EQUITY RESEARCH: BALKRISHNA INDUSTRIES LIMITED

Balkrishna Industries (BKT) is the leading producer of off-highway tyres. BKT is present in specialized markets such as turf care applications, agricultural, construction, industrial, earthmoving, port, and cross-ply & radial construction.

BALKRISHNA INDUSTRIES LIMITED

ABOUT

The leading producer of off-highway tyres is Balkrishna Industries (BKT). BKT is present in specialized markets such as turf care applications, agricultural, construction, industrial, earthmoving, port, and cross-ply & radial construction. With a 4%–5% market share in FY22, the firm has grown to become a major player in the off-highway tyre sector globally.

The business offers a wide variety of products and sells them in more than 160 nations. Currently, the corporation has one domestically and four totally owned subsidiaries abroad (WOS). BKT Tires Limited is the local WOS, while the international WOS are BKT Europe S.R.L., BKT USA Inc., BKT Tires (Canada) Inc., and BKT Exim US, Inc. They also have a lower-level company, BKT Tires Inc., situated in the USA, and a wholly owned subsidiary of BKT Exim US, Inc.

In India, they operate five tyre production facilities: two in Aurangabad, two in Alwar, and one in Kutch. Additionally, it owns one mold manufacturing facility in Thane, one wind farm in Jaisalmer, and one carbon black production facility in Kutch. Currently, the corporation has 3,200 or more stock-keeping units.

SHAREHOLDING PATTERN

The promoter organization owns 58.29% of the company. The percentage of FII shares fell from 14.3% in Q1 FY23 to 12.96% in Q2 FY23. As of Q1 FY23, DII's ownership was up from 11.17%. in Q2 FY23, reaching 18.91%. The non-institutional ownership dropped from 9.83% in Q2 FY23 to 16.24% in Q1 FY23.

MANAGEMENT

The management wants to increase the market share from 5.5% to 10% globally. By making strategic efforts to improve market penetration in the US, increase product portfolio, strengthen Indian market distribution channels, and boost utilization rates, they would continue to build their capacities to fulfill this purpose. Additionally, they will keep increasing their brand recognition by collaborating with numerous international sporting events. It is upbeat about the rising tire demand, especially in the OHT market. The recovery in demand is correlated with increased output and investment in advanced economies, which are anticipated to surpass pre-pandemic levels and increase volume in FY23.

SECTOR POTENTIAL

AUTO INDUSTRY

In FY22, the automobile industry expanded by 27% YoY. Due to pent-up demand, sales increased across all categories, including personal cars, trucks, two and three-wheelers, and tractors, and they neared pre-pandemic levels. The automobile sector faced difficulties in the second half of the year despite a recovery in demand because of a lack of semiconductors and an increase in steel prices. The Indian automotive market, according to Moody's India, is anticipated to grow by 10% in FY23 as a result of robust underlying demand that reflects the global economic recovery and a shift in consumer choice from public transit to personal vehicles.

TYRE INDUSTRY

India is the world's fourth-largest market for tyres, behind China, Europe, and the US Radicalization of tyres has been increasing recently, particularly in buses and trucks, on the Indian market. Two end-user sectors, OEMs and the replacement segment, which dominate the market, are the main drivers of tyre demand. According to ICRA, the domestic demand growth in volumes for the tyre sector is anticipated to be between 13% and 15% in FY23 and to maintain a growth rate between 2022 and 2025 of 7% to 9%. Due to improved foreign market acceptance of Indian tyres and strong demand from countries like the United States and Europe, tyre exports have seen considerable growth in FY22. A CAPEX of over ₹20,000cr is anticipated for the sector between 2022 and 2025 as a result of rising off-take on both the Indian and international markets.

SEGMENT:

Manufacture and sale of tyres:

• BKT has only one segment which is divided on the basis of the industry.  The key product range of BKT is Specialty Tires commonly known as “Off-Highway Tires” which cater to Agriculture, Industrial, Construction, Earthmoving, Mining, Port, Lawn and Garden, and All-Terrain Vehicle (ATV) Tires. This segment is highly technical & capital intensive and known as the “large varieties low volume segment” where any credible player needs to maintain a large number of Stock Keeping Units (SKUs) to meet the diverse requirement of its customers worldwide. Apart from this, it needs to service its client's pre & post-sales.
• While the sub-segment (agriculture) is largely known as non-cyclical in nature, the other sub-segment (industrial, construction, and mining) is generally considered cyclical and its performance of it is largely linked to the overall economic outlook of the world.
• The market for Company’s products is mainly Europe, America, Australia, and India. The global supply chain disruption has created serious issues leading to higher raw material costs. Logistics and freight costs are also a cause for concern across industries. Despite these considerations, the strong demand for BKT's products is very encouraging. Considering a very strong vaccination program across the globe, the economy seems to be opening up as can be seen from the all-time high production and sales for the year under review and a strong order book position. The backward integration program of setting up Carbon Black manufacturing facilities and Captive Power Plant has proved to be a boon and has augmented the supply of critical raw materials in the present circumstances.

FINANCIALS

REVENUE:

The net sales for FY22 were ₹8,295cr, up 43.4% year over year. The sales volume was 2,88,795 MT, up 27.1% year over year. Off-highway tyres (OHT) saw increased sales due to strong demand in the mining and agricultural sectors. On a YoY basis, there was an increase in realizations. Net sales increased by 36.2% year over year in H1 FY23 to ₹5,277cr, from ₹3,875cr in H1 FY22. In comparison to 1,41,356 MT in H1 FY22, its sales volume for the same time period was 1,62,025 MT. In Q2 FY23, the volumes decreased by 5.1% sequentially. The feasible production capacity is now 3,35,000 MTPA for FY23 and will rise to 3,60,000 MTPA by H1 FY24 after the Waluj brownfield project is commissioned.

EBITDA:

• EBITDA was recorded as ₹2,009cr, in FY22, up 11% year over year. Natural and synthetic rubber, carbon black, and nylon fabric are the company's main raw materials. Most of the raw materials and capital equipment are imported. EBITDA was ₹870cr in H1 FY23 compared to ₹1,049cr in H1 FY22. The increase in input costs, freight forwarding costs, and other expenses were the cause of the fall. It is projected that the easing of raw material costs, the fall in freight rates, and the improvement of shipping constraints will bode well for profitability in the upcoming quarters. 
• At 24%, the EBITDA margin for FY22 was lower. Costs for logistics, freight forwarding (shipping availability is a concern), and power were high throughout the year. Additionally, the cost of crucial raw materials (natural rubber, carbon, and fabric) continued to grow for the corporation. In FY22, the firm raised prices by 15%–16%. The EBITDA margin was 16.5% in H1 FY23 compared to 27.1% in H1 FY22. The increase in input costs and the decrease in order placing by the dealers and distributors were the causes of the margin erosion.

PAT:

• On the strength of rising operating profits and other income, the PAT for FY22, which was ₹1,435cr, increased by 21.9% YoY. In comparison to FY21, when the effective tax rate was 24.27%, FY22's was 27.58%. Fewer provisions from prior years and a rise in deferred tax expenses led to an increase in tax expenses. PAT was ₹689cr in H1 FY23 compared to ₹722cr in H1 FY22.
• The PAT margin decreased to 17.3% in FY22 as a result of a decrease in the EBITDA margin. The PAT margin for H1 FY23 was 13.1%.

CASH FLOW:

Operating cash flow totaled ₹908 crores. The reduction in operating cash flow was brought on by changes to working capital. A total of ₹1,897 cr. in cash was used on investing operations, of which ₹1,589 cr. net was spent on PP&E and ₹352 cr. the net was spent on investments. There was ₹980cr in cash flow from finance operations. The main elements included the payment of a dividend of ₹560cr, net proceeds from long-term borrowings of ₹1,64cr, and net repayment of short-term borrowings of ₹932 cr.

WORKING CAPITAL CYCLE:

Working capital days were 26 in FY22. The rise in working capital (anticipated to remain at comparable levels moving forward) was brought on by increased overall turnover, longer lead times due to longer shipping times & container shortages, and rising raw material costs, which resulted in higher purchase prices. The business typically holds 30-45 days of excess inventory, which includes materials in transit.

FREE CASH FLOW:

At -27.60 per share in FY22, free cash flow was negative. The company doesn't foresee any fresh capital investment for FY24 and plans to spend between 300 and 400 crores on CAPEX for the remaining months of FY23.

DEBT TO EQUITY:

The measurement was 0.36x. As of March 31, 2022, there was ₹2,529cr in debt. Non-current borrowings of ₹501cr primarily consisted of non-convertible debentures. The current borrowings included ₹211cr in secured bank borrowings and ₹1,816cr in unsecured bank borrowings. Its long-term and short-term borrowings as of September 30, 2022, were ₹837cr and ₹2,336cr, respectively. The debt would be used by the business to cover its working capital needs.

CAPEX STATUS

The current achievable capacity is 335,000 MTPA and will increase back to 360,000 MTPA by H1FY24 post-commissioning of the Waluj brownfield project.

Carbon Black and Captive Power Plant; 

▪ Commissioned 55,000 MTPA Carbon Black capacity along with Power Plant.
▪ The Project of advanced carbon material for 30,000 MTPA is proceeding as per the schedule.
▪ Project Capex cost - Rs. 650cr.

Waluj Brownfield Capex

▪ The Board had earlier intended to replace the OLD Waluj plant with the newly commissioned Greenfield Plant, but given the subsequent business outlook, it was decided to continue operations at both plants along with the modernization of the Old Plant.
▪ In November 2022, the Board of Directors decided to revert to its earlier decision of ceasing operations at the old plant. The earlier approved capex of Rs. 350 crores for the modernization of the old plant will now be utilized at the new plant site to bring in economies of scale.
▪ Execution of this brownfield project has commenced and is expected to be completed as per schedule. The Waluj location will accordingly have an overall capacity of 55,000 MTPA at a single site.

VALUATION & ANALYST COMMENT

The company's brand-new Waluj facility started producing in FY22, starting in September 2021. After the new plant starts operating, the old Waluj plant was supposed to be shut down. At their meeting on November 11, 2021, the board of directors resolved to continue operating the old plant after appropriate machinery upgrades at a CAPEX of ₹350 cr. This decision was made considering the scenario of growing demand and the positive outlook. The board of directors, however, advised delaying this capital expenditure at their meeting on May 13, 2022, in order to maintain uninterrupted production and meet end customers' demands for faster production schedules and high demand. However, given the following commercial outlook, it was decided to maintain operations at both plants while modernizing the older plant. The board had originally intended to replace the existing Waluj plant with the recently commissioned greenfield unit.

The board has now decided to go back to its first choice of shutting down the old plant. To achieve economies of scale, the previously approved CAPEX of ₹350cr for the modernization of the old factory will now be used at the new plant location. This will be carried out as a brownfield project, and completion is targeted for H1 FY24. As a result, the Waluj location will have a total site capacity of 55,000 MTPA. At the Rajasthan & Bhuj factory, capital expenditures for modernization, automation, and technology advancement are now complete. This is anticipated to lead to improved productivity and an increase in profit. It anticipates starting up a power plant and a 55,000 MTPA carbon black capacity in December 2022. In Q4 of FY23, the project for advanced carbon material for 30,000 MTPA will be put into operation. The project's capital price was ₹650 crore. Currently, carbon black makes up 5% of the company's revenue.

PE RATIO: BKT is currently selling at a 26.86x TTM-based PE. BKT's margin-accretive actions, along with efforts to increase volumes and a strong capacity for generating cash flow, have enabled the company to command a higher valuation multiple than that of its competitors.

DIVIDEND YIELD: The company declared a final dividend of ₹4/share, three intermediate dividends of ₹4/share, one special dividend of ₹12/share, and three dividends of ₹4/share in FY22, bringing the total dividend to ₹28/share. In FY22, the dividend payout ratio was 37.71%. The first interim dividend of ₹4/share was paid in August, and the Board of Directors approved a second interim dividend of ₹4/share in November.

ROCE: The ROCE was 24.2% in FY22. The backward integration of the carbon black facility is anticipated to benefit the company and will support operational profits now that operating leverage has begun to materialize. This will help the company's ROCE to increase.

ROE: In FY22, the company's ROE was 22.2%. Savings from purchasing carbon black from in-house production are anticipated to help the PAT, enhancing the company's overall ROE.

Since hitting a low of ₹694 in March 2020, Balkrishna Industries has had tremendous growth. Between November 2020 and April 2021, the stock consolidated in the region of ₹1,500 to ₹1,850. In May 2021, it made a breakout over the higher end of the range, and in September 2021, it reached a high of ₹2724. After that, the stock had some cooling off and frequently found support at the ₹1900 level. The range between  ₹1900 and  ₹2100 will continue to serve as strong support, and any further gains over  ₹2700 would be needed.

SOURCES:
- COMPANY WEBSITE

- STOCX.

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