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Balkrishna Industries (BIL IN)- Initiating Coverage

INDSEC

Accumulate Incorporated in 1961, Balkrishna Industries Ltd is the flag

CMP

280

Rating

Target

343

Upside

22%

STOCKDETAILS

InvestmentRationale:

BSECode

502355

NSECode

BALKRISIND

MarketCap(Rsmn)

ship company of Siyaram Poddar Group and is the largest


manufacturer and exporter of Off Highway Tyres (OHTs)
fromIndia.

27076

Sector

AutoTyres&RubberProducts

YearEnd

March

52w.High/Low

318/199

Avg.DailyTurnover(Rsmn)

46.3

Listedon

BSE/NSE

SharesinIssue(mn)

96.7

BSESensex

21058

NSENifty

6256

Off Highway TyresNiche Segment with long term


growth Potential: Off Highway Tyres (OHT) is a niche
segmentcomprising910%oftotaltyremarketglobally.
Total size of Global Tyres market is pegged at USD
180bn which means OHT market size stands at approx
USD1618bn.Lackofmanpoweravailability,highcost
of available labor and higher productivity requirement
arethekeydriversofmechanizationofallkindsofpro
duction (Agriculture/Mining/Infrastructure etc) activi
tieswhichinturnpropelsdemandforOffHighwayTyres
(OHT). We believe, these trends are irreversible and
thuslongtermdemandforOHTsaresecularinnature.
The incremental OHT demand of USD 480640mn per
annumitselfpresentsgoodgrowthopportunity(double
digit) to Balkrishna Industries (which currently holds
marginal share of 4% of global OHT market) over next
fewyears.

Cost leadership provides competitive edge: BKT man


powercostcomesatlessthan4%ofsalesvisavis25%
forgloballeaderMichelinduetoproductmixandplant
location.BKT produces tyres against firm order book
againstpracticeofholdinginventorybyglobaltyrema
jorswhichsavesitinventorycarryingcostaswell.Com
bineddifferenceof2530%ispassedontodistributors
which keep a portion to themselves and pass the re
mainingtoconsumers.ThismakesiteasyforBKTtosell
its products against stronger brands in the global mar
ketplace.

Capacity expansion at Bhuj, a game changer: BKTisin


the process of commissioning a tyre manufacturing
plant at Bhuj in Gujarat with capacity of 1,20,000
MTPA with capital outlay of Rs 18bn. On successful
commissioningBhujplantwilltaketotaltyrecapacityto
2,76,000MTPAandwilloffermultiplegrowthleversto
BKT.BhujcapacitywillbedistributedbetweenAgricul
ture and Non Agriculture tyres in the ratio of 55:45 ,
whichwillalterconsolidatedcapacitybetweenAgriand
Non Agri in the ratio of 60:40 from current level of
65:35. Almost 40,000 MTPA capacity at Bhuj will be
Large/Ultralarge(>51)allsteelradialtyrestocaterto
miningsectorwheredemandismorerobust.Bhujplant
after commissioning will allow the company to target
OEMswhereitwillbeabletogarner25%oftotalreve
nue over next 3 years from current level of 18%. Bhuj
plantsproximitytoKandlaPortwillalsoleadtosome
reductionintransportationcostforBKT.

SHAREHOLDINGPATTERN
%

Sept2013

June2013

Promoter

58.3

58.3

FII

10.7

10.6

DII

19.7

19.7

Others

11.3

11.4

CONSOLIDATEDFINANCIALS
Rsinbn

FY12

FY13

FY14P

FY15P

Revenue

30.2

33.9

36.5

40.6

EBIDTA

5.1

6.7

7.0

8.4

EBIDTA(%)

17.0

19.7

19.3

20.7

PAT

2.7

3.5

3.2

3.7

EPS

27.8

36.2

33.1

38.4

P/E(x)

10.1

7.7

8.5

7.3

OutlookandValuation:

Going by EV/EBITDA trend in last 18 months the company


hasbeentradingaround5.25xTrailingEV/EBITDA(between
4.56x)Maintainingthehistoricalvaluationtrend,whenwe
valueBKTat5.25xFY15PEV/EBITDAbasis,weget18months
targetofRs343which gives potential upside of 22% from
currentlevel.
We Recommend ACCUMULATE on the stock with upward
biastoourtargetprice.

Source:Company,IndsecResearch

SHAILESH KUMAR
shaileshk@indsec.co.in
+91 22 61146139

INDSEC SECURITIES AND FINANCE LTD.


1

OCTOBER 31, 2013

INDSEC
TableofContents

1.

Investment Summary ...1

2.

Company Background ...3

3.

Business Model ...4

4.

Management Profile .5

5.

Key Investment Rationale 6

6.

SWOT Analysis 9

7.

Sector View 10

8.

Financial Performance Analysis 13

9.

Peer Comparison 14

10. Valuation and Recommendation 15

11. RisktoCall 15

12. Financials .16

13. Disclaimer . 18

INDSEC SECURITIES AND FINANCE LTD.


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CompanyBackground

Incorporatedin1961,BalkrishnaIndustriesLtdistheflag
shipcompanyofSiyaramPoddarGroupandisthelargest
manufacturer and exporter of Off Highway Tyres (OHTs)
fromIndia.
Ithasachievableproductioncapacityof166000TPAason
March 31,2013 from 5 different plants situated across
Northern and Western India (Gujarat, Maharashtra & Ra
jasthan) and 90% of the production is exported to more
than120countriesacrosstheglobe.
Companys products are sold under the brand name of
AGRIMAX (Agricultural Tyres), EARTHMAX (Mining Tyres),
MULTIMAX, RIDEMAX (Radial Transport Tyres) & FOR
ESTECH(ForestryTyres).

The company is present across most categories of Off


Highway Tyres (OHTs) viz Agriculture, Mining, Industrial,
Construction, Earthmovers, Port, ATV (All terrain Vehicles
andTurfcareApplicationTyres;however,majorityofreve
nuealmost62%comesfromAgriculturetyres.
Company has more than 2000 SKUs and tyres are sold
through200distributorsacross120countries.

Product Profile: The company operates mainly into Off Highway Tyres (OHT) segment however, through its subsidiaries
(BalkrishnaPaperMillsandBalkrishnaSynthetics)ithasexposuretootherbusinessesofPaperBoards(CoatedandUncoated),
SyntheticTextilefabricandMarketingsupportservices,thoughtheycontributearound4%tothecompanystopline.
SegmentwiseSalesContributionFY13
Agriculture

OTR

GeographywiseSalesContributionFY13
India

Others

Europe

4%
25%

NAmerica

Others

14%

34%
18%

62%

Source:Company,IndsecResearch

43%

Source:Company,IndsecResearch

ManufacturingFacility
PlantLocation

Product

OperationalSince

Capacity
(MT)

Status

Bhiwadi,Rajasthan

AgricultureTyresBias&Radial,IndustrialTyresBias

CY2002

79500

Operational

Chopanki,Rajasthan

PTRBias,Industrial&ConstructionTyres

CY2006

43000

Operational

OTRTyresAllsteelRadial

CY2008

11500

Operational

Waluj,Maharashtra

MaterialHandling,Floatation,Industrial&OTRTyres

CY1988

22000

Operational

Dombivili,Maharashtra

MouldforTyres

CY2005

NA

Operational

Bhuj,Gujarat

TobefullyoperationalbyFY15E 120000

UnderConstruction

Source:Company,IndsecResearch

CorporateStructure

INDSEC SECURITIES AND FINANCE LTD.


3

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BusinessModel
ManufacturingandSales

BrandcreationhasbeenthekeyfocusareaforBalkrishna ChannelwiseRevenueFY13
Industriesasthereisfirmbeliefthatastrongbrandises
sential to attract customer loyalty and command pricing
Distributors OEMs
power. Based on this belief, almost 9596% of revenue
comes from in house brands while remaining 45% reve
nue comes from contract manufacturing where company
4%
manufacturesTyresforleadinginternationalbrands.
15%
Global brands have offered the company to utilize its full
production capacity for contract manufacturing under
Take or Pay route on cost plus basis. However, the
companyhasdeliberatelyresistedthetemptation.Further,
under its own brand sales, almost 81% comes from re
placement market while 15% sales comes from OEMs.
Catering to replacement market helps in brand building
andhelpsgainacceptabilityamongenduserswhichactas
launchingpadtocatertoOEMs.

Offtake

81%

Volvo,BOMAG,JohnDeere,JCB,Ferrari,CNH&L&TCASE
aresomeoftheGlobal/LocalOEMstowhichBKTcatersto
Source:Company,IndsecResearch
fortheirtyresrequirement.

RawMaterialSourcing

Rawmaterialcostaccountsforalmost60%oftotalsales RawMaterialCompositionVolumewise
andNaturalrubberisthelargestcomponentofRawmate
rial constituting 48% in volume terms (As seen from the
Rubber CarbonBlack Chemicals Fabric
attacheddiagram).
Rubberpriceshavebeenveryvolatileoverperiodoftimes
fluctuating widely. To tide over this price volatility, the
company enters into medium term supply contract with
both domestic as well as international rubber producers
andalsokeepsrubberinventoryforcoupleofmonths.

BeadWire

6% 3%
16%
48%

27%

Pricing

The company enjoys decent pricing power due to


recognized brand and quality of its products and is
normallyinapositiontopassonanyhikeinrawmaterial
cost.However,thepassoncomeswithsometimelagand
isgradual.
Source:Company,IndsecResearch

TrendinNaturalRubberPricesTOCOMRubberIndexUSD

Source:TOCOM,IndsecResearch

INDSEC SECURITIES AND FINANCE LTD.


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ManagementProfile
Name

Designation

Profile

Mr.ArvindPoddar,

Chairman&

B.Com

ManagingDirector

Mr. Arvind Kumar Mahabirprasad Poddar, B.Com has been Managing Director of Bal
krishnaIndustriesLtd.sinceAugust1,2006.HehasbeenaNonExecutive&NonInde
pendentDirectorofSiyaramSilkMillsLtd.sinceMay29,1992.HeservesasaDirectorof
TeloijanTeaCo.Ltd.,GRLInternationalLtd.,S.P.Investrade(India)Ltd.,VishalFurnish
ingsLtd.,BalkrishnaPaperMillsLtd.,BKT(EXIM)Ltd.andSiyaramPolycoteLtd.

Mr.RajeevPoddar,

ExecutiveDirector

Mr.Rajiv.A.PoddarservedasanExecutiveofBalkrishnaIndustriesLtd.sinceSeptember
16,2006.HehasbeenanExecutiveDirectorofBalkrishnaIndustriesLtd.sinceJanuary
22,2009.

ExecutiveDirector

Mrs. Vijaylaxmi A. Poddar has been an Executive Director of Balkrishna Industries Ltd.
sinceMay30,2012.SheservedasanExecutiveDirectorofSiyaramSilkMillsLtd.from
October 23, 1999 to May 30, 2012. She has rich industry experience & led Siyaram's
forayintothereadymadegarmentindustry.

ExecutiveDirector

Mr. Rameshkumar Dharaprasad Poddar has been a Non Executive NonIndependent


DirectorofBalkrishnaIndustriesLtd.sinceJuly31,2006.Mr.PoddarservedasanAddi
tionalDirectorofBalkrishnaIndustriesLtd.sinceAugust1,2006.

PG(BM),KingstonUniversity,
London

SmtVijaylaxmiPoddar,
B.Com

Mr.RameshKumarPoddar

Mr.SubhashChandMantri,
ACA

IndependentDirector Mr.SubhashChandraB.MantriservesasaNonExecutiveIndependentDirectorofBal
krishnaIndustriesLtd.

Mr.SachinNathChaturvedi,

IndependentDirector Shri.SachinNathChaturvediisNonExecutiveIndependentDirectorofBalkrishnaIndus
tries Limited since July 31,2006. He is Director of Jai Corp Limited, Jai Realty Venture
Limited.BalkrishnaPaperMillsLimitedandNRAgarwalIndustriesLimited.

Btech,FCA,MBA

Mr.LaxmiDasMerchant

Mr.SanjayAshar,
BCom,FCA,LLB

NonExecutive

Shri.MerchanthasbeenaNonExecutiveIndependentDirectorofBalkrishnaIndustries
Ltd. since January 2009. He serves as the Chairman and Director of Reliance Ventures
IndependentDirector PrivateLimited.HeservedasaDirectorofRelianceCommunicationsLtd,RelianceNatu
ralResourcesLtd.andRelianceEnergyVenturesLtdaswell.
NonExecutive

Shri.SanjayK.AsherisNonExecutiveIndependentDirectorofBalkrishnaIndustriesLtd
SinceAug2010.HeisapartnerinlawfirmCrawfordbayley&Co.SolicitorsandAdvo
IndependentDirector catesandhasbeenlegalcounseltoGoIinvariousdivestmentmatters.Heholdsdirec
torship in Ashok Leyland; Bajaj Allianz General Insurance & Life Insurance; Mandhana
Industries; Repro India; Shree Renuka Sugars; Tribhovandas Bhimji Zaveri; Innoventive
Industries&SanghviMovers.

Mr.AshokSaraf

NonExecutiveDirector Mr.AshokM.SarafhasbeenaNonExecutiveIndependentDirectoratBalkrishnaIndus
triesLtd.sinceMay29,2008.

Mr.KhurshidDoongaji,

IndependentDirector Mr.DoongajiservesasaNonExecutiveIndependentDirectoratBalkrishnaIndustries
Ltd.Mr.Doongajihasover40yearsofexperienceinprojectandcorporatefinance,legal,
operationsandcorporatelawswithICICILimited.HehasbeenassociatedwithJAICorp.
Ltd.since1999.

BA(Eco)LLB

MrVipulShah,

Director

Shri.VipulR.ShahservesastheComplianceOfficerofBalkrishnaIndustriesLtd.andhas
beenitsCompanySecretarysinceFebruary11,2012.

ACS

INDSEC SECURITIES AND FINANCE LTD.

INDSEC
GlobalPopulationsettogrowto8.2bnbyCY30from
6.5bninCY07.

InvestmentRationale:
1.OffHighwayTyres:NicheSegmentwithlongtermgrowthPotential:

Thiswillcreateadditionaldemandfor652MTPAof

Off Highway Tyres (OHT) is a niche segment comprising 810% of total


tyremarketglobally.TotalsizeofGlobalTyresmarketispeggedatUSD
180bn which means OHT market size stands at approx USD 1416 bn.
Thiswillrequire7%increaseinarablelandandequal The OHT segment is characterized by low quantity high customization
level which means high labour and capital cost. This peculiar nature of
increaseincroppingintensitybyCY30.
industryactsasnaturalentrybarrier.TheIndustryispeggedtogrowat
5% per annum over next 5 years though short term hiccups are seen
1.4bnincreaseinGlobalurbanpopulationbetween
currentlyduetoweakeconomicscenarioworldwide.Lackofmanpower
CY13CY30willrequireUSD53.8Trninvestmentto
availability,highcostofavailablelabourandhigherproductivityrequire
wardsurbaninfrastructurecreationi.eUSD3.5Trn
ment are the key drivers of mechanization of all kinds of production
(Agriculture/Mining/Infrastructure etc) activities which in turn propels
Pa.
demandforOffHighwayTyres(OHT).Webelieve,thesetrendsareirre
Thiswillleadtogrowthinminingoperationby2.5% versibleandthuslongtermdemandforOHTsaresecularinnature.The
incrementalOHTdemandofUSD480640mnperannumitselfpresents
3.0%paoverCY12CY30.
good growth opportunity (double digit) to Balkrishna Industries (which
currently holds marginal share of 4% of global OHT market) over next
ThesefactorscollectivelywillleadtoOHT/OTRde
fewyears.
mandgrowthof3.04.0%overtheforeseeablefuture
whichmeansincrementaldemandforUSD480640mn PopulationandFooddemandgrowth(CY19632030)
cerealsbyCY30.

OHT/OTRtyrespa.

Source:FAO,IndsecResearch

OHT/OTRdemand(USDbn)

InfrastructureInvestmentUSDTrn(betweenCY1330)
Road

Rail

Port

Power

Water

Telecom

Airport

9.0
16.1

11.2
4.1
11.7

0.2
1.5

Source:Industry,IndsecResearch

Hardcommoditydemand(CY1230)CY12=100asbase

Source:Industry,IndsecResearch

Source:RioTinto,IndsecResearch

INDSEC SECURITIES AND FINANCE LTD.

INDSEC
2.Costleadershipprovidescompetitiveedge:

BKT manpower cost comes at less than 4%


of sales vis a vis 25% for global leader
Michelinduetoproductmixandplantloca
tion.

BKTproducestyresagainstfirmorderbook
against practice of holding inventory by
global tyre majors which saves it inventory
carryingcostaswell.

Combined savings of 2530% in production


and distribution cost is passed on to dis
tributors which keep a portion to them
selves and pass the remaining to consum
ers.

This makes it easy for BKT to sell its prod


ucts against stronger brands in the global

As discussed earlier, Off Highway Tyres is a labour intensive business


characterized by low volume and high variety of products as per cus
tomers needs. Thus, labour cost is a key determinant of product pric
ing.. Global Players like Michelin's Manpower cost accounts for 25% of
sales (in CY12 and 24.2% in CY11) while the same forBalkrishna Indus
triesisaround3.9%.Therearetwokeyreasonsbehindthiswidegapin
manpowercost.Firstisproductmixandsecondisplantlocation.Mich
elinhasderived83%revenueinCY12fromNonSpecialtyTyreSegment
whichareverycommoditizedinnature(havinghighvolumelowmargin)
whereoperatingmarginfallsinmidtohighsingledigit(69%)whereas
in specialty tyres segment it commanded operating margin of 26% in
CY12vs21.5%inCY11.Thus,itisundercompulsiontokeepmarginshigh
in specialty segment to accommodate other low margin businesses. As
farasemployeelocationisconcerned,Michelinhasgot80%of0.113mn
workforce located at high cost location of Western Europe and North
America where wages are almost 45 times higher than those in India.
Storyissimilar withotherbiggieslikeGoodyear,Bridgestoneandalike.
ComparedtothisBKTderives94%ofrevenuefromSpecialtyTyresseg
mentand100%oflabourforcesislocatedinIndia.Thisexactlyexplains
lowmanpowercostforBKT.This80%differenceinManpowercostpro
vides20%costadvantagetoBKTwhichitpassesontodealersandcon
sumers to successfully compete with Market leaders. Needless to say,
dealersaretoohappytopushtheproducttoendconsumer.Themove
also helps consumers experience the quality of BKT products which is
comparable with the best. This will help the company successfully tap
theOEMmarketincomingyears.
BKTvs.MichelinComparison(FY13)
100.0

94.0

BKT(%)

Michelin(%)

marketplace.

25.0

2 0.0

17.0

19.9
11.3

3.9
SpecialityTyres
revenue
contribution

Manpoweratlow Manpowercost
costlocation

OPM

Source:ARBKT(FY13),ARMichelin(CY12),IndsecResearch

MichelinSegmentwiseSales(%)CY12
PassengerCar/Lighttruck

Truck

MichelinSegmentwiseMarginTrend
OPM(%)FY12

Speciality

OPM(%)FY11

26.0
21.5

17%
52%
9.3

31%

11.30

9.4

9.4

6.6
3.5

Passenger
Car/Lighttruck
Source:ARMichelin(CY12),IndsecResearch

Truck

Speciality

Miche lineGroup

Source:ARMichelin(CY12),IndsecResearch

INDSEC SECURITIES AND FINANCE LTD.


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3.CapacityexpansionatBhuj,couldbeagamechanger:

BKTcurrentlyoperatesthrough4plantsandhashit90%levelofcapacity
utilization and was undertaking debottlenecking to increase production
facturingplantatBhujinGujratwithcapacityof
incrementally.However,tocapturegrowthopportunitiesfully,thecom
1,20,000MTPAwithcapitaloutlayofRs18bn.
panyhasembarkeduponmassivecapacityexpansionplanatBhujwhere
freshcapacityof1,20,000MTPAisbeingaddedwithcapitalexpenditure

ofRs18bn.WhencommissionedfullybyFY15EBhujPlantwilltaketotal
installedcapacityofBKTto2,76,000MTPA.Successfulcommissioningof
BhujcapacitywillbedistributedbetweenAgriculture BhujplantwillprovideBKTwithadditionalgrowthlevers.Currently,BKT
derives 65% of revenue from Agriculture OHT tyres which are facing
andNonAgriculturetyresintheratioof55:45,
whichwillalterconsolidatedcapacitybetweenAgri someslowdown.Managementhasindicatedthat,Bhujcapacitywillbe
dividedbetweenAgriandNonAgri(OTR)intheratioof55:45.Thiswill
andNonAgriintheratioof60:40fromcurrentlevel effectivelychangeoverallmixbetweenAgriandNonAgrityresto60:40.
of65:35.
Companys focus is on production of Large /Ultra Large All steel Radial
miningtyreswhicharestillclockinghighergrowthduetoshortsupply.

These tyres also command higher margin compared to OHT. The com
panyalsointendstoenhanceitsshareofOEMrevenuewhichcurrently
Almost40,000MTPAcapacityatBhujwillbeLarge/ standsat18%(15%ayearago)andtargetstotakeitto25%overnext3
years time. In case of delay in recovery of demand, company has the
Ultralarge(>51)allsteelradialtyrestocaterto
optiontoutilizetheexcesscapacityforcontractmanufacturingwhichit
miningsectordemandwheredemandismorerobust.
hasdeliberatelyavoidedsofar.
BKTisintheprocessofcommissioningatyremanu

CapacityUtilizationandMarginProjection

Bhujplantaftercommissioningwillallowthecom
panytotargetOEMswhereitwillbeabletogarner
25%oftotalrevenueovernext3yearsfromcurrent
levelof18%.

BhujplantduetoitsproximitytoKandlaPortwill
alsoleadtosomereductionintransportationcostfor
BKT.

Source:Company,IndsecResearch

Wehavebeenveryconservativeinourprojectionofcapacityutilization
andareprobablyfactoringintheworstcasescenario.Inspiteof11.5%
CAGR volume growth over FY1316 & 11.3% CAGR in topline, the bot
tomlineisgrowingby8.5%CAGRonly.8%averagepricecutinFY14and
higherdepreciationandinterestoutgoinsubsequentyearsarethekey
factors keeping bottomline suppressed. Any improvement in capacity
utilizationcanalterthisequationsignificantlyandyieldhigherPAT.
TrendinOperatingandNetProfitGrowth

TrendinSalesandProfitGrowth

Source:Company,IndsecResearch

Source:Company,IndsecResearch

INDSEC SECURITIES AND FINANCE LTD.


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SWOTAnalysis

Source:Company,IndsecResearch

INDSEC SECURITIES AND FINANCE LTD.


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Specialtytyres:SectorView
Specialitytyreaccountsforalmost910%ofTotalGlobaltyremarketsizeofUSD181bn(Industrydata)whichmeansitssize
standsatUSD1618bn.
OTRMarketHighlights

KeyGlobalPlayersintheSpecialtyTyreMarket

SpecialtyTyreMarketSales(USDBn)&MarketShare(%) Bridgestone/Firestone, Micheline & Goodyear are top 3 players


(Categorised as tier 1players) in both Agriculture and OTR tyre
segmentswithmorethan70%globalmarketshare,thoughspeci
Micheline
Bridgestone
Goodyear
alitytyrebusinessislessthanonesixthoftheirconsolidatedgross
TitanInternational
Others
turnover.
3.64,21%

5.11,30%

OTRMarketSize:USDBn
3.7,22%

1.82,11%

SmallTyres(51''&Lower)

Large/ULTyres(57''&63'')

2.16,18%

2.73,16%

9.84,82%

Source:CompanyAnnualReport,IndsecResearch

MarketSegment:ProductProfile

Source:Industry,IndsecResearch

KeyPlayersinLarge/UltraLargeOTRTyresMarketShareUSDBn
Bridgestone
0.32,15%

Micheline

Goodyear

Others

0.11,5%
0.86,40%

Source:Industry,IndsecResearch

0.86,40%

MarketSegment:UserProfile
Source:Industry,IndsecResearch

OHT/OTRMarketSizeCY12(USDBn)

HighlightsofLarge/UltraLargeOTRTyreSegment

OEM,5.1,
30%

Replaceme
nt,11.9,
70%

Bridgestone, Micheline & Goodyear (Tier 1 players) com


mand95%marketshareofLarge/UltraLarge(5763)OTR
segment and are preferred player due to strong brand and
ultimate reliability of the product and their products per
form100%asperexpectation.

Yakohama,TitanInternational&Belshinaareconsideredas
tier2playersinthissegmentandtheirproductperformance
is5075%ofexpectationandcompeteonpricing.

Some Chinese Players Like Triangle, Shifeng, Taishan and


others (Tier 3) players are basically into 57 category and
planningtogainfoothold.Theirperformancehasbeenpoor
sofar(2050%ofexpectation).

Source:Industry,IndsecResearch

INDSEC SECURITIES AND FINANCE LTD.


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LongTermOutlook
PopulationandFooddemandgrowth(CY19632030)

UrbanPopulationGrowthCY0030(mn)

Source:FAO,IndsecResearch

Source:UnitedNations,IndsecResearch

CropProductionGrowthSources(%)

InfrastructureInvestmentUSDTrn(betweenCY1330)
Road

Rail

Port

Airport

Power

Water

Telecom

9.0
16.1

11.2
4.1
11.7

0.2
1.5

Source:FAO,IndsecResearch

Source:Industry,IndsecResearch

TractorUnits/1000farmers

Hardcommoditydemand(CY1230)CY12=100asbase

Source:WorldBank,IndsecResearch

Source:RioTinto,IndsecResearch

Worldpopulationwilladdaround1.7bnpeoplebetweenCY0730whichrequires652mnTonpaadditionalcerealstofeeditresulting
intohighcropproductionrequirement.FoodandAgricultureOrganization,aUNbodysuggeststhatthisproductionincreasewillrequire
additionalarablelandandincreaseincropfrequencybesidesimprovingcropyieldtomeetfoodrequirementoftheworld.Further,Mc
KinseyGlobalInstituteforecastsurbanpopulationtogrowby1.4bnbetweenCY1330whichwillrequireUSD3.2Trninvestmentperan
numleadingtototalinvestmentofUSD53.8TrnbyCY30.Thiswillleadtomininggrowthof2.53.0%paoverCY1230.
Duetocombinedimpactofallthesefactors,longtermglobalincrementaldemandforOHT/OTRtyresisexpectedtogrowby3.04.0%pa
whichmeansincrementaldemandofUSD480640mnpa.

11

INDSEC SECURITIES AND FINANCE LTD.

INDSEC
NearTermOutlook
TrendinUSFarmEconomy

AgricultureTyreDemandCY09=100,Base

Source:USDA,IndsecResearch

Source:Michelin,IndsecResearch

CropProductionTrendEU

MiningOTRTyreDemandCY09=100,Base

Source:EUShorttermAgriOutlook201314,IndsecResearch

Source:Michelin,IndsecResearch

EUAgroCommodityY/YPriceChange(%)September2013

Infra.OTRTyreDemand(EU&N.America)CY09=100,Base

Source:EuropaCommoditypricedashboardSept13,IndsecResearch

Source:Michelin,IndsecResearch

CropproductionandareaundercultivationinbothUSandEUisexpectedtoregistergrowthinCY1314overpreviousyearasperfore
castsofUSDAandEurope,thoughrealizationaredownonY/Ybasis.ThusdemandforAgriMachineryisexpectedtogrowinhighsingle
digits which augurs well for Agriculture Tyre demand but farmers propensity to spend on machinery due to lower realization of Agri
producewillkeepdemandsubduedinnearterm.AtbestAgriTyredemandcanbemaintainedatlastyearslevelwithlowtomidsingle
digitgrowthduetogrowthinSouthAmericanMarket.Intheminingsector,Globalmajors(BHPBilliton,RioTinto,Vale)Q3FY13produc
tionhasgoneupbuttheyallareonstrictcostcontrolmode(whichdoesnotaugurwellforMiningequipmentsales.Thisisdefinitelybad
newsforOEMshowever,replacementsalesofOTRshouldrecoveronthebackofhighwearandtearduetohighproduction.Overall,
shorttermoutlookforbothOHT/OTRiscautiouslyoptimisticonthebackofreplacementmarketdemand.

12

INDSEC SECURITIES AND FINANCE LTD.

INDSEC
FinancialPerformanceAnalysis
BKTTyresVolumeVsRealizationTrend
Inspiteof11%volumeCAGRbetweenFY1316,Top
lineisgrowingat12%CAGRonlymainlyduetoNon
improvementinrealizationinINRtermsduetoex
pectedappreciationofINRagainstUSD.

Source:Company,IndsecResearch

SalesandMarginsTrendYearly

BKTisturningFCFpositivebyFY15duetocompletion
ofBhujcapexandnonmoremajorcapexisplanned
thereafter.

Source:Company,IndsecResearch

MovementofFCF,BVandEPS

InspiteofimprovementinleveragefromFY13on
wards,returnratioswouldimprovefromFY15on
wardsmainlyduetoimprovementincapacityutiliza
tionfromFY15only.

Source:Company,IndsecResearch

INDSEC SECURITIES AND FINANCE LTD.


13

INDSEC
TrendinLeverageandReturnRatios

ReturnratiostoimprovefromFY15due
tobettercapacityutilization

Source:Company,IndsecResearch

QuarterlyMarginTrend

Volatilityinrubberpriceshasimpacton
operatingmarginsq/q.

Source:Company,IndsecResearch

PeerComparison
Company

BKT

Sales(Rs.bn)

33.94

Apollo
Tyres
127.94

EBITDA(%)

19.90

11.38

8.71

7.99

14.54

15.97

NPM(%)

10.41

4.79

2.69

1.99

9.37

7.32

NetWorth(Rs.bn)

14.43

33.90

9.06

7.82

1029.59

711.19

DebtEquity

1.10

0.89

3.03

1.63

0.45

0.89

ROCE(%)

17.32

19.65

13.71

20.53

ROE(%)

24.25

19.71

24.62

18.49

10.58

18.48

DivYield(%)

0.59

0.74

3.43

2.69

1.60#

FY14PE

4.50

5.16

1.75

3.21

9.51@

10.23

FY14EV/EBITDA

5.32

3.54

4.02

2.45

4.93

4.72

17.89*

12.70

22.47

40.71

12.70

4.88

PATCAGR(%)(FY1215E)

JK
Tyres
75.20

CEAT
Tyres
53.05

Bridgestone
Corp
2362.82$

Michelin,
France
1712.00

Source:Bloomberg,IndsecResearch

$BridgestonenumberbelongstoFY12endingDecember,andconverted
fromYENtoINR.
#betweenFinancialyearendingDec13andDec15.
@becauseofmajorlosses,networthhasgonedownconsiderably.
*The CAGR number is for FY1416 while the same for FY1316 comes at
8.50%asFY14EPSisshowingdeclineoverFY13andrecoveryexpectedfrom
FY15onwards.
Whencomparedtopeers,BKThastheBestoperatingandNetMarginand
secondbestROE.CurrentvaluationofBKTstandsatpremiumcomparedto
peers and justifiably so since even in the worst of the scenario , BKT has
better margins compared to peers and there is high entry barrier due to
laborintensiveandcustomizednatureofbusiness,thuslimitedcompetition.

14

INDSEC SECURITIES AND FINANCE LTD.

INDSEC
ValuationandRecommendation:

BKT18monthsEV/EBITDATrend

Source:IndsecResearch

Going by EV/EBITDA trend in last 18 months the company has been


tradingaround5.25xTrailingEV/EBITDA(between4.56x)Maintaining
the historical valuation trend, when we value BKT at 5.25x FY15p EV/
EBITDAbasis,weget18monthstargetofRs343whichgivespotential
upsideof22%fromcurrentlevel.
WeRecommendACCUMULATEonthestock.
Risktocall:
WehavebeenReasonablyconservativeinprojectingfuturerevenuefor
BKThowever,therearecertaininherentrisksassociatedwithourcall.
Fewofthemasarefollows.

We have assumed 12% Y/Y improvement in volume and 7% Y/Y


improvementinrealization(inUSDterms)whilerawmaterialcost
(In USD terms )assumed to go up by 5% Y/Y in FY15E which we
believe to be reasonable assumption in given scenario. Our Vol
ume/Realization/rawmaterialcostassumptionissubjecttofluc
tuation which may impact the Topline/Bottomline for the said
period.However,upsideriskismorelikelythanthedownsideone.

Huge unexpected volatility in raw material price may have nega


tiveimplicationforprojectedmarginofthecompanyasitisafter
sometimelagthatthecompanyisabletopassontheincreased
rawmaterialcosttotheendconsumers.

After commissioning of Bhuj Plant, Interest and Depreciation


charges will start flowing through P&L and thus company will be
hard pressed to maximize capacity utilization. It may so happen
that,itstartspushingitsproductsinthemarketbyfurthercom
promisingonmarginorbygivingliberalcredittermstoitsdealers.
Further,companyinitsefforttoenhanceexposuretoOEMsmayit
might have to sacrifice the discipline of margin and receivables.
This will have negative impact on future margins, cash flow and
earnings.

INDSEC SECURITIES AND FINANCE LTD.


15

INDSEC
FinancialStatements
SUMMARYINCOMESTATEMENT
FiscalYearEnding
inmn

FY11

FY12

FY13

FY14E

FY15E

NetRevenues

21,322.1

30,166.4

33,939.3

36,511.6

40,622.2

CostOfRevenues(inclStockAdj)

16,538.5

22,580.9

24,289.6

26,495.5

28,877.9

GrossProfit

4,783.6

7,585.5

9,649.7

10,016.1

11,744.3

SellingGeneral&AdminExp.

1,696.8

2,112.4

2,615.6

2,766.8

3,106.3

OtherOperatingExpenses
EBITDA
OtherIncome
EBITDA,includingOI

141.5

173.7

200.8

218.6

239.1

3,757.7

5,119.6

6,688.6

7,030.6

8,398.9

112.0

40.4

45.1

43.0

47.0

3,869.7

5,160.0

6,733.7

7,073.6

8,445.9

NetInterestExp.

215.0

292.0

273.7

346.6

566.6

Depreciation

773.4

863.9

1,122.0

1,825.0

2,195.0

EBT
Taxes
TaxRate

2,881.4

4,004.2

5,338.0

4,902.0

5,684.3

936.1

1,314.8

1,839.0

1,702.7

1,967.8

0.3

0.3

0.3

0.3

0.3

NetIncome

1,945.3

2,689.4

3,499.0

3,199.3

3,716.5

NIExclExtraItems

1,945.3

2,689.4

3,499.0

3,199.3

3,716.5

NIInclExtraItems

1,945.3

2,689.4

3,499.0

3,199.3

3,716.5

BasicEPS(INR)

20.1

27.8

36.2

33.1

38.4

SharesOutstanding

96.7

96.7

96.7

96.7

96.7

(inmn)
Assets
TotalCash
CurrentInvestments
TotalReceivables
Inventory
OtherCurrentAssets
TotalCurrentassets

SUMMARYBALANCESHEET
FiscalYearEnding
FY11
FY12

122.5
3,698.4
113.2
0.1
3,358.1
4,900.2
4,229.9
4,985.4
1,291.2
2,215.8
9,114.9
15,800.0

2,779.7
2.0
5,196.7
4,567.4
2,573.1
15,119.0

1,250.1
2.0
5,716.4
5,024.2
2,773.0
14,765.7

4,764.8
2.0
6,459.5
5,777.8
3,070.9
20,075.0

TotalPayables(incshorttermloan)
Provisions
TotalCurrentLiabilities
NetCurrentAsset
NetBlock
CWIP

8,202.0
187.0
8,389.0
725.9
7,247.9
563.5

10,397.4
206.0
10,603.5
5,196.5
8,729.9
4,767.4

9,145.6
224.3
9,369.9
5,749.1
13,352.7
10,125.5

8,792.9
232.8
9,025.6
5,740.0
20,027.7
7,895.5

8,908.8
265.5
9,174.3
10,900.7
23,182.7
3,045.5

OtherNonCurrentassets
Goodwill
TotalAssets
Liabilities
TotalDebt
EquityCapital
Reserves
OtherLiabilities
LongTermProvisions

4,822.5
0.6
13,360.3

357.4
193.3
8,420.2
832.6
3,556.8

4,081.9
0.6
22,776.3

9,398.3
193.3
10,907.5
1,013.6
1,263.6

2,909.4
0.6
32,137.3

15,666.5
193.3
14,236.7
2,036.2
4.6

924.4
0.6
34,588.2

15,666.5
193.3
17,316.4
1,406.5
5.6

842.2
0.6
37,971.8

15,666.5
193.3
20,890.7
1,214.8
6.6

TotalLiabilities

13,360.3

22,776.3

32,137.4

34,588.2

37,971.8

FY13

FY14E

FY15E

INDSEC SECURITIES AND FINANCE LTD.


16

INDSEC

(inmn)
PBT&Extraordinary
Depreciation
OtherNonOperating(Income)/Exp
OPbeforeWCadjustments
(Inc)/DecinWorkingCapital
Taxes&Others
CashfromOps.
FixedAssets(purchase)/sale
InterestReceived
DividendReceived
Sale/PurchaseofInvestments
CashfromInvesting
ShorttermLoans
LongTermLoans
Dividend

SUMMARYCASHFLOWSTATEMENT
FiscalYearEnding
FY11
FY12
FY13
2,881.4
4,004.2
5,338.0
773.4
863.9
1,122.0
(80.7)
(14.1)
(66.1)
3,574.1
4,853.9
6,393.9
(2,069.9)
(2,836.2)
295.5
(914.9)
(1,560.9)
(1,447.1)
589.3
456.8
5,242.3
(2,159.2)
(7,747.9)
(10,548.8)
15.6
26.0
16.1
32.1
9.2
3.5
479.4
113.1
(8.7)
(1,632.1)
(7,599.7)
(10,537.9)
3,759.8
1,828.5
(1,765.0)
(2,443.7)
9,040.8
6,268.2
(157.7)
(157.7)
(168.8)

FY14E
4,902.0
1,825.0
76.7
6,803.7
(934.5)
(1,728.1)
4,141.0
(4,900.8)

(1.3)
(4,902.1)
(598.7)

(169.9)

FY15E
5,684.3
2,195.0
53.9
7,933.2
(1,281.8)
(1,993.3)
4,658.1
(692.1)

(2.5)
(694.6)
(279.2)

(169.6)

CashfromFinancing
Extraordinaryreceipts/payment
NetChangeinCash
BFCash
ENDCash

1,158.4
(46.7)
68.9
53.7
122.6

(768.5)

(1,529.6)
2,779.5
1,250.1

(448.8)

3,514.7
1,250.1
4,764.8

Profitability
ReturnonAssets(%)
ReturnonCapital(%)
ReturnonEquity(%)
MarginTrend
GrossMargin(%)
EBITDAMargin(%)
NetMargin(%)
Liquidity
CurrentRatio
QuickRatio
DebtorDays
InventoryDays
CreditorDays
WorkingCapitalDays
Solvency
TotalDebt/Equity
InterestCoverage
ValuationRatios
EV/EBITDA
P/E
P/B

10,711.7
5.2
3,573.9
122.6
3,696.5

SUMMARYRATIOS
FiscalYearEnding
FY11
FY12

8.9
8.1
22.3
18.7
22.6
24.2

22.4
25.1
17.6
17.0
9.1
8.9

1.1x
1.5x
0.6x
1.0x
49.7
49.3
54.1
55.0
12.8
20.7
19.3
35.3

0.0x
0.8x
13.9x
14.6x

7.2x
6.4x
13.9x
10.1x
3.1x
2.4x

4,334.4
42.2
(918.9)
3,696.5
2,779.5

FY13

8.4
17.3
24.2

28.4
19.7
10.3

FY14E

7.3
15.1
18.3

27.4
19.3
8.8

FY15E

7.9
16.3
17.6

28.9
20.7
9.1

1.6x
1.1x
53.6
50.7
26.0
58.1

1.1x
20.3x

6.0x
7.7x
1.9x

1.6x
1.1x
53.8
47.3
27.8
56.6

0.9x
15.0x

5.9x
8.5x
1.5x

2.2x
1.6x
54.0
47.9
27.4
73.7

0.7x
10.9x

4.5x
7.3x
1.3x

INDSEC SECURITIES AND FINANCE LTD.


17

INDSEC
INDSECRatingDistribution
BUY:Expectedtotalreturnofover25%withinthenext12months.
ACCUMULATE:Expectedtotalreturnbetween10to25%withinthenext12months.
REDUCE:Expectedtotalreturnbelow10%withinthenext12months.
SELL:Expectedtotalreturnisbelowthemarketreturnwithinthenext12months.
NEUTRAL:Noinvestmentopiniononthestockunderreview.
Disclaimer
ThisreporthasbeenissuedbyIndsecSecuritiesandFinanceLimited(ISFL),whichisaSEBIregulatedentity.
Thisdocumentisforinformationalpurposesonlyandisnotintendedasanofferorsolicitationforthepurchaseorsaleofsecurity.
Thisdocumenthasbeenpreparedandissuedonthebasisofpubliclyavailableinformation,internallydevelopeddataandothersources
believedtobereliable.However,wedonotguaranteeitsaccuracyandtheinformationmaybeincompleteandcondensed.Notehow
everthat,wehavetakenmeticulouscaretoensurethatthefactsstatedareaccurateandopinionsgivenarefairandreasonable,neither
theanalystnoranyotheremployeeofourcompanyisinanywayresponsibleforitscontents.TheCompanysresearchdepartmenthas
receivedassistancefromthesubjectcompany(ies)referredtointhisdocumentincluding,butnotlimitedto,discussionswithmanage
mentofthesubjectcompany(ies).Allopinions,projectionsandestimatesconstitutethejudgmentoftheauthorasofthedateofthis
documentandthese,includinganyotherinformationcontainedinthisdocument,aresubjecttochangewithoutnotice.Pricesandavail
abilityoffinancialinstrumentsalsoaresubjecttochangewithoutnotice.Whilewewouldendeavortoupdatetheinformationhereinon
reasonablebasis,weareundernoobligationtoupdateorkeeptheinformationcurrent.Also,theremayberegulatory,compliance,or
otherreasonsthatmaypreventusfromdoingso.
Securitiesrecommendedinthisdocumentaresubjecttoinvestmentrisks,includingthepossiblelossoftheprincipalamountinvested.
Anydecisiontopurchase/salesecuritiesmentionedinthisdocumentmusttakeintoaccountexistingpublicinformationonsuchsecurity
oranyregisteredprospectus.Theappropriatenessofaparticularinvestment,decisionorstrategywilldependonaninvestor'sindividual
circumstancesandobjectives.Thesecurities,instruments,orstrategiesdiscussedinthisdocumentmaynotbesuitableforallinvestors,
andcertaininvestorsmaynotbeeligibletopurchaseorparticipateinsomeorallofthem.Eachrecipientofthisdocumentshouldmake
suchinvestigationsasitdeemsnecessarytoarriveatanindependentevaluationofaninvestmentinthesecuritiesofcompaniesreferred
tointhisdocument(includingthemeritsandrisksinvolved).
Thisreportisnotdirectedorintendedfordistributionto,oruseby,anypersonorentitywhoisacitizenorresidentoforlocatedinany
locality,state,countryorotherjurisdiction,wheresuchdistribution,publication,availabilityorusewouldbecontrarytolaw,regulation
orwhichwouldsubjectthecompanytoanyregistrationorlicensingrequirementwithinsuchjurisdiction.Thesecuritiesdescribedherein
mayormaynotbeeligibleforsaleinalljurisdictionsortocertaincategoryofinvestors.Personsinwhosepossessionthisdocumentmay
comearerequiredtoinformthemselvesofandtoobservesuchrestriction
Thecompanymaytradeinsecurities,whicharethesubjectofthisdocumentorinrelatedinstrumentsandmayhaveactedupon,useor
usedtheinformationcontainedinthisdocumentortheresearchortheanalysisonwhichitisbased,beforeitspublication.Thecompany
oritsdirectorsmayhaveapositionorbeotherwiseinterestedintheinvestmentstrategyreferredtointhisdocument.Thecompanymay
be involved in any other transaction involving such securities and earn brokerage or other compensation or act as advisor or lender/
borrowertosuchcompany(ies)orhaveotherpotentialconflicts.ofinterestwithrespecttoanyrecommendationandrelatedinformation
andopinions.Thisisjustasuggestionandthecompanywillnotberesponsibleforanyprofitorlossarisingoutofthedecisiontakenby
thereaderofthisdocument.Anycommentsorstatementsmadehereinarethoseoftheanalystanddonotnecessarilyreflectthoseof
thecompany.Nomattercontainedinthisdocumentmaybereproducedorcopiedwithouttheconsentofthecompany.Anyunauthor
ized use, duplication, redistribution or disclosure is prohibited by law and will result in prosecution. The information contained in this
documentisintendedsolelyfortherecipientandmaynotbefurtherdistributedbytherecipient.TheCompanyacceptsnoliabilitywhat
soeverfortheactionsofthirdparties.
Theresearchanalyst(s)ofthisreportcertifiesthatalloftheviewsexpressedinthisresearchreportaccuratelyreflecttheirpersonalviews
aboutthoseissuer(s)orsecuritiesandthatnopartofhis/her/theircompensationwas,is,orwillbe,directlyorindirectly,relatedtothe
specificrecommendation(s)orview(s)expressedbythatresearchanalystinthisresearchreport.
AnalystsholdinginthestocksmentionedintheReport:NIL

18

INDSEC SECURITIES AND FINANCE LTD.

INDSEC

CONTACTDETAILS
ContactInformation

ManagingDirector
NandkishoreGupta

ngupta@indsec.com

02261146101/02

ResearchTeam

SectorsCovered

ContactInformation

MilanWadkar

Cement,Auto&MidCaps

milanw@indsec.co.in

02261146105

ShaileshKumar

Banking&MidCaps

shaileshk@indsec.co.in 02261146139

RohitNatarajan

EPC,Infra,CapitalGoods&MidCaps

rohitn@indsec.co.in

02261146118

DivyaSankaranarayanan

ResearchAssociate

divyas@indsec.co.in

02261146109

InstitutionalSalesTeam

ContactInformation

NileshMistry

nileshm@indsec.co.in

02261146125

PradnyaPotdar

pradnyap@indsec.co.in 02261146134

ParagShah

parags@indsec.co.in

02261146133

Foradditionalinformationpleasecontact:research@indsec.co.in,orvisitusatwww.indsec.co.in
IndsecSecurities&FinanceLtd,301/302,"215Atrium","A"Wing,AndheriKurlaRoad,Chakala,Andheri(East),Mumbai400093
Telephone:+912261146114/61146100,Fax:+912261146180/86

19

INDSEC SECURITIES AND FINANCE LTD.