Balkrishna Industries – Not just any regular tyre company

Its logical not to go for tyre companies as long term investment as the business model is not very attractive cause:

1. No competitive edge hence no pricing power and high competition

2. ROCE are low

This is where Balkrishna Industry (BKT) stands out. This company has had a spectacular track record of:

1. Growing at 30.47% CAGR for last 11 years!!! Yes, the company had a turnover of just 98 Cr in 1999 and last year, the company was able to post a turnover of 1407 Cr.

2. Net profits have also grown at the same pace.

3. ROCE has on average remained in the range of 20-25% for last 5 years.

4. Consistent healthy margins

5. Good dividend pay-out.

WHY is the the difference between Balkrishna Ind and other tyre cos so huge?? Reasons:

BKT operates in the OHT (Off Highway tyres) segment i.e.. the tyres find application in the agricultural and construction equipment segments. BKT exports 90% of its production to developed countries and 75% of the sales are to the replacement market.

Globally this industry is leaded by Bridgestone, Good year and Michelin…and as this business involves high customisation and labour, these global companies are unable to maintain their competitiveness. BKT has been able to provide the quality at 30% cheaper prices and hence is gradually gaining market share. As of now, BKT has a market share of 2-3% and the company aims to increase the market share to double digits in next 5 years.

The company has 1900 SKUs – one of the highest in the industry and the company claims to have an expertise in developing the new SKUs in-house in the least time.

Other positives:

During the crisis last year, BKT prudently held back the planned expansions to better the balance sheet. Result – the interest cost has reduced majorly and so has the debt equity ratio. The cash flows are coming in.

Going ahead, I feel the company will be back on growth to gain market share.

At CMP of 590 and declines, the company is available at attractive valuations for a long term investment perspective.

20 thoughts on “Balkrishna Industries – Not just any regular tyre company”

  1. Hi
    maybe because you said it is a good buy for “Long term” I assumed that currently it is fairly priced. My Mistake

    You suggested it at Rs 590 it is currently trading at Rs 640; even at these levels it is undervalued. the EPS for first three quarters is already 75, if the EPS for the entire year is around 100 it is available at P/E of 6.5!

    Not bad for a company with a CAGR of 26% on revenue over the past 4 years.

  2. Hi
    maybe because you said it is a good buy for “Long term” I assumed that currently it is fairly priced. My Mistake

    You suggested it at Rs 590 it is currently trading at Rs 640; even at these levels it is undervalued. the EPS for first three quarters is already 75, if the EPS for the entire year is around 100 it is available at P/E of 6.5!

    Not bad for a company with a CAGR of 26% on revenue over the past 4 years.

  3. Hi,

    Good to see your comment on Balkrishna. Yes, it remains to be one of the best long term bet.

    Its hard to find cos growing at 30% CAGR for almost 10-11 years and trade at less than 8 PE 🙂

    Keep reading more on it…I’m sure you will find a lot of value in it.

    Regards,

  4. Hi,

    Good to see your comment on Balkrishna. Yes, it remains to be one of the best long term bet.

    Its hard to find cos growing at 30% CAGR for almost 10-11 years and trade at less than 8 PE 🙂

    Keep reading more on it…I’m sure you will find a lot of value in it.

    Regards,

  5. Hi don't you think the high rubber prices (you mentioned in Harrison malayalam) will prove to be a negative for balkrishna in the short run.

  6. The high rubber prices have already impacted most of the tyre cos by now. As you might have noticed that NP of MRF has halved while Balkrishna has been able to post excellent margins of 20%+ despite high rubber prices due to the advantageous business model the co is present in.

  7. Are Balkrishna and Gujarat Reclaimed Rubber Products competitors? I am having difficulty to trying to comparing them.

  8. No they are not competitors. BKT is into making of OTR tyres which find application in tractors and construction equipments etc. While Gujarat Reclaim is maker of reclaimed rubber – which is a cheaper substitute to natural rubber.

  9. Hello, I have been tracking TVS Srichakra since 2-3 months.. I find TVS Sri to be better coz of :
    * Ethical Management
    * Capacity expansion was done in 2009-10, so currently it operates at just 42%-45% capacity. Hence, it gives a great opportunity to cater to the rising demand for tyres. (This is mentioned in AR2009-10.
    * TVS Srichakra has good networks in South America, Europe n Africa. Demand from S. America n Africa has started since 3rd Quarter of 2009-10 n demand from Europe will kick start in 2010-11, as the the inventory levels in Europe has come down.
    * Operating n NP margins of TVS Sri is much better than other tyre companies even during the 1st two quarters of 2010-11, wherein al have suffered due to high Natural Rubber prices. This may be due to better pricing power.
    * TVS Sri would now be concentrating more on After Market, as this segment offers much better opportunities in coming 3-4 years..

    ***COMMENTS FROM EVERYONE ARE WELCOME***
    Lets take it further…

    Happy investing… 🙂

    1. Hi Jigar,

      I had a brief look at TVS Srichakra and yes the company has started doing quite well since last 2 years. Earlier the operating margins were low and NP was stagnant for quite some time. What has been the reason for this major improvement in operating margin?

      Now compare TVS Srichakra with Balkrishna and you will agree that BKT is a better pick…reasons:
      1. Operating margins for BKT are in the range of 20-25% as compared to approx 10% for TVS
      2. NP margins of BKT is about 10% as against 4% for TVS
      3. Both cos have been growing at about 23% CAGR for last 5 years and have strong growth plans ahead. BKT is in process of doubling its capacity and turnover by 2014.
      4. BKT has a much consistent and better ROCE at above 20%.
      5. BKT is trading at a P/BV of 1.8 vs P/BV of 2.42 of TVS. PE multiple based on TTM earning for BKT is 5.85 while for TVS is 6.66

      Jigar, its not that TVS Srichakra won’t do well or something like that…its just that I feel BKT has more value as it is available at similar valuations despite better margins, growth, ROCE etc.

      Views Invited

      Regards,

    2. Hi Jigar,

      Since your post, we have been tracking TVS Srichakra also. Indeed the co has been doing very well.

      What would be the reasons for such strong growth in the co? I don’t think the co can get such growth rates just from 2-3 wheelers in domestic market.

      Please share your views.

      Regards,

  10. Hi Ayush,

    It’s an year since you recommended BKT.The price has fallen from your mentioned CMP of Rs.590 to Rs.132. What is the reason? Was there a stock split and what ratio?

    Would you recommend a buy on BKT at Rs.132? Any additional comments on investing in this company is appreciated.

    1. Hi Madhav,

      The company had declared a stock split in the ratio of 1:5. Hence CMP of 132 is equal to Rs 660 earlier.

      If you look at the past track record of the company and the aggressive expansion plans ahead, the stock does offer opportunity for long term investors. For very short term the negative remains – High rubber prices.

      Regards,

    1. Primary Access TOLL NUMBER for participants
      India: (+91 22) 3065 0143*/ 6629 0365*

      Local Access NUMBER for participantsDelhi, Bangalore, Chennai, Hyderabad, Kolkata: 6000 1221#Gurgaon (NCR), Bangalore, Kolkata, Cochin, Pune, Lucknow, Ahmedabad, Chandigarh: 3940 3977*

        1. The concall was good…the co seems to be doing well and they are confident of maintaining 25% growth rates. The growth should start coming from second half of FY13

Leave a Reply

Your email address will not be published. Required fields are marked *