Assured Growth - Balkrishna Industries

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A flagship company of the USD 550 million Poddar Group, Balkrishna Industries (BIL) is present in two distinct businesses – textiles and tyres. The company’s sales and profit have seen a CAGR of 26 per cent and 33 per cent over the past five years respectively. Against an 8 per cent decline in the BSE 500 Index over the past one year, the stock of Balkrishna Industries has gone up by 7 per cent.

The company has consistently rewarded its shareholders for the past 21 years and at its current market price of Rs 114.3 the stock provides a dividend yield of 1.2 per cent. BIL’s sales grew by 57 per cent in the September 2010 quarter while its operating profit was up by 9 per cent over the same period last year. Despite the rising costs, the company has been able to maintain its margins at a steady level with OPM averaging at 24 per cent over the past five quarters. Its PAT at Rs 51.03 crore was up by 13 per cent over the same period last year.

Though it is into tyres, the company caters to a speciality clientele by supplying agricultural tyres, OTR (off-the-road) tyres, industrial construction tyres, ATV tyres, lawn and garden tyres, and solid tyres. Up to 95 per cent of its sales come from the export market while the remaining 5 per cent is from the domestic customers.

Also, about 70 per cent of BIL’s products are consumed by the agricultural sector. BIL enjoys a distinct advantage over its global competitors in terms of the product manufacturing cost. The availability of cheap labour and better productivity enables the company to supply products which are almost 30 per cent cheaper than what its global competitors can provide.

Its average realisation currently stands at Rs 175 per kg against Rs 160 per kg last year. The increasing rubber prices have forced the company to hike its product prices as this constitutes 50 per cent of its raw material cost. A further rise in rubber prices is not likely to impact the company as it has already entered into a contract for the supply of the material at USD 3,500 per tonne against a prevailing rate of USD 4,200 per tonne. This will keep its margins intact at least for the next two quarters. The company has also earmarked Rs 200 crore for capex which would be spent in the debottlenecking of processes at its existing plant. This is expected to increase its achievable production capacity from 1,20,000 tonnes per annum to 1,30,000 tonnes per annum. In addition to this, it is also going in for greenfield expansion at a cost of Rs 1,200 crore at Bhuj that is likely to be operational by the end of FY13. This is expected to add another 90,000 tonnes of capacity for the company.

On the valuation front, the stock discounts its trailing 12-month earnings by 5.5 times while its EV/EBITDA ratio stands at 3.92 times which looks quite attractive. Looking at the company’s appealing valuation, capex plan, and robust growth prospects, we would advise taking exposure in the counter with the expectation of a 15-20 per cent hike in the next one year.