Balkrishna Industries poised for more gains

Maker of specialised tyres expected to profit from higher sales volumes

The tyre stocks’ rally does not look like it would end anytime soon. Falling Chinese imports, weak rubber prices, regulatory action on imports, and steady demand have fuelled the rally. One company that will be a major beneficiary of falling rubber prices is Balkrishna Industries. The company makes off-highway tyres, or OHT, for specialised segments, such as mining, agriculture, construction and all-terrain applications. It is expected to gain from higher demand, increasing market share and rising operating profit margins.

Analysts believe the slump in OHT market (growth fell each year between the calender year 2011 and 2016) has bottomed out after declining by 33 per cent to $11 billion in CY16 as compared to about $16.3 billion in CY11. Given the increase in commodity prices and higher mining activity, global sales could grow by six per cent in CY17. Global OHT leader Michelin believes that mining tyres would grow by five to 10 per cent in CY2017, while agriculture tyres could see a three per cent annual growth in the 2017-20 period. 

Balkrishna gets about 63 per cent of its revenues from agriculture tyres and 34 per cent from tyres used in industrial, construction and earth moving equipment segments. All-terrain, lawn and garden vehicles account for the rest. Demand revival is expected to play out for Balkrishna, which has outperformed the global OHT industry over the last few years both on the volumes and revenue growth front. 

A bit of the growth revival, according to ICICI Securities, is reflected in the 18 per cent year-on-year growth for Balkrishna in the nine months ended FY17. While the global OHT segment is expected to grow at just over four per cent over the FY17-20 period, Balkrishna is expected to register a 15 per cent growth over that period. This should help the company gain 200 basis points market share over 2016-2019 period due to competitive pricing, growth in OEM segment and higher share in OTR (off-the-road) segment. 

“The firm is one of the lowest cost manufacturers of OHT industry globally (due to lower labour cost), helping it price its products more competitively. This coupled with strong focus on product quality has helped it consistently gain market share over the past seven years,” says an analyst at Kotak Institutional Equities. Further, lower costs allow it to sell its products at a 20 per cent discount to global peers. Labour as a proportion of sales are six per cent for Balkrishna, while the same for global peers is 20 per cent. A cost advantage coupled with falling rubber costs should reflect favourably in margins (32.8 per cent in FY16). Analysts, thus, have revised their earnings estimates upwards for FY18 and FY19 by four to seven per cent. While Balkrishna Industries’ stock has more than doubled over the past one year and now trades at 16 times its FY18 estimates, it can be acquired on dips.