Stock Pick From The Auto Ancillaries Industry

HERE’S WHY:

• Competitive advantage arising out of 100 per cent production in India and 90 per cent exports
• Bottoming out of global demand weakness
• Improved margin outlook

Which brand of tyres does your car sport? Very less thinking goes into buying tyres as the decision depends on their price, warranty and drive. With tonnes of domestic and foreign brands flooding the Indian markets, the industry is getting increasingly commoditised. 

The off-highway tyres industry is extremely specialised due to the usage of these tyres and thus demand is also influenced by the quality and engineering prowess. Balkrishna Industries (BKT) operates in this industry with 64 per cent sales to agricultural tyres and 34 per cent in the OTR (off-the-road) tyre segment among others. 

BKT garners about 90 per cent of its revenues from exports. Forty six per cent of its revenues come from Europe, 25 per cent from the Americas, 15 per cent from Asia and the remaining from the rest of the world. While large, mechanised farms and a buoyant replacement market have helped sales in developed economies, boom in agriculture, infrastructure and mining and the movement from traditional to largersized equipment will drive the future growth of developing economies. 

The company plans to build on its potential by increasing penetration in current markets and development of new markets like India, Russia and CIS through the enhancement of its distribution network and expansion of its OEM base. It also plans to develop new products through its strong R&D team and introduce variants like all steel radial mining tyres and agri radial tyres. 

Moreover, BKT enjoys superior margins due to its proximity to rubber producing nations resulting in lower logistic expenses. Rubber constitutes to about 50 per cent of the total manufacturing cost of a tyre. For two years, the tyre industry took a hit on margins because of the soaring rubber prices. Since one year however, prices have stabilised at lower levels and benefited players. In Q4FY13, average prices of RSS 3 and RSS 4 rubber declined by 15 per cent as compared to Q4FY12. 

Resulting out of a global slowdown in automobile sales and industrial and construction activity, BKT witnessed a volume decline of 15 per cent in Q3FY13. This also resulted in a 12 per cent decline in revenues. However, the weakness in global demand seems to have bottomed out. The management too is optimistic about demand and has maintained its volume guidance of 140000-145000 MT for FY13. In the last five years, BKT has seen CAGR revenue growth of 28.01 per cent. It has also recently commenced production at its greenfield project at Bhuj, Gujarat with capacity expansion indicative of a positive outlook. 

The bottoming out of weakness and a positive outlook for margins combined with the scrip’s availability at a trailing 12-month PE of 7.83x makes BKT a good buy at the current levels. We expect the stock to reach Rs 350 per share in the medium term.