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.