Over the years, the Company has emphasized on improving its capacity
utilization. In the last 4 years, BKT grew its volume at a CAGR of ~9.7%, while
the OHT industry experienced a lean period. As a result of sweating assets
better, BKT has improved its capacity utilization and has also gained market
share.
86%
100%
2,88,795
90%
3,60,000
76%
70% 67%
80%
2,27,131
66% 3,35,000 2,11,261
3,40,000
70%
1,99,213 2,01,760
60%
3,20,000
3,00,000
40%
30%
2,80,000
20%
2,60,000
10%
2,40,000 0%
2018 2019 2020 2021 2022 2018 2019 2020 2021 2022
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Balkrishna Industries Limited | Initiating Coverage Report
Expansion Plans
Expansion at Waluj, Maharashtra: The Company will spend Rs. 3.5Bn for an
additional capacity of 25,000 MT and modernize its old plant. The plant is
expected to ramp up its production in H2 FY23.
Carbon Black & Captive Power Plant: Considering the overall demand/supply
outlook as well as internal demand for Carbon Black, the Company has
embarked to enhance the installed achievable capacity of 1,15,000 MT to
2,00,000 MT, including 30,000 MT of high-value advanced Carbon Black
material. The Company will spend Rs. 6.5Bn for the additional capacity. The
plant is expected to commission in Q4 FY23
Market Share
The global OHT industry is valued at $18Bn (Rs. 1,440Bn). Within the OHT
industry, 63% is attributed to off-the-road tyres, 33% to agricultural tyres, and
4% to other segments. BKT holds a market share of approximately 6% in the
global OHT industry.
11-12%
~6%
~5%
~3%
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Balkrishna Industries Limited | Initiating Coverage Report
Revenue Segmentation
Geography-wise: Historically, a large portion of BKT's sales volume has
originated from Europe. However, the Company is now shifting its focus to
America and India in order to diversify its customer base and reduce reliance
on the European market.
Segment-wise: A large portion of BKT's sales volume has been generated from
agricultural tyres, which have a replacement cycle of 4 years. However, the
company is now focusing on expanding its market share in the OTR tyre
market, which is ~63% of OHT industry and has a shorter replacement cycle of
1-2 years.
28%
18%
54%
69%
17%
31%
66%
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Balkrishna Industries Limited | Initiating Coverage Report
Unit Economics
Though BKT is gradually improving its Gross Profit per KG, EBITDA per KG has
seen a substantial dip in H1 FY23. The primary cause for this is an increase in
freight and transportation expenses. However, it is anticipated that with the
decrease in rubber prices and freight expenses, the company will be able to
maintain an EBITDA of Rs. 70 per KG post-FY23.
Significantly low employee cost is the primary reason for higher EBITDA Margins
43-45%
30-35%
26-28%
24-26% 24-26%
22-24%
17-19%
6-7%
BKT Michelin
Source: Company, Michelin, Keynote Capitals Ltd.
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Balkrishna Industries Limited | Initiating Coverage Report
- ATPL was run by the former CEO of BKT, Mr. Yogesh Mahansaria (who was Currently, Mr. Yogesh Mahansaria runs
his own company (Mahansaria Tyres)
ATPL’s CEO till 2017)
On all parameters, BKT is facing fierce competition from ATPL. From FY17-21,
BKT grew its revenue at a CAGR of ~11%, whereas ATPL grew it at ~19%. Both
Companies have similar EBITDA margin profiles. Due to capital intensive
nature of business, both the companies have a stable asset turnover of ~0.8-1x
and D/E of less than 0.5, but the ROE% of ATPL is better than BKT.
BKT ATPL
100
30% 31% 35% 100
31% 35%
90 90
27% 28%
25% 25%
30% 30%
80 25% 24% 80
24%
25% 25%
58
70 70
60 52 48 20%
60
20%
45 36
38
50 50
31
15% 15%
28
40 40
30
10%
30
18 22 10%
20 20
5% 5%
10 10
- 0% 0 0%
FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21
BKT ATPL
32%
27% 25% 23%
23% 22%
1.5 1.5
1.3 1.3
20% 20%
1 1
0.9
1.1 1.1
0.7 0%
0.9
0%
0.7 0.7
-10% -10%
0.5 0.5
-20% -20%
0.3 0.3
-30% -30%
FY17 FY18 FY19 FY20 FY21 FY17 FY18 FY19 FY20 FY21
Total Asset Turnover (x) ROE % Total Asset Turnover (x) ROE %
D/E
0.4
0.3 0.3 0.3
0.2 0.2 0.2 0.2 0.2 0.2
Opportunities
Improving Brand Visibility
BKT has established a robust brand identity through various marketing efforts
across different regions. Over the years, the Company has spent ~3-4% of its
revenue on advertising and promotional activities. BKT has consistently
promoted global sporting events. BKT is the official and exclusive tyre
manufacturer for 'MONSTER JAM', a premier sporting event in America.
Additionally, to increase market share in the domestic market, the Company
has employed a similar sports-oriented marketing strategy.
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Balkrishna Industries Limited | Initiating Coverage Report
208
190
177 171
166 160
FY06 FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18 FY19 FY20 FY21 FY22 Q2
FY23
Source: Rubber Board, Management commentary, Keynote Capitals
Ltd.
Carbon Black & Captive Power Plant: Considering the overall demand/supply
outlook as well as internal demand for Carbon Black, the Company has
embarked to enhance the installed achievable capacity of 1,15,000 MT to
2,00,000 MT, including 30,000 MT of high-value advanced Carbon Black
material. The Company will spend Rs. 6.5Bn for the additional capacity. The
plant is expected to commission in Q4 FY23
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Balkrishna Industries Limited | Initiating Coverage Report
Challenges
Inability to pass on freight cost
From a normalized level of ~5-6% of revenue, freight cost has jumped to
~14%. BKT is unable to pass on the entire cost to its customers leading to an
impact on EBITDA margins. Management is expecting that freight costs will
soften in the near future.
14%
11%
5% 5% 5%
4%
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Balkrishna Industries Limited | Initiating Coverage Report
Income Statement Cash Flow
Y/E Mar, Rs. Mn FY21 FY22 FY23E FY24E FY25E Y/E Mar, Rs. Mn FY21 FY22 FY23E FY24E FY25E
Net Sales 57,832 82,951 99,959 1,03,189 1,11,647 Pre-tax profit 15,549 19,822 17,214 21,471 25,093
Growth % 43% 21% 3% 8%
Adjustments 2,602 2,127 279 2,778 3,376
Raw Material Expenses 23,110 37,778 48,980 47,467 50,241
Change in Working Capital -1,251 -8,289 -1,827 359 -1,077
Employee Expenses 3,709 4,301 4,498 5,675 6,141
Other Expenses 12,905 20,783 28,988 25,797 26,795 Total Tax Paid -3,510 -4,579 -4,304 -5,368 -6,273
EBITDA 18,108 20,090 17,493 24,249 28,470 Cash flow from operating
Activities 13,390 9,080 11,362 19,241 21,120
Growth % 11% -13% 39% 17%
Margin% 31% 24% 18% 24% 26% Net Capital Expenditure -9,232 -15,889 -13,994 -8,255 -6,699
Depreciation 4,163 4,554 5,395 6,644 7,242 Change in investments -2,891 -3,516 0 0 0
EBIT 13,945 15,536 12,098 17,605 21,227 Other investing activities 388 431 5,250 4,000 4,000
Growth % 11% -22% 46% 21% Cash flow from investing
Margin% 24% 19% 12% 17% 19% activities -11,734 -18,975 -8,744 -4,255 -2,699
Interest Paid 118 94 134 134 134 Equity raised / (repaid) 0 0 0 0 0
Other Income & exceptional 1,722 4,379 5,250 4,000 4,000 Debt raised / (repaid) 857 15,498 3,000 0 0
PBT 15,549 19,822 17,214 21,471 25,093 Dividend (incl. tax) -2,316 -5,603 -5,552 -5,314 -5,081
Tax 3,774 5,468 4,304 5,368 6,273 Other financing activities -122 -91 -134 -134 -134
PAT 11,775 14,354 12,911 16,103 18,820 Cash flow from financing
Others (Minorities, activities -1,581 9,804 -2,686 -5,448 -5,215
Associates) 0 0 0 0 0 Net Change in cash 76 -91 -68 9,537 13,206
Net Profit 11,775 14,354 12,911 16,103 18,820
Growth % 22% -10% 25% 17%
Margin% 20% 17% 13% 16% 17%
Valuation Ratios
Shares (Mn) 193.3 193.3 193.3 193.3 193.3 FY21 FY22 FY23E FY24E FY25E
Per Share Data
EPS 60.92 74.26 66.78 83.30 97.35
EPS 61 74 67 83 97
Balance Sheet Growth % 22% -10% 25% 17%
Y/E Mar, Rs. Mn FY21 FY22 FY23E FY24E FY25E Book Value Per Share 310 359 397 453 524
Cash, Cash equivalents & Return Ratios
Bank 751 517 450 9,987 23,192
Return on Assets (%) 16% 15% 11% 13% 14%
Current Investments 3,920 6,845 6,845 6,845 6,845
Debtors 7,536 10,962 11,995 12,383 13,398 Return on Equity (%) 21% 22% 18% 20% 20%
Inventory 9,397 16,721 19,592 17,563 17,584 Return on Capital Employed (%) 19% 19% 13% 15% 15%
Short Term Loans & Advances 1,726 870 870 870 870 Turnover Ratios
Other Current Assets 1,461 3,027 3,027 3,027 3,027 Asset Turnover (x) 0.8 0.9 0.9 0.8 0.8
Total Current Assets 24,791 38,942 42,779 50,675 64,917 Sales / Gross Block (x) 1.1 1.4 1.4 1.2 1.2
Net Block & CWIP 42,258 52,778 61,377 62,988 62,445 Working Capital / Sales (x) 8% 7% 6% 10% 19%
Long Term Investments 10,256 12,122 12,122 12,122 12,122
Receivable Days 42 41 42 43 42
Other Non-current Assets 4,359 5,949 5,949 5,949 5,949
Inventory Days 123 126 135 143 128
Total Assets 81,665 1,09,790 1,22,226 1,31,733 1,45,431
Payable Days 72 60 66 78 66
Creditors 6,550 8,293 10,370 9,087 9,047 Working Capital Days 93 107 112 108 104
Provision 51 45 45 45 45 Liquidity Ratios
Short Term Borrowings 9,989 20,270 23,270 23,270 23,270 Current Ratio (x) 1.3 1.2 1.1 1.4 1.8
Other Current Liabilities 2,425 3,749 3,749 3,749 3,749 Interest Coverage Ratio (x) 133.2 213.0 129.5 161.3 188.3
Total Current Liabilities 19,015 32,356 37,434 36,151 36,111 Total Debt to Equity 0.2 0.4 0.4 0.3 0.3
Long Term Debt 15 5,010 5,010 5,010 5,010 Net Debt to Equity 0.2 0.4 0.4 0.2 0.1
Deferred Tax Liabilities 2,035 2,509 2,509 2,509 2,509
Valuation
Other Long Term Liabilities 602 584 584 584 584
PE (x) 27.7 28.8 32.8 26.3 22.5
Total Non Current Liabilities 2,651 8,103 8,103 8,103 8,103
Paid-up Capital 387 387 387 387 387 Earnings Yield (%) 4% 3% 3% 4% 4%
Reserves & Surplus 59,612 68,944 76,303 87,092 1,00,830 Price to Sales (x) 5.6 5.0 4.2 4.1 3.8
Shareholders' Equity 59,998 69,330 76,689 87,478 1,01,217 Price to Book (x) 5.4 6.0 5.5 4.8 4.2
Non Controlling Interest 0 0 0 0 0 EV/EBITDA (x) 18.5 21.8 25.6 18.5 15.8
Total Equity & Liabilities 81,665 1,09,790 1,22,226 1,31,733 1,45,431 EV/Sales (x) 5.8 5.3 4.5 4.3 4.0
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Balkrishna Industries Limited | Initiating Coverage Report
Particulars Estimates
Estimate Period FY24E
Revenue (Rs. Mn) 103,189
PAT (Rs. Mn) 16,103
PE 30
Market Capitalization 483,090
Fair Value per Share 2,499
Source: Keynote Capitals Ltd. estimates
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Balkrishna Industries Limited | Initiating Coverage Report
Rating Methodology
Rating Criteria
NEUTRAL Expected positive return of > 0% to < 10% over 1-year horizon
NOT RATED (NR)/UNDER REVIEW (UR)/COVERAGE SUSPENDED (CS) Not covered by Keynote Capitals Ltd./Rating & Fair value under
Review/Keynote Capitals Ltd. has suspended coverage
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Balkrishna Industries Limited | Initiating Coverage Report
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Date: 2023.01.23
MAROO 14:02:49 +05'30' 19
Balkrishna Industries Limited | Initiating Coverage Report
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