Stock Review: Balkrishna Industries (BIL)

 

Mid-sized tyre company Balkrishna Industries (BIL) is a niche player in the tyre sector. It enjoys a global presence and has discretion in fixing product prices due to the nature of its operations. Investors who wish to benefit from the upward momentum in the tyre sector may look at BIL's stock considering its promising outlook.

BUSINESS

BIL makes tyres for infrastructure and agriculture-related vehicles. Hence demand is closely related to overall economic growth. It mainly serves the agriculture segment in Europe, followed by North America, Middle East, Africa, Australia and Asia. Since agriculture in Europe is highly mechanised with a diverse set of farm equipment, demand for BIL's tyres is relatively hedged against economic slowdown that affects most other domestically-focused Indian tyre makers.

It is one of the strongest players in the domestic market in the off-highway tyre segment, but commands a market share of just around 3% in the $11-billion global industry. The company's closest competitors are Michelin and Titan's Tyre, which make tyres for earthmoving equipment.

GROWTH DRIVERS

BIL will spend 1,400 crore on capex to increase its global share to 6% by 2015. This includes capacity addition of 2.3 lakh tonnes per annum by mid- FY13.

FINANCIALS

BIL's consolidated revenues grew at a compounded annual growth rate (CAGR) of 21% over the last four years while its operating margin was in the range of 22-27%. In the last few quarters, its profit growth has lagged top line growth due to higher input costs.

BIL looks attractive in comparison to its Indian peer group since it has a higher operating margin of over 18% against the industry average of around 15%. This is despite high rubber prices which are putting pressure on operating margins of other tyre players. The higher margin is a result of cost management and the company's unique pricing model. Also, its employee cost is just about 5% of sales compared to 33% for most western companies.

VALUATIONS & CONCERNS

At the current market price of 149, the stock of BIL is trading at a P/E of three for the 12 trailing months on a standalone basis. This is lower than the industry average P/E of nine.

BIL is a reasonable bet for investors seeking high returns in the long term considering its capacity expansion plan and an operating margin which is higher than average despite high rubber prices.

The company's ability to control the impact of rising input costs will be crucial for its overall growth and profitability in the near term.