Balkrishna Industries

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PA Wealth Advisors Blog

SEBI REGISTERED INVESTM ENT ADVISORS

F R I DAY , J U LY 2 6 T H , 2 0 1 9 |

COMPANIES' RESEARCH FACTS

Balkirshna Industries:
A Global Tyre Giant
BY PA W E A LT H A DV I S O R S O N J U LY 1 1 , 2 0 1 9 • ( L E AV E A CO M M E N T )

(A) Introduction
Balkrishna Industries Ltd, popularly known as BKT is India’s largest off-highway tyre
manufacturer with the global presence. The company was founded by Mahabir Prasad
Poddar who also founded Siyaram Poddar group along with his brothers Dhara Prasad
Poddar & Ram Prasad Poddar.

Currently the company is being managed by the second and third generation; father-son
duo Mr Arvind Poddar & Mr Rajiv Poddar who work as the Chairman & Managing Director &
Joint Managing Director respectively.

Mr Arvind Poddar was inducted in the Tyre Industry Association (TIA) Hall of Fame at the
SEMA show in Las Vegas, USA in October 2018. Hall of Fame award is TIA’s highest honour &
most prestigious accolades of the tyre industry at a global level.

The promoter belongs to the Siyaram Poddar group. The group amicably realigned their
businesses in 2013 to carve up a smooth structure for the onset of the family’s third
generation. After the re-organisation in the businesses, Arvind Poddar continued with
Balkishna Industries while other businesses were divided among the other family members.

(B) Important historic events


1954- The Balkrishna group was established wherein a Cycle Tyre manufacturing facility was
setup.

1987- The company set up its first plant at Aurangabad for the manufacturing tyres of two
and three wheeler vehicles as well as for cars, jeeps and light trucks.

1995- The company started with the production of Off-Highway tyres for the international
markets.

2002- BKT acquired the Auto Tyre plant of Govind Rubber Ltd at Bhiwadi, Rajasthan. The
plant is being used for the manufacturing of radial tyres for agriculture along with those
conventional tyres for agriculture, earth moving & industrial sector.

2003- BKT started with the production of ATV, gardening and earth moving tyres.

2004- BKT entered radial Agrimax tyres segment. Also a plant for the production of tyre
moulds was commissioned in Dommbivali.

2005- The company in February set up its wholly-owned subsidiary ‘BKT (Europe) Ltd in UK
in order to market its products in the European market.

2005- In February, company expanded its production capacity in Bhiwadi & Waluj to 42,000
TPA and 18,000 TPA respectively. Further the company installed 5MW Wind-farm in
Rajasthan for captive usage.

2006- The production capacity at Bhiwadi plant further expanded by 3,000 TPA to 45,000 TPA.

2006- In August, BKT incorporated its wholly owned subsidiary ‘BKT Europoe Srl’ in Itlay.

2006- BKT launched plant in Chopanki for the production of all steel radial tyres for
Industrial & OTR sector.

2007- Company incorporated yet another overseas subsidiary ‘BKT Exim Ltd’ in January.
Later, Balkrishna Paper Mills & Balkrishna Synthetic Ltd were incorporated in the month of
March.

2009- The company achieved a significant milestone by crossing Rs 1,000 crore turnover.

2013- BKT opened a plant in Bhuj with a capacity of 120,000 tons per annum for Off-Highway
tyres catering to all segments.

2015- The company launched another plant in Bhuj.

2015- Demerged paper business into ‘Nirvikara Paper Mills Ltd’ which was later named as
‘Balkrishna Paper Mills Ltd’.

2019- The company at its ‘Bhuj’ facility started manufacturing large size 51″ diameter tyres.

2019- BKT completes Phase-I of setting up of Carbon Black plant at Bhuj with a capacity of
60,000 MTPA.

(C) Shareholding Pattern


As on 31st March 2019, the Promoters of BKT held 58.30% of the shares of the company
while the balance shareholding of 41.70% held by the Public. Amongst the public
shareholders, 26.49% stake is held by Institutions & 15.21% is held by the Non-Institutions.
Shareholders holding more than 1% capital (other than promoters):

(D) Revenue from operations


The revenue from operations of the company are from the business activity of
manufacturing & selling of tyres, which is the primary activity of the business.

On the basis of contribution by Subsidiaries


In FY19 the standalone entity earned a revenue of Rs 5,244.5 crore while the consolidated
revenue of the company was Rs 5,209.99 crore.

On the basis of geography


Large amount of sales of BKT are from exports to foreign countries, and this is why the
company enjoys a status of being a “Four Star Export House”. In FY19 on a consolidated
basis, the Exports contributed 82% of the revenue of the company while domestic sales
contributed 18% of the sales.

On the basis of application products


The tyres manufactured by the company are put to application in either Agricultural sector
or in other than Agricultural sector. While Agriculture is considered as Non-cyclical business,
but the non-agriculture sector is a cyclical business that comprises of Industrial, Mining and
it(non-agriculture sector) contributes 1/3 to the revenues of the company.

(E) Sales Volume


In FY19, the company achieved a sales volume growth of 6% and reported a sales volume of
211,261 MT as compared to 199,302 MT sales volume in the previous financial year. The sales
volume of the company can further be bifurcated on the following parameters:-

On the basis of application of products


61% of the sales volume comes from the agriculture segment, 36% from off highway (over
the road) and 3% from all terrain vehicles.

The growth rate of over the road (OTR) tyres category has been increasing and is beneficial
to the company owing to better realisations & margin earnings as compared to the
Agriculture tyres.

In the OTR tyre category, company supplies tyres for mining vehicles which are used in the
mining of Gold, Diamond, Iron & Coal mining.

On the basis of type of customers


BKT sells its tyres either to the OEM’s which form the B2B sales or to the final consumers for
meeting the replacement needs. For BKT, replacement market forms a major portion of its
sales as 71% of the sales are made to the final consumers. Further, owing to a large chunk of
sales in to the replacement market BKT is able to earn an EBITDA margin in the range of 25-
28%. 27% sales are attributed towards OEM market and 2% of the remaining are attributed
to the off-take segment.

(F) Raw Material


Raw-material forms the major portion which amounts to 47% of the Net sales. The main raw
material for the manufacturing of tyres is rubber both natural as well as synthetic rubber,
carbon black and Sulphur. Around 70% of the raw material of the company is imported from
foreign nations.

Synthetic rubber is in the form of polymers whereas natural rubber (in liquid latex form) is
mixed with certain acids that lead to the solidification of rubber which can then be squeezed
into sheets. Carbon Black is another constituent and is a fine, soft powder produced as a
result of incomplete combustion of crude oil or natural gas. Carbon Black is required in
different grades & particle sizes as it is used to customise the performance related
properties of tyres especially in giant tyres.

The company imports Carbon Black from different locations across the world and the
setting up of its new Carbon Black facility at its Bhuj plant shall be able to meet its
requirements in-house and might be able to earn better margins.

(G) Production Facilities


BKT’s tyres are currently manufactured in India at the company’s manufacturing sites in
Aurangabad, Bhiwadi & Chopanki. Further, the company has its mould production plant in
Dombivali (situated in North of Mumbai) as well as in Bhuj.

The Bhuj plant extends over an area of 120 hectares and is also home to the company’s R&D
centre as well as modern testing track.

(H) Production Capacities


The current capacity of the company has been listed below plant wise:
The company sold nearly 211,000 MT of tyres implying that the company is ~70% of capacity
utilisation.

(I) Products and their applications


BKT is involved in the manufacturing of specialised tyres that is the ‘Off Highway tyre
segment’ with application in Agriculture, Industrial, Construction, Earthmoving, Mining,
Port, Lawn, Garden & All-Terrain Vehicle tyres.

The Off Highway Tyre as a category is a low volume business, but the companies need to
maintain huge varieties of stocks in order to meet the diverse needs of its customers.
Further, while the Agriculture sub segment is non-cyclical business, the other segment
comprising of Industrial, Construction & Mining is cyclical in nature which depends on the
economic performance of the country. The products which are cyclical in nature contribute
nearly one-third to sales.

(J) Brands

(K) Clients
BKT is a preferred supplier to many OEM’s who use the tyres of BKT in their products. Some
of the major clients of the company include the following:

For Agriculture Tyres – New Holland Agriculture, John Deere , AGCO , Case IH , SAME Deutz
Fahr , CLAAS , Turk Traktor , Antonio Carraro, Kubota Tractor , Horsch , TAFE , Goldoni .

For Industrial Tyres – Terex, Wirtgen Group , Hamm AG , Ferrari , SAKAI.


For OTR Tyres – JCB, Greaves, CAT, Kalmar Cargotec

(L) Key Markets


Being technical product, the main markets of BKT’s product is in the developed nations of
US, UK, Europe, Australia, Japan, New Zealand etc.

The Exports form nearly 82% of the total revenues of the company. The company’s key
markets are of America & Europe wherein America accounts 17% of its sales, Europe 51% of
its sale while India accounts for 18% sales, the remaining sales of 14% are from the rest of
the world including Australia, Latin America, Middle East, Asian countries etc.

The company is getting good response for its products in the Australian market wherein
they are largely demanded for mining related activities. The company has recently entered
the geography of South America and is yet to explore the potential of the market. India is a
potential market for the company where it was not focusing earlier.

The company has started focusing lately and is able to get good response from the Indian
market but margins are lower as compared to the international markets.

(M) Market Share


The global market share of BKT on an overall basis was 5% in FY19. Breaking it down, BKT
had 8% market share in the agriculture tyre segment & ~2.5% share in the OTR segment.

The company’s India sales form just 18% of its total sales mix, also the company entered
quite late in the Indian market owing to which it owns a very little market share in India.

(N) Competitors
Balkrishna Industries competes with some of the World’s largest players apart from the
local competition in India.
(O) Product pricing
BKT prices its products in a way such that it is able to earn an EBITDA margin in the range of
25-28%. The BKT’s products have a price difference of 10-15% from its competitors. This
difference has reduced considerably from the past 3-4 years. The comparatively lower
pricing charged by BKT shall help it to gain further market share.

(P) Marketing Activities


BKT has roped in popular Bollywood icon Sunny Deol to be the brand ambassador of the
company. The company used to spent ~2.6% of its Net Sales on its branding & advertising
activities which has now increased to 4.16% of Net Sales in FY19.

The increase in advertising & branding expense is largely on account of company’s new
sponsorship activities in France, Italy and Australia’s sports events.

(Q) Competitive Advantage


The competitive advantage of the company is in the form of products offered at a lower
price in comparison to the competitors. Tyre manufacturing process is a labour intensive
process but the presence of BKT in Indian locations with access to cheaper labour allows it
to earn handsome margins.

But the company’s decision of setting up a green field plant in the US went against it, when
owing to the loss of access to cheaper labour in the US, major brokerage houses
downgraded the ratings of Balkrishna Industries. This is because the brokerage houses feel
that additional capacities in foreign markets would increase the labour cost for the company
and thus reduce its return ratios.

(R) Forex
BKT owing to the large exports made by it remains overall positive on the foreign exchange
income. In FY19 it earned Rs 4,152 crore of foreign exchange while had on outflow of Rs
2,815 crore.

The company maintains hedge policies owing to huge exposure to foreign currencies. The
imports of the raw material items are made in the US Dollar and the company does not
hedge as it enjoys a natural cover (given revenue earnings in US dollars). It hedges Euro
currency largely, for the financial year 2020 company plans to hedge Euro around Rs 80
(which is in line with the FY19 Euro hedge rate in the range of Rs 79-80).

(S) Production Capacities Expansion


Plans
The company has embarked on a spree of capital expansion projects which are strategic in
nature. The said capex shall not bring any breakthrough improvement in the capacities but
rather help the company to be more backwardly integrated. Company annually spends ~Rs
250 crore on the maintenance of its plant & machinery.

The detail of the on-going capex plans along with the future capex plans of the company are
mentioned below:

1. In FY18 BKT had announced the Carbon Project, wherein the company would setup a
Carbon Black facility with a capacity of 60,000 MTPA at its Bhuj plant. In FY19, the Board
of Directors further revised the plan and approved setting up of additional capacity of
80,000 MTPA. For the total capacity of 140,000 MTPA an estimated cost of Rs 425 crore
has been earmarked.
2. In June 2019, BKT had finished setting up of the first phase of 60,000 MTPA capacity with
a cost outlay of ~ Rs 175 crore and began with the trial productions. The Phase-II of the
Carbon Project is expected to be complete by the end of FY20. The Carbon project at its
full capacity of 140,000 MTPA shall bring about an improvement in EBITDA margin by
~100-125 bps but at the current capacity of 60,000 MTPA it is expected to bring ~50-60
bps improvement in the EBITDA margin. As per Rajiv Poddar (Joint MD of BKT) 50% of
the Carbon Black capacity will be used for the tyre manufacturing process the balance
50% shall be sold in the market.
3. The company in order to meet demand in the US markets has approved setting up of
green field plant in the United States with a capacity of 20,000 MTPA through its US’s
wholly owned subsidiary. The estimated capex amount will be up to USD 100 million and
shall be funded through a mix of debt & equity. The company like its earlier expansion
will resort to foreign currency borrowing. The company has yet not been able to finalise
the location and in case if the location takes further time the capex shall spill over to
FY22.
4. The company is shifting its Waluj plant to a new location which is within 5km of the
existing plant. The Waluj plant was established by the company in 1987 and has grown
very old, the new facility will have a co-generation plant, mixing plant and an in-house
warehousing facility for storing raw-material and finished goods. The plant would
require funding of Rs 500 crore.
5. At its Bhuj plant, the company is currently manufacturing All steel OTR Radial tyres upto
49” and in order to extend product category from 51” to 57”, it is setting up additional
facility at an expected cost of Rs 500 crores. The facility will also include an additional
mixing line as well as a warehouse.
6. The company’s Europe subsidiary is constructing a small warehouse in Italy, the said
facility is going to be on long term lease. With the onset of this facility the company
would be able to bring office & warehouse at one location & thus operate under one
roof.
(T) Company’s focus areas
The management of BKT has circled few focus areas which are of utmost importance for the
growth of the company in the coming times. These areas are of:

Expanding the market reach of the company by penetrating deeper into the existing
Sales channels and at the same time improving position in the replacement as well as
the OEM segment.

A specific focus market is the U.S., wherein the company wants to improve its market
share by not only dispatching more from India but also manufacturing from USA plant.

Further, the company also wants to work on its distribution channel in India.

Expansion of the product portfolio so that the company is able to add large sized tyres
and offer more variety to its clients & customers.

Lastly, the company has a mission to attain a capacity utilisation of 100% at its ‘Bhuj’
plant in the coming years.

In an interview in January 2019, Arvind Poddar (Chairman & MD of BKT) said that the capex
plans of the company are targeted towards achieving a sales volume of more than 2,70,000
MT of tyre by 2020 so as to attain a global market share of 10% by 2025. Although the target
seems to be too inflated given the current macro-economic conditions and the
management guidance of 3-5% sales volume growth in FY20.

(U) Opportunities & Threats


Opportunities
Scope for OTR segment- Off-highway tyres (OHT) are most commonly employed in
vehicles used in off the road (OTR) applications, such as construction, mining and
industries but the company derives only 36% from this segment. But over the years the
company has been introducing more & more SKUs in order to improve its sales in this
segment, this is because the realisations as well as the margins both are better than the
agriculture segment.

Commissioning of the Carbon Black facility- The commercial production of Carbon


Black by the company at its Bhuj plant will help it to become more backwardly
integrated. The company will be able to reduce its dependence on the imports of carbon
black and is expected to make savings of ~50-60 bps in its operating costs. But with the
commissioning of full facility with a capacity of 140,000 MTPA the savings shall range
within 100-125 bps.

Scope of growth in India- The company had introduced the agriculture tyres in India
just 3 years back and has received a phenomenal response from the Indian market. Due
to this the company finds sufficient headroom for growth in India. Even in challenging
environment the company expects to achieve a sales growth of 10-12%.

Strong presence in the Replacement market- The company has a strong hold in the
international replacement markets and with a slowdown in the new automobile &
equipment production, company shall remain largely unaffected. As per the
management of the company while OHT industry is going to de-grow or show a muted
growth, the company is expected to perform better than the industry.

Threats
Reduced demand for new Agriculture Equipment- Due to the drought & heat wave in
the European nations and a subsequent crop failure, the demand for new tractors and
other agri equipment is expected to decline. Given Europe is the biggest market for
Balkrishna Industries & agriculture is the largest segment in which the company might
face risk in meeting its growth targets.

USA Plant- The competitive advantage of Balkrishna Industries is its ability to control
labour cost in an otherwise labour intensive manufacturing process. The company had
announced in September 2018 a capacity plan for meeting sales in the US markets. The
capacity plan would although help company to improve its market share but the
company might ruin its return ratios given expensive labour in the US markets.

Raw material price volatility- The main raw material of Balkrishna Inustries is Natural
rubber which being a commodity is susceptible to price volatility. The tyre
manufacturing process also requires a large amount of crude derivatives whose prices
again are quite volatile. 70% of the company’s raw material being imported also adds
foreign exchange risk for the company.

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References: Annual Reports, News Publications, Corporate Announcements,


Management Discussions, Analyst Meets & Management Interviews.

Disclaimer: The report only represents personal opinions and views of the
author. No part of the report should be considered as recommendation for
buying/selling any stock. The report & references mentioned are only for the
information of the readers about the industry stated.

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