Company Name: Balkrishna Industries

BALKRISIND
Sector: Tyres
Date – 10 November 2022
Made by:

ABOUT THE COMPANY :

Balkrishna Industries Limited (BKT) started its Off-Highway tyre business in 1987. For over 30 years, BKT
has successfully focused on specialist segments such as agricultural, construction and industrial as well as
earthmoving, port and mining, ATV, and gardening applications. It is the leading player in the Global „Off-
Highway Tire‟ market.

Global Presence: Company sells its tyres in 160+ countries through its distribution network in
Americas, Europe, India & ROW. [1] It receives 49% of its sales from Europe, followed by India (23%),
Americas (15%) & Rest of World (13%).

Client Base: Company's client base includes OEMs like New

Holland, John Deere, AGCO, CLASS, JCB, CAT, Sakai, Goldoni,
TEREX, Turk Traktor, etc.

Volume Mix: Company's tires find application in tractors,

harvesters, irrigators, loaders, cranes, mining, handlers, dumps
& telehandlers.Presently, agriculture tyres account for 64% of
total volume sales, followed by off=the-road tyres (33%) &
others (3%).

Channel Sales Breakup: Presently, replacement channels

account for the majority of sales at 71%, followed by OEMs
(25%) & the rest 4% sales are contributed by other channels.

Manufacturing Capabilities: Company owns tire manufacturing

facilities in Waluj, Bhiwadi, Chopanki & Bhuj which gives a
combined output of ~285,000 MTPA. It owns a mould unit in Dombivli, and it also owns a
Carbon Black manufacturing facility for backwards integration. It possesses a capacity of
140,000 TPA which is situated alongside its tyre facility in Bhuj.

Future Capex Program: Company has proposed a new CAPEX program worth 1,900 crores which
includes debottlenecking & expansion of its Bhuj plant which would add capacities by 50,000 MTPA,
setting up of another Carbon Black & Captive power plant. It also plans for modernization,
automation and technology up-gradation of certain existing equipment and install automated
material handling systems for better efficiency.
Brand Promotion: Company has taken various initiatives across its markets for improved brand
recognition. It is the official tyre manufacturer of MONSTER JAM in the USA. It is also the official partner/
title sponsor of many sports across Canada, Italy, Spain, France, Australia & India.Wide and
comprehensive product portfolio Deep understanding of OHT market has led to capabilities to
manufacture over 3,200 SKUs 05 Strong OEM Presence Strong Partnerships with Global OEM‟s a
testimony of our Brand Acceptance & Performance 06 Experienced Management Team Experienced
Management Teams across business divisions and verticals 04 Global reach Sales to over 160 countries
through Distribution network in Americas, Europe, India and Rest of the World 03 Capacities Achievable
Capacity at end of FY23 will be 360,000 M.T.P.A.
Future Outlook :
The company‟s performance may remain muted for the next 2-3 quarters due to increased freight and raw
material costs and the looming recession in Europe, from where the company gets its major revenue(about
50%). The volume growth reported by the company in FY22, which is expected to continue going forward as
well due to strong demand in the OHT market, especially from Europe and America due to surge in
mining/farming activities. The company has been undertaking capacity expansion to cater the growing
demand and has a strong order book position. Despite commodity prices rising rocket high, the company
continued to have robust operating margin, which is expected to be sustained in the future as well. The
continued growth momentum along with healthy operating margin is expected to result in further
improvement of business risk profile of the company

Credit Rating :
The capital structure of the company is comfortable with good debt coverage indicators as debt to equity is
low at just 0.12x. The increase in overall gearing was mainly due to the increase in working capital debt.
The capex requirements of the company are generally met through internal accruals without much reliance
on external debt. Thus, the debt coverage indicators are expected to remain strong going forward as well
despite upcoming capex. The interest cover indicator was also comfortable at over 200x in FY22.

KEY RISKS :
Volatility in raw material prices and currency risk:
The main raw materials for the company are natural rubber and synthetic rubber, carbon black and other
chemicals. The prices of raw material account for around 65% of its aggregate production costs. The rubber
prices and prices of other raw materials have continued to be at an elevated level since Q4FY21. Although
price increases are taken from time to time, the operating margins continue to remain susceptible to the
variation in raw material prices. The company has backward integration for its carbon black, and nearly
80%-85% of its carbon black requirements are met through in-house production. Furthermore, as most of
the raw materials and capital equipment are imported, the company is exposed to the foreign currency risk.
The freight costs have also been increased due to high crude oil prices which has reduced the net profit
margin.

Government Regulations of importing countries:

The US Department of Commerce had imposed duties on some of the Indian tyre manufacturers who exported OHT to
the US in March 2017. For BIL, the rate of duty is 5.36%, which is unlikely to have material impact on the overall
revenue, as the company has well-diversified geographical presence with less revenue exposure to North America.
Furthermore, India being a low-cost manufacturing hub, the exported tyres continue to be cost-effective.
Nevertheless, the company continues to remain exposed to the impact of government regulations of importing
countries.

ONGOING CAPEX

Carbon Black and Captive Power Plant

▪ Expect commissioning for 55,000 MTPA Carbon Black capacity along with Power Plant during Q3FY23
▪ The Project of advanced carbon material for 30,000 MTPA will be commissioned in Q4FY23
▪ Project Capex cost - Rs. 650cr

Modernization, Automation and Technology Upgradation

▪ Capex on Track ▪ Expect completion by end H1FY23
▪ Project Capex cost - Rs. 450cr

Shareholding Pattern
Promoter Holding has been constant in the last 3 quarters whereas Mutual Funds have reduced their holding from
11.64% to 11.10%. On the other hand, Domestic Institutions have increased their holdings in the company from less
than 1% in FY22 to more than 7% in the first quarter in FY23. Foreign Institutions have also reduced their exposure in
the company to around 13%. The company has not pledged any shares which is a good sign for the company. The
retail holdings have also drastically reduced from about 16% to less than 10%.

PERFORMANCE OF BALKRISHNA INDUSTRIES WITH RESPECT TO NIFTY 50

The company has given returns of about 50% in the last 4 financial years. The performance of the company hasn‟t
been good in the recent years due to the rapid rise of raw materials and freight costs around the world mainly due to
COVID-19 outbreak.
World Market of Farm Tyre Segment :
The market size of current farm tyre market globally is valued at $7.64 US Dollars which has
expected to grow to $11.29 US Dollars by FY2029. Balkrishna Enterprises, having a
prominent share in world tyre market in farm segment has expected to grab this opportunity.
It generates major sales geographically from European market in farm segment. North
America is dominating the farm tyre market Agricultural exports in 2021 -22 by around $
135.87 billion US Dollars according to the latest figures from US Department of Agriculture.
Several major tyre players are launching new and innovated products in farm tyre segment
including YOKOHAMA, CONTINENTAL and NOKIAN. BKT has come up with new AGRIMAX RI
818 radial tires for pivot irrigators. Optimal traction in wet and muddy conditions is the key
feature of the new tire.
120

100

80 53.9

60 2022
2015

40

53.8 17.3
17.6
20 11.2
18.8 15.1 12.4
0
Europe Americas India RoW

Fig: Balkrishna Industries: Regional Mix

 Sector Analysis :
Product: The farm tyre market is generally divided into two segments on the basis of their raw
material composition. Bias tires are widely used in south Asian regions especially in India and
China their key components are derived up of natural rubber, which is abundant in these two
nations. In addition, the bias tires crosshatch structure, combined with its inexpensive price,
is likely to increase demand. The cost of raw materials is cheap, which lowers the cost of
making the product. The dwindling availability of natural rubber, on the other hand, is
projected to limit segment expansion. The natural rubber also enhances tire rigidity, which
loses homogeneity after use, jeopardizing the shelf life of bias tires. On the other hand,
Radial tires are made with steel ply, which promotes durability, and bead-to-bead construction
at a 90-degree angle to the circumferential centerline, which increases tire flexibility and
lowers rolling resistance, resulting in better performance. Over the projected term, this is
likely to fuel demand for radial tires in agricultural vehicles.

Distribution channel: The farm tire market is segmented into OEM and Aftermarket. In
FY2022, the aftermarket segment dominated the market, accounting for 71.22% of global
sales. Over the projected period, the increased demand for tire replacement by farmers due
to the expansion of agricultural activities around the world is expected to support the
segment's growth.
Innovation of R&D: BKT Tyres is analysing which tyre suits which application and which tire is
best for factors such as rolling resistance and circumference and structure. Due to their
structure, the radical solutions offer lower rolling resistance, ensuring less and more uniform
wear and tear compared to bias solutions, allowing for greater fuel saving for farmers. For
BKT‟s radical solutions, the RIB 713, steel-belt tyre is equipped with IF technology which is
capable of supporting heavier load at lower tyre pressures. The All Star SR 713 radial tyre
with VF technology has a sturdy casing with multilayer steel belts and a tread with a multiple
groove design to guarantee low rolling resistance. And also, the AW 708 solution stands out
and is particularly resistance to cuts, tears and stubble. Some sizes are also available in the
“Special” version with an ultra-resistant compound, and in the “Stubble resistant” version
which ensures extraordinary resistance to stubble, finalising the wide range of options that
BKT tyres offers its customers.
140.0 160.0
140.0
120.0 120.0
100.0 69.1
100.0 65.5
80.0
80.0 60.0
2022 40.0 2022
60.0 75.0 27.7
2015 20.0 2015
31.1 22.0 3
40.0 0.0 4. 3
0
64.0
20.0 33.0
0.0 3.3

Agri OTR Others

Fig: Balkrishna Industries mix: Segment Mix Fig: Balkrishna Industries mix: Channel Mix
Valuations and other forecasts :
Balakrishna Industries has a unique set of business. Unlike other tire makers in India, BKT focuses more
on producing OHT involving highly cost cutting measures and producing them at less developed countries,
while most of the sales generated by BKT are from European markets having developed agriculture and
mining sectors. This gives BKT a cutting edge competitive advantage and allow them to grow long term
margins at 25-30%. Balakrishna has a mere global market share of 6% highlighting its growth potential in
a long term.

However, the company has been facing decline in price performance as compare to its peer competitors
along with that, PBT has also declined in FY22 by 6.5% margin. This statement can be supported by
increase in its freight cost from 8% to 17% in first quarter. Recessionary clutches in Europe has also
caused a decline in mining activities. Erratic weather conditions in Europe has rose questions on its long
term growth in agriculture sectors which negatively impacted on the demand for agri tyres.

In financials, while EBITDA margin for FY21 stood at a record high level of 31.5%, for FY22, it declined to
26% and further declined to 20% in Q1FY23. While rising input costs are the main reason for this, the
other key reason has been the sharp increase in freight costs. As highlighted in the previous section,
freight costs have increased from 5% of revenue in FY21 to 13.8% of revenue for Q4FY22 and further to
14.2% for Q1FY23.