(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:
- 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.
- 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.
- 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.
- 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.
- 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.
- 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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