Company Profile. Investment Rationale

Transcription

1 February 15, 2011 Balkrishna Industries Ltd. Confidence Reinforced CMP Rs Target Rs. 168 Initiating Coverage- Buy Key Share Data Face Value (Rs.) 2 Equity Capital (Rs. Mn.) 193 M Cap.(Rs. Mn.) 11, wk High / Low (Rs.) / Avg. Daily Volume (NSE) 19,337 BSE code NSE code BALKRISIND Reuters code BLKI.BO Bloomberg code BIL IN Shareholding Pattern 31 st December, 2010 Bodies Corporate 2.25% DII 16.20% Source: BSE Financials (Consolidated) (Rs. Mn) FY10 FY11E FY12E FY13E Net Sales 15,637 21,197 24,525 28,539 Sales gro. (%) EBIDTA 3,845 3,962 4,520 5,405 PAT 2,168 2,249 2,354 2,434 PAT gro. (%) EPS (Rs.) CEPS (Rs.) Key Financial Ratios FY10 FY11E FY12E FY13E Div. Yield (%) P / E (x) P / BV (x) P / CEPS (x) M.Cap/Sales(x) EV/EBITDA (x) ROCE (%) ROE (%) EBITDA M (%) NPM (%) Debt-Equity I year Performance comparison Balkrishna v/s BSE % 20% 0% -20% Others 12.97% FII 14.21% Balkrishna Industries Indian Promoter 54.37% BSE_500 Analyst: Vikesh P. Mehta Tel No.: , Mob: vikesh.mehta@skpmoneywise.com Company Profile Balkrishna Industries Ltd. (BIL) is the world's premier manufacturer of pneumatic tyres for special applications it was incorporated on November 20, They primarily focus on the production of range of off-highway tyres that includes agricultural, industry, material handling, forestry, lawn and garden, construction and earth moving tyres. The company has a worldwide distribution network ensuring extensive reach and penetration. Investment Rationale Augmenting Achievable Capacity to over 80% by BIL is undertaking sizeable capacity creation plans to raise its installed capacity, At present, it has an installed capacity of 1,60,000 MTPA which they plan to take it to 2,93,333 MTPA by 2013 in two phases. Under phase one, they are undertaking Brownfield capex plan at Chopanki plant to augment the achievable capacity to 1,30,000 MTPA by Q3 FY12. Simultaneously a Greenfield capacity creation plan at Bhuj, to up its achievable capacity to 2,20,000 MTPA has been initiated which is expected to conclude by Q3 FY13. BIL has the ability to provide Quality Products at Competitive Prices. BIL has an alcove market presence in the global OTH tyre industry, with its presence in economically low cost producing country; the company has the capability of delivering globally approved quality products at cheaper prices. At present, BIL s products are priced at ~25% discount to other OTR tyre manufacturers. As an outcome the company has an ability to pass on the increase in its raw material prices at regular intervals and avoid taking a steep hit on its margins. Wide product range and the capability to develop new sizes within short span BIL has a wide range of products to offer, containing 1900 SKUs. It supplies varied number of tyres weighing between 3 kgs and 3,000 kgs. The primary rationale of BIL being able to offer a substantial product basket and develop new sizes every year is due to its excellent R&D team, which is able to produce new sizes within 8-10 weeks of finalization of specifications. Valuation At CMP of Rs , the stock is trading at a PE of 5.2x, 4.9x, and 4.8x for FY11E, FY12E and FY13E respectively. Based on FCFF approach, we arrived at a target price of Rs. 168, yielding a potential return of 38% in 12 months. SKP Securities Ltd Page 1 of 11

2 Industry Overview Indian tyre industry is pegged at ~Rs 240 bn & the production of ~1.2 mn tonne has grown by ~9% CAGR over the past 5 years ( ). World tyre industry is estimated at ~USD 120 bn. BIL, at present has a market share of ~3%. Which, we expect it to increase to ~6.15% by FY15E. This increase in market share will be fuelled by increase in Installed Capacity and BILs ability to produce quality products at competitive rates. The niche OTH tyre segment is anticipated to have an industry size of ~USD 11.5 bn, We expect the OTH tyre market to grow by ~3-4 % annually to achieve an industry size of ~USD bn by 2015E, see Exhibit 1. Off The Highway (OTH) tyre classification includes tyres for equipments used in Agriculture, Industries, Construction, Earth Movers etc. Usually, OTH tyres are custom made as a result they influence a premium over conventional tyres. Unlike the conventional tyre segment, OTH tyre segment is not driven by volumes and mechanization as the products are specialized and tailor made to suit customer requirements, yielding high labour interface. OTH tyre segment is generally characterized by low level of mechanization, continuous product development, higher labour interface, lower volumes and large variety. As a result of above mentioned characteristics, low-cost manufacturing is imperative for the OTR products. India has a competitive advantage as its labour cost is lower compared to other western equivalents together with being closer to major rubber producing countries transforms in lower logistics costs. Chart 1: BILs Market Share vis-à-vis OTH Market Size % % % % E 2012E 2013E 2014E 2015E 3% OTH Market Size (USD bn) BILs Market Share Source: Company, SKP Research SKP Securities Ltd Page 2 of 11

3 Exhibit 1: Demand drivers in Key Continents Balkrishna Industries Ltd. Europe Large and Mechanized Farms. Large Replacement Market. Americas Growth in Agriculture & Mining Sector. Large Farm Equipments trends. Fast growing economies such as Brazil, Argentina, Colombia, Cost a Rica etc. Asia Pacific Agriculture & Infrastructure booming. Moving from traditional to larger sized equipments. Source: Company Presentation Company Overview Incorporated in 1961, BIL is a flagship company of the acclaimed Siyaram - Poddar group. BIL is one of the world's premier manufacturers of pneumatic tyres for special applications. The company has three business activities under their umbrella namely tyre, paper and textile processing. The tyre business is a focused business activity of the company that constitutes ~88% of company's total business revenues and by virtue of this becomes their core business. The company s subsidiaries includes: a. Balkrishna Paper Mills Limited, b. Balkrishna Synthetics Limited, c. BKT Exim Limited d. BKT Tyres Limited, e. BKT (EUROPE) LTD f. BKT EUROPE S.R.L. g. BKT (USA) INC. BIL focuses on the production of range of off-highway tyres that includes agricultural, industry, material handling, forestry, lawn and garden, construction and earth moving tyres. The company has a worldwide distribution network ensuring extensive reach and penetration. Being India s largest exporter of Off Highway Tyers, the company exports ~92% of its topline to diverse geographies including Europe, South America, Latin America, Africa, Russia, Asia etc. BIL has a market presence in over 120 countries. Supported by a strong distribution network of more than 200 distributors, BIL has a product portfolio of 1900 SKUs to offer. BIL has three manufacturing plants in India and the fourth plant in on track in Bhuj, which is expected to be commissioned in FY13E. SKP Securities Ltd Page 3 of 11

4 Investment Arguments Balkrishna Industries Ltd. Achievable Production Capacity is 75% of Total Installed Capacity due to the very nature of the business of producing high variety and low volume per tyre, as the products are specialized and tailor made to suit customer requirements. Augmenting Achievable Capacity to over 80% by 2013E. Source: Company BIL has three manufacturing plants at present, with an achievable capacity of 1,20,000 MTPA. The company has started the initiative of enhancing its installed capacities in two phases. Plants FY10 FY12E FY13E Waluj, Maharashtra 30,000 30,000 30,000 Chopanki 45,000 55,000 55,000 Bhiwadi 45,000 45,000 45,000 Bhuj ,000 Achievable Capacity (MTPA) 120, , ,000 Under phase one; the Chopanki plant is witnessing a planned capital outlay of ~Rs.200 crs. to be funded through internal accruals for upgrading and debottlenecking of the plant to increase its capacity from 60,000 MTPA to 75,000 MTPA. The Chopanki plant is experiencing this capex to increase the capacity of premium products like Agri-radial and OTR Tyres. This capacity creation process is expected to conclude by Q3 FY12E. We believe in BIL s growth story, by looking at its historical performance and its ability to generate adequate cash flow we foresee no cause of worry that might hamper its ambitious capex plans. Source: Company Concurrently under phase two; BIL has begun the process of setting a Greenfield plant in Bhuj. The plant is expected to have an installed capacity of 1,20,000 MTPA, with a total assumed capex of ~Rs.1200 Crs. over three years to be funded through ~USD 175 mn (~Rs. 785 Crs.) and internal accruals. The facility is expected to be commissioned by Q3 FY13E. Year FY11 FY12 FY13 Estimated Capex Rs. 100 Crs. Rs. 700 Crs. Rs. 400 Crs. All these manufacturing facilities will function at an achievable capacity of 75%, due to the very nature of the business of producing high variety and low volume per tyre, as the products are specialized and tailor made to suit customer requirements. At present BIL has a total Installed Capacity of 1,60,000 MTPA which is expected to increase by ~23% CAGR to 2,93,333 MTPA between 2010 to 2013E. Chart 2: Sales Volume (MTPA) & Realization (Rs. / Kg) 140, , ,000 80,000 60,000 40,000 20,000 Source: Company, SKP Research E 2012E 2013E Volume Realization SKP Securities Ltd Page 4 of 11

5 BIL has the ability to provide quality products at competitive rates. At present, BIL s products are priced at ~25% discount to its global peers such as Michelin, Titan, Mitas, Bridgestone etc. There are many reasons why BIL is able to do this, one of the primary reasons being its location. Labour Costs: All manufacturing facilities of BIL are located domestically. India has a competitive advantage over its other western equivalents in terms of labour costs as it is a developing economy. BIL s labour charges form ~5% of its net sales as compared to ~25% of its global counterparts. We consider this cost to come down in the future due to economies of scale that BIL shall achieve after its new capacity creation. Huge Distribution Network: Exports contribute ~90% of BIL s topline. To cater the huge export market BIL sells its products through a distribution network of >200 distributors who are situated at varied key locations in 120 countries and caters to the replacement market. As a result BIL s makes its presence feel worldwide and has to spend less on advertisement and promotional expenses. Usually BIL spends ~2.5% of its sales on advertisement and promotional expenses. Owing to BIL s lower cost of production ability and the increase in its achievable production capacity, BIL shall be able to increase its market share by entering new markets by adding new distributors and penetrating the current market of its global counterparts. Hedged Raw Materials: BIL has booked a six month forward hedge for Natural Rubber at $3,500 / tonne valid till June The management expects this cost to come up gradually over a period of time. They expect their cost of Natural Rubber to be around $ 3,800 / tonne for Q4 FY11 and around $ 4,200 / tonne for Q1 FY12. BIL has entered into similar contracts for other constituents of raw materials. In volume terms Natural Rubber forms 32% of total raw material consumption. On the back of hedged raw materials and the head room available due to lower employee costs, BIL will efficiently but gradually be able to pass on the increase of raw material prices to the end users. Over the last twelve months BIL has had three price hikes and been able to pass on the increase in costs, which has cumulatively led to the price increase of 20-25%. This has cushioned the fall in its operative margins to a great extent. Chart 3: Rubber Price Trend (INR / MT) Chart 4: Raw Material Composition 6% 3% % 32% % 27% Jan-10 Feb-10 Mar-10 Apr-10 May-10 Rubber Index Jun-10 Jul-10 Aug-10 Sep-10 Oct-10 Nov-10 Dec-10 Thai Rubber Index Jan-11 Natural Rubber Carbon Black Synthetic Rubber Chemicals Fabric Bead Wire Source: Bloomberg Source: Company SKP Securities Ltd Page 5 of 11

6 Wide product range and the capability to develop new sizes within short span BIL has 1900 SKU s in its product basket. They supply tyres weighing from minimum 3 kgs. to maximum 3000 kgs. Agricultural tyres form a colossal part (~70%) of the total sales mix. These include tyres for tractors, trailers, farm equipment, and forestry. These are specifically designed as per farm requirements ranging from 12 bead diameter to 48. Tractor radial tyres are marketed under the brand Agrimax. BIL has 1900 SKUs to offer and keeps on developing over new sizes every year coupled with world s fastest turnaround time of 8 to 10 weeks. OTR are also an integral part of BIL s product offerings as these constitute almost 26% of company s sales mix. This segment includes tyres used for industrial, construction and earth mover equipments such as articulate dump trucks, loaders, underground mines, port applications, ranging from 8 inches bead diameter to 51. Steel Radial OTR tyres are marketed under the brand Earthmax. Others which include ~4% of the sales mix include Tyres for Sports, Utility vehicles such as Golf-cart, Lawn & Garden tyres. The key reason BIL tyres are globally competitive is because of its engineering talent and continuous investment in R&D. Over the years a dedicated team of engineers have taken on the task of designing and manufacturing better tyres more quickly after precise and complex planning. BIL keeps on developing over new sizes every year coupled with world s fastest turnaround time of 8 to 10 weeks for new product development. BIL has established its brand image through quality and after sales service and the brand BIL enjoys good reputation in the domestic as well as international market. Chart 5: Sales Mix 4% 26% 70% Agricultural Tyres OTR Tyres Other Tyres Source: Company SKP Securities Ltd Page 6 of 11

7 Anti dumping duty on Chinese Tyres in America to linger. Stiff antidumping and countervailing duties on off-the-road (OTR) tyres imported from China have been in place in the U.S. for nearly 2½ years now and they seem likely to remain in place for the foreseeable future. The U.S. Commerce Department, on September 04, 2008 announced that it would levy duties of percent and another duty ranging from 2.45 percent to 14 percent on Chinese OTR tyres. Chinese officials had earlier filed a complaint with the international trading organization alleging that U.S. anti-dumping duties imposed on Chinese tyre imports were a violation of the organization s rules. The dispute settlement panel, recently in December 2010 ruled out their claims and allowed America to continue to apply the anti-dumping duty. BIL is eyeing America as a market with a huge potential. In FY06 BIL exported 15% of its topline to America which increased to 19% in FY10. We expect that by FY13E, BIL will be able expand its market share in America to 22%. Chart 6: Sales across Geographies 100% 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% 11% 13% 11% 10% 17% 18% 15% 19% 22% 64% 51% 49% FY06 FY10 FY13E Europe America Asia RoW Source: Company, SKP Research Peer Comparison Company P / E EV / EBITDA Price / Sales 2011E 2012E 2013E 2011E 2012E 2013E 2011E 2012E 2013E BIL (India) Titan Int. Inc. (U.S) N.A N.A N.A Bridgestone (Japan) Michelin (France) Apollo Tyres (India) Source: Bloomberg, SKP Research SKP Securities Ltd Page 7 of 11

8 Key Concerns Natural Rubber and Synthetic Rubber prices remain a cause of concern for the tyre industry at large lately and BIL is no exception for that matter. Even though these have been hedged at a considerable discount to current rates any significant increase in the prices from here on could impact our estimates. Demand for replacement tyres in each country where BIL operates is also a function of national trends in consumer spending, automotive fuel prices and a range of other local market variables. Any combination of trends that might cause demand for replacement tyres to decline or to grow at a slower rate could adversely affect our estimates. BIL exports most of its products to Europe and America, any significant INR appreciation against Euro or USD could impact the operating results and the financial position of the company. Any delay in executing the capex plans for Brownfield as well as Greenfield capacity creation could negatively impact our estimates. Valuations and Outlook We initiate coverage on Balkrishna Industries (BIL) with a Buy rating for a target price of Rs At current market price of Rs. 122, the stock yields a potential upside of 35%. We have valued BIL on the basis of Free Cash Flow to Firm approach and arrived with a target price of Rs. 165 with an investment horizon of 12 months. DCF Assumptions Assumed Terminal Year FY16E Cash Flow at Terminal Year (Rs. mn) 2,465 Cost of Equity (%) WACC (%) Discounted Terminal Value (Rs. mn) 35,981 Enterprise Value to Firm (Rs.mn) 20,316 Add: Marketable Securities (Rs. Mn.) 617 Less: Debt (Rs. mn) 4,777 Add: Cash (Rs. mn) 54 Present Value of Equity (Rs. mn) 16,210 No. of Equity Shares (mn) 97 Fair Value (Rs.) 168 SKP Securities Ltd Page 8 of 11

9 Chart 7: 1 year forward P / E Band Chart 8: 1 year forward EV / EBITDA Band x 12x x 6x 200 9x x 3x x 2x Source: SKP Research. Financial Outlook Topline to grow at 22% CAGR between FY10-FY13E. BIL has been able to deliver sustainable performance in the past and we expect it to do that in the future as well. We expect BIL topline to grow at 22% CAGR to Rs. 28,539 mn by FY13E from Rs mn. reported in FY10. This growth will be fuelled by its robust capacity creation plans and revival of the western countries including Europe and America. Margins to remain stable. We expect the EBITDA margins to grow at 12% CAGR over FY10-FY13E. Whereas NPM could erode to an extent, on account of higher depreciation and financial charges. Chart 9: Net Sales to grow at 22% CAGR Chart 10: Profitability 30, % CAGR 28,539 6,000 30% in Rs. mn. 25,000 20,000 15,000 10,000 11,338 13,999 15,637 21,197 24,525 Rs. in mn 5,000 4,000 3,000 2,000 1,000 25% 20% 15% 10% 5% 5, E 2012E 2013E - 0% E 2012E 2013E EBITDA Net Profit EBITDA Margin Net Profit Margin Source: Company, SKP Research. SKP Securities Ltd Page 9 of 11

10 Financials (All data in Rs.mn unless specified) Profit & Loss Statement Cash Flow Statement Particulars E 2012E 2013E Particulars E 2012E 2013E Net sales 15,637 21,197 24,525 28,539 Earnings Before Tax 3,264 3,357 3,513 3,633 % Growth 12% 36% 16% 16% Expenditure 11,792 17,235 20,005 23,134 Depreciation ,018 1,625 EBITDA 3,845 3,962 4,520 5,405 Other Non-Cash Charges (804) Depreciation ,018 1,625 Changes in Working Capital (800) (288) (3,045) (159) EBIT 3,159 3,185 3,502 3,780 Tax paid (1,048) (1,108) (1,159) (1,199) Other Income Cash Flow from Operating Activities 1,299 2, ,900 Interest Earnings before Tax 3,266 3,357 3,513 3,633 Capital Expenditure (1,408) (3,182) (7,598) (4,237) Tax 1,097 1,108 1,159 1,199 (Inc.) / Dec. in Investments (3,397) Adjusted Profit After Tax 2,168 2,249 2,354 2,434 Cash Flow from Investing Activities (1,964) (3,181) (7,580) (4,235) No of Shares (in Mn.) Adjusted EPS (Rs.) Equity raised Inc / (Dec) in Debt , Balance Sheet Dividend payout (135) (153) (160) (166) Particulars E 2012E 2013E Cash Flow from Financing Activities (198) 464 7, Net Change in Cash (63) 21 (6) 10 Inventories 2,177 2,267 2,631 3,042 Cash and Cash Equivalents at the end Accounts Receivable 2,531 3,484 4,048 4,731 Loans/Advances 3,822 4,239 7,603 7,135 Ratios Total Current Assets 8,586 10,066 14,352 14,988 Particulars E 2012E 2013E Total Fixed assets 7,151 9,557 16,137 18,749 Profitability & Return Ratios EBITDA Margin (%) Investments Net Profit Margin (%) EPS Total Assets 16,354 20,241 31,107 34,355 CEPS BVPS Accounts Payable 1,001 1,581 1,834 2,076 Other Current Liabilities Operating Efficiency & Other Ratios Provisions 2,858 3,290 4,216 4,323 Asset Turnover Ratio (x) Total Current Liabilities 4,149 5,321 6,568 7,035 D/E (x) Loan Funds 4,777 5,394 12,801 13,311 Valuation Ratios P / E (x) Deferred Tax Liability M.Cap / Sales (x) EV / Sales (x) Total Equity 6,814 8,910 11,104 13,372 EV / EBITDA (x) ROCE (%) Total Liabilities 16,354 20,241 31,107 34,355 ROE (%) SKP Securities Ltd Page 10 of 11

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