Recommendation From Tyres Sector
This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.
BALKRISHNA INDUSTRIES LIMITED : SMOOTH ROAD AHEAD
HERE IS WHY
✓Huge growth potential
✓Focus on cost reduction
✓Good returns on capital employed
Balkrishna Industries Limited (BIL) is focused solely on ‘off-highway’ tyres catering to the agricultural and industrial segments. The company has 7 per cent share of the global market. While OTR forms 65 per cent of the global market, for BIL it only contributes 33 per cent to its revenue. The company has been undertaking various actions like setting up warehouses in markets in North America and Europe to be closer to the customer and have a just in time (JIT) system. The company sales cover over 130 countries through distribution network in Americas, Europe, India and rest of the world. BIL also has strong partnership with OEMs. The company has over 2,700 SKUs.
The company reported net sales of Rs 5,783.19 crore in FY21. It had reported net sales of Rs 4,811.24 crore in FY20, an increase of 20.2 per cent. The company reported PBIDT of Rs 1,810.44 crore in FY21, an increase of 42.41 per cent. It had reported PBIDT of Rs 1,271.25 crore in FY20. The company reported PAT of Rs 1,177.53 crore in FY21, an increase of 22.7 per cent. It had reported PAT of Rs 959.65 crore in FY20. The company has reported cash from operating activities of Rs 1,339 crore in FY21 as against Rs 1,173 crore it reported in FY20. India business grew 29 per cent in FY21 and the strong momentum is likely to continue.
Net sales were at Rs 1,753.45 crore in March 2021, up by 27.78 per cent from Rs 1,372.27 crore in March 2020. This was on account of robust volume growth, led by strong demand for agriculture tyres across geographies. Demand has been picking up in other segments on account of increased commodity prices and growth in economic activities. Its PBIDT stands at Rs 550.47 crore in March 2021, up 43.34 per cent from Rs 384.04 crore in March 2020. Its increase was driven by favourable product mix, cost declines and positive operating leverage. The quarterly net profit was at Rs 379.95 crore in March 2021 as against net profit of Rs 264.70 crore in March 2020, an increase of 43.54 per cent.
The management remains optimistic and expects the current demand trend to continue in FY22. For FY22 the company expects volumes to be in the range of 2,50,000 – 2,65,000 MT, implying 10-16 per cent YoY growth. The company aims to achieve 10 per cent global market share in tyres which is currently at 6 per cent. This is expected to be driven by expansion of the product portfolio, scaling up of distribution channels and strengthening of market share in key markets. The company continues to focus on market share gains through domestic presence where it sees more potential. In the global business, BIL’s products are priced roughly 20 per cent below the leading players and the company aims to narrow this gap to 12-15 per cent.
Driven by the company’s robust operating performance and visible demand prospects, the management has given optimistic volume guidance for FY22. In-sourcing of carbon black, favourable product mix and better operating efficiencies are expected to support margins in the coming quarters. The company has had a robust operational performance on account of strong agriculture sector demand and BKT’s market share gains and stable demand recovery in non-agriculture segments. The total debt to equity ratio is 0.166. On the returns front, it has ROE and ROCE of 21.39 per cent and 24.21 per cent, respectively. By virtue of these factors, we recommend our reader-investors to BUY this stock.