Stock Review: Balkrishna Industries

Hit by a double whammy of high input costs and competitive pressures, companies have lost the ability to price pressure. While most companies, from IT to FMCG, are trying to support growth by playing the volume game, their ability to price products has suffered. This may be the reality that promoters have to grapple with, spreadsheet junkies are uneasy with such situations, as most of them like companies that have the ability to drive margins and boost bottom line. From Infosys to Hindustan Unilever are battling the revenue vs margin conundrum, a niche tyre player, Balkrishna Industries, has become the talk of the town.

Here's why this company is occupying the mind space of both foreign and domestic investors: the company manufactures off-highway tyres for agricultural, industry, material handling, forestry, lawn and garden, construction and earth moving segments. Nearly 90 per cent of the production is exported and the company has aworld wide distribution network ensuring extensive reach and penetration. At present, the company has an installed capacity of 160,000 tonnes per annum, and it plans to take the capacity to 293,333 tonnes per annum by 2013 in two phases. Given that the company does not operate in a niche space, it faces competition only from global players like Michelin and Titan. Currently, it has 3.5 per cent global market share and intends to take it to 6 per cent.

In order to reduce the cost of carrying inventory, the company follows a distributorship model. It owns no overseas warehouse, in turn, sells products through a network of 200 distributors in 120 countries. Not only is the product offering and business model unique, the pricing model is interesting too. It sells to the distributors at a30 per cent discount to its global leaders and distributors then take 5-10 per cent margin and pass-on the rest of the benefit to the end-user.

A report by MSFL Research, says: "Such distributor incentivized structure provides for lesser advertisement and promotional expenditure (1.5 per cent of sales), along with passing on the inventory management expense to the distributors." Even if input pressures rise, the company is in a better position to take price rise as it has a 30 per cent lower cost operation. Labour cost is only 3 per cent of its revenue while for global peers this is as high as 30 per cent.

In the current circumstances, the company may look better than many peers, this company comes with its own unique investment risks. By virtue of 50 per cent revenue from exports to Europe, the company has net receivables in euro. Despite hedging all its receivables, drastic fluctuations of the rupee versus these currencies can affect profitability.

Manufacturer of off-the-highway tyres has flexibility to price products as it operates in a niche market