More than 90% of sales for Balkrishna come from exports, making it vulnerable to the imposition of anti-dumping duty by any target market, says broking firm Espirito Santo Securities. We in our Antelope Stockletter had recommended Balkrishna Industries in the weekly issue date 11 July 2011 from which we exited with a gain of 42% on 20 February 2012
Balakrishna Industries reported a 15% y-o-y (year-on-year) decline in sales volumes in the third quarter of FY13, resulting in a 10% y-o-y revenue drop. While the fall in volumes was worse than expectation, Espirito Santo Securities’ view is that it is primarily due to an inventory cut-off and quarter-specific demand issues. The brokerage’s market update report expects volumes to pick up from Q1FY14.
According to the brokerage, primary channel checks in America and Europe, and commentary of Titan International (well known for its Titan and Goodyear brands of farm tyres) reinforce the confidence in revival of demand in CY2013. Espirito Santo Securities leaves its estimates unchanged and reiterates a BUY recommendation with 38% upside for the shares of Balkrishna.
Balakrishna Industries is a Siyaram-Poddar group company in which the promoters hold a 54% stake. It specialises in the development and manufacturing of a wide range of off-highway specialty tyres (OHT). The specialty tyres are meant for agricultural, industrial, material handling, construction, earthmoving, forestry, lawn and garden equipment and all-terrain vehicles. Balkrishna derives about 90% of revenue from exports, with Europe the larger share (46% of sales). Balkrishna’s portfolio is skewed towards the replacement market (80% of sales) and the agriculture sector (62% of sales). It has a strong distribution network of over 200 distributors spread across 120 countries.
The slowdown in demand coupled with destocking by distributors was responsible for the volume decline. However, the company benefited from declining rubber prices, which helped EBITDA margins expand by 393 basis points (bps) to 22.1% in Q3FY13. The company’s management cited an increase in the monthly production run-rate of tyres to 11,000-12,000 from 9,000-10,000 seen in Q3FY13 and it expects demand to revive from hereon. Furthermore, upbeat guidance on the demand outlook for CY13 by Titan and Michelin enhances Espirito Santo Securities’ confidence in its FY14E estimates.
According to the market update report of the brokerage, key risks for the company include:
(a) Euro depreciation: Balkrishna derives over 40% of its sales from Europe; hence,
any significant depreciation of the euro against the rupee will have an adverse financial impact on the company.
(b) Imposition of anti-dumping duty: More than 90% of sales for Balkrishna come from exports making it vulnerable to the imposition of anti-dumping duty by any target market.
(c) Strong rubber prices: Rubber forms 50% of the raw material consumed for Balkrishna. Significant rises in the prices of rubber can dent profitability.
(d) Goodyear’s manufacturing facility in France, which manufactures Agri-OHT
tyres catering to Europe, Africa and several other countries, is about to shut down, which means 10%-15% of the European Agri OHT market is up for grabs.
(e) Lower market share in India: Titan’s management has acknowledged losing market share to low-cost Indian manufacturers, especially in the smaller tyre segment.
Increase in capacity and ability to price product at 20%-25% below competitors will help increase market share in the global OHT market. Opportunities to increase market share by entering newer geographies, increasing penetration in existing geographies by widening product offering. Lower presence in the US gives an opportunity to grow further in a big OHT market.
Balkrishna is a value stock which we had recommended in our stockletter in July 2011 and suggested an exit with a 42% gain about seven months later, earlier this month. If you are interested in our stockletters, click here to subscribe.
The Tulip Telecom stock has crashed even as Nomura held out ‘Buy’ and ‘Hold’ recommendations. This shows how analysts can go completely wrong if they allow themselves to be misled by the company they track
Brokerages and research institutions, especially those dealing with the securities market, are expected to do a thorough research before providing any recommendation on any company. However, here is one case where it seems that instead of doing independent research, the analysts remained dependent on the company for inputs which they were tracking.
Nomura Equity Research, in its latest recommendation has suspended rating of Tulip Telecom from neutral on delays in foreign currency convertible bonds (FCCB) redemption, weak operational trends and data centre utilisations. On 17 May 2012, Nomura rated Tulip Telecom as neutral with a target price of Rs90, when the company shares were trading at Rs76.70. Thereafter, Tulip shares rebounded for a few months. On 6 July 2012, Tulip recorded its 52-week high of Rs129. Since then Tulip shares are on a freefall and today touched a 52-week low of Rs11.50, thus hitting the circuit limits.
The stock has crashed 93% from 3 December 2010 when Nomura rated Tulip as ‘Buy’ with a target price of Rs230, against a closing price of Rs178.15. Even on 10 February 2012, Nomura had a target price of Rs150 for Tulip when the closing price was Rs110.30. On both instances, the company share price, however nosedived, thus raising a big question on the research and recommendation process of an elite, foreign broking house like Nomura.
Tulip shares have been falling since 3 December 2010, when Nomura rated it as ‘Buy’. The freefall continued even as Nomura changed its target price for Tulip on 10 February 2012. So, what went wrong in the recommendations?
While suspending Tulip from ‘neutral’, Nomura said, "The (Tulip) stock is down by around 70% in the past three months and our long-term thesis on it being able to capitalise on its network investments has been impacted by delays in meeting its debt repayments and high cash flow needs. In addition, weak customer demand, and its execution missteps have also clouded the outlook and investor confidence.”
In the December 2012 quarter, the company reported a net loss of Rs85 crore compared with a net profit of Rs77.25 crore, same period last year. During the quarter, its total revenues fell 23% to Rs528.67 crore from Rs686.59 crore in the year-ago period.
As of December 2012, Tulip Telecom had a debt of about Rs2,700 crore which includes Rs780 crore in FCCBs, Rs600 crore worth of term loans, non-convertible debentures (NCDs) of Rs545 crore and external commercial borrowings (ECBs) of around Rs340 crore.
Last year in February, Forbes India published a highly upbeat story on Tulip Telecom saying that though the company's bets appear audacious, in reality, they are often conservative and textbook examples of expansion. "...unlike most of his (Col HS Bedi (retd), the CMD of Tulip) peers who invest billions of dollars in pursuit of often ephemeral markets, Bedi prefers to line up customers for Tulip's services before incurring the capital expenditure for the underlying infrastructure," the article said.
"...instead of spending serious money laying inter-city (between cities) fibre-optic, it cannily chose to lease that capacity from other operators thanks to the glut in supply there. In contrast, intra-city fibre is usually in short-supply. As a result of these moves, Tulip has been able to increase its addressable market tenfold from Rs1,400 crore to Rs14,000 crore within just 3-4 years," Forbes India had said.
The first appeal erroneously was received by the PIO and it took 34 days to reach the FAA. Accepting its error in making the charge, the Commission apologised to the FAA. This is the 43rd in a series of important judgements given by former Central Information Commissioner Shailesh Gandhi that can be used or quoted in an RTI application
In an interesting case, the Central Information Commission (CIC) had charged the First Appellate Authority (FAA) for not passing an order in the matter within 45 days, the maximum limit under the Right to Information (RTI) Act. However, it was found that the FAA was not at fault since the Public Information Officer (PIO), took 34 days to forward the appeal.
While giving this judgement on 15 March 2010, Shailesh Gandhi, former Central Information Commissioner offered his apologies to the FAA for making charge of Vishwa Mohan (the FAA) being ‘guilty of dereliction of duty”.
The appellant filed his first appeal on 20 October 2009, but the FAA passed an order only on 16 December 2009, after 45 days, the maximum time permitted under the Right to Information (RTI) Act. Based on the information received, the CIC on 22 January 2010, said, “The FAA Vishwa Mohan, Joint Commissioner (Industries) is guilty of dereliction of duty since he had not passed an order in the matter within 45 days which is maximum time permission to give an order as per the RTI Act. Vishwa Mohan is directed to give an explanation to the Commission for his dereliction of duty before 15 February 2010.”
Delhi resident Harishankar Thakur sought information from the government of the National Capital Territory of Delhi (GNCTD) about aids given to help poor, destitute, blind and handicapped as per Society Registration no. (XXI) 1860. During the hearing, he told the Commission that he received the information only after the order was issued by the FAA. “Thus the second appeal was entirely unnecessary and was made only because of the delay on the part of Vishwa Mohan (FAA) who did not do his duty as per the RTI Act,” the Commission observed.
In a written and oral submission, the FAA stated that was an error on the part of the Commission to have held him ‘guilty’ without giving him an opportunity of hearing. In his reply he stated as below…
(i) He assumed charge as FAA only on 26 October 2009 and hence cannot be held responsible for actions before that.
(ii) A perusal of the records reveals that the RTI appeal was erroneously received by the PIO on 22 October 2009 and after travelling through some officers was received in the office of the FAA only on 26 November 2009.
(iii) On receipt of the appeal on 26 November 2009 he scheduled a hearing on 8 December 2009 which could not be held on that day since he was required to be present in the High Court of Delhi.
(iv) After hearing the matter he gave an order on 16 December 2009. Thus he had issued an order within 19 days of receiving the appeal in his office.
The FAA also requested the Commission to withdraw its charge of “dereliction of duty” against him and close that matter.
After considering the submission of the FAA, the Mr Gandhi, the CIC, said, “I erred in making the statement and should have given an opportunity to him to explain his actions before passing this observation.”
The Commission, said, based on the evidence given by Vishwa Mohan, it appeared that he was not guilty of any dereliction of duty by has actually performed his duty as FAA very diligently. “The appeal was erroneously received in the office of the PIO, from where it took 34 days to reach the FAA. Vishwa Mohan cannot be held accountable for this. The Commission accepts its error in making the charge of Vishwa Mohan being 'guilty of dereliction of duty' and withdraws it completely,” Mr Gandhi said in his decision.
Here is the information sought by Thakur from the Registrar of Society, GNCTD and the reply given by the PIO...
A. Whether any organization under Society Registration Act (XXI) 1860 can implement schemes which include financial transactions?
PIO's Reply- There is no such provision in the Act.
B. If yes. Then what is maximum amount permitted?
PIO's Reply- As stated above, there is no such provision in the Act.
C. Whether using gifted (Dan) amounts is permissible/approved under such schemes to organization namely ‘Utthan’?
PIO's Reply- No such information is available regarding reorganization and justification.
D. If not. Then under which rule such schemes can be implemented?
PIO's Reply- Companies Act, Chit Fund Society and Cooperative Society Act (Threft & Credit)
E. If such organizations are not doing their work as approved, then what action has been taken against such organizations?
PIO's Reply- Registrar of Societies is empowered to take any action against such society.
F. Whether 80 G certificate can be used for other such schemes?
PIO's Reply- No legal opinion can be given in this regard.
CENTRAL INFORMATION COMMISSION
Decision No. CIC/SG/A/2009/003121/6529adjunct
Appeal No. CIC/SG/A/2009/003121
Appellant : Harishankar Thakur
New Delhi - 110059
Respondent : Public Information Officer
Govt. of NCT of Delhi
O/o the Registrar of Society,
Plot no. 419, FIE,
Patparganj Industrial Area,
Delhi - 110092
: First Appellate Authority
Jt. Commissioner of Industries
419, Udyog Sadan
FIE, Patparganj Industrial Area