Balkrishna Industries

 

At A Market Price Of Rs 619, Co Has A P/E Of Close To 7, Lower Than Average For Sector

 

MID-SIZE tyre company Balkrishna Industries (BIL) has seen its stock price soar almost five times in the past one year in line with the rest of tyre stocks, because auto sales revived and investors flock back to the stock market. The company benefited from an improvement in demand from sectors such as agriculture, construction, earthmoving and mining industries.

   However, from here on, the stock movement will hinge on different dynamics for the company, which is a niche player in the 'offhighway' tyre segment.

   BIL, an export-dependent Rs 1,400-crore company, makes tyres for infrastructure and agriculture-related vehicles whose demand is closely related to overall economic growth. It is one of the strongest players in the domestic market in the off-highway tyre segment, but commands a market share of close to 3% in the $11-billion global industry.

   The company derives about 90% of its total revenue from the overseas market, with Europe accounting for over two-thirds of total exports. With agriculture in the European continent highly mechanised for diverse set of farming equipment, including vineyards, demand for tyres is relatively hedged against economic slowdown that impacts most other tyre makers.

   This means that even as the Euro zone is yet to recover from the global economic recession, export demand for BIL may not be adversely impacted in the near term. BIL's consolidated revenues grew at compounded annual growth rate (CAGR) of 30% over the past four years whereas its operating margins were in the range of 18-20%. However, it has witnessed a marginal growth of 7.6% in sales for quarter ended December '09 on the back of higher realisation and register growth in net profits to Rs 47 crore, compared to Rs 17 crore a year ago on the back moderation in interest cost.

   BIL seems attractive compared to Indian peers, because it is able to operate at a higher operating margin of over 18% against the industry average of around 15% despite the fact that prices of natural rubber is trading in the higher territory due to higher margin from the OHT segment.

   However, as the company derives a major part of its revenues from global markets, the global economic outlook has a bigger bearing on its business than the fast-growing Indian market. Besides, currency fluctuation poses a threat to the bottom line.

   The company currently enjoys modest valuations compared to its peers. At the last traded market price of Rs 619, the stock has a price-earning ratio (P/E) of close to 7, which is marginally lower than the average for the tyre sector of 8. Historically, BIL scrip's P/E ratio has been much lower, compared to the top two tyre makers — MRF and Apollo Tyre. Currently, Apollo Tyre and MRF are trading at a P/E ratio of around 10 and 7, respectively.

   However, as the company is expected to post a reasonable top line growth on the back of improved global scenario in the coming quarters, investors can accumulate this stock on dips.