BalKrishna Industries (BKT-Tires)

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BalKrishna Industries (BKT-Tires) – Stock note.                Date – 23rd February, 2022

Purpose of the note – The note aims to give you a brief overview of the company : its origins, businesses and future prospects along with risks associated with the business and ownership of BKT stocks.

About the company :

This is a family run business, with its origins of the group dating back to the 1950’s. Starting off as a bi-cycle tyre company, BKT went full steam in the “Off-the-road” tyres (Agri + OTR) business in the 90’s. The company is head quartered in Mumbai, India.

Global OTR Tyres market :

The Global OTR Tires Market is projected to grow from USD 8.7 billion in 2021 to USD 11.0 billion by 2026, at a CAGR of 5.0% during the forecast period. Increase in infrastructural development activities and growth in mining sector has created higher demand for the construction and mining equipments which is driving the demand for OTR tires from the OEMs. Also higher demand of farm mechanisation and various schemes offered by the governments has boosted the demand for agriculture tractors, which has a positive impact on demand of OTR tires. 

OTR tires are required in various equipments such as construction, mining, agriculture mechanisation and industrial applications. The demand for radial OTR tires is also observed to have increased in the recent past over bias tires, which is expected to further pick momentum due to its numerous advantages (The main difference between radial and bias ply tyres is in the belt construction. The cord  materials too are different, leading to changes in the functional performance of the tyres). 

Major Global Players 

The key players in the OTR tires market include the Continental AG (Germany), Bridgestone Corporation (Japan), Michelin (France), Goodyear Tire & Rubber Company (US), and Pirelli & C. S.p.A. (Italy).

BKT-Tires global market share is less than 6%.

BKT-Tires : Business segments

  • Agricultural tyres (35 categories). Few categories listed below.
  • Industrial tyres (23 categories). Few categories listed below. 
  • Mining and construction (13 categories). Few categories listed below.

Unique aspects of the business:

  • Caters to customised requirement for specific production needs – as a case in point, BKT tires has close to 2800 S.K.U.s (stock keeping units). The units sold per SKU is much lesser as compared to segments like passenger car tyres. 
  • High investment in R&D and relationships built with OEMs as a result of higher customisation need creates entry barriers. 
  • Key customers include; 
  • The replacement market is the other avenue for sales, where the replacement cycle depends on usage of the tyres;
  • Agriculture : 3-4 year replacement cycle. BKT is an established player in this segment with market share of 8%
  • Industrial and construction activity : 1.5-2 years replacement cycle. New businesses for BKT. 
  • Mining activity : 1 year replacement cycle. New businesses for BKT.
  • Industrial and mining are much larger OTR segments and BKT currently has a market share of just over 2.5% here.
  • Lower labour cost – labour cost as percentage of sales is around 7% as compared to 26-27% for global competitors.
  • Distributor led model Vs. Own store formats by global competitors. Lower cost allows BKT to pass 13-14% margin to distributors as compared to the global competitors offering single digit margins.

Risks to the business:

  • Raw material prices account for 42% of revenue. Fluctuation in material prices leads to margin variance.
  • High logistics cost on account of global supply chain. Oil prices impact margins.
  • Threat of anti-dumping duties from key markets may affect competitiveness. 
  • Promoter compensation has been on the higher side over the last 2 years. However, the promoter holding being at 59% gives comfort.

Concluding note :

  • The company operates in a sector that will continue to grow in the foreseeable future
  • The company has significant room to expand market share in the OTR business
  • The company has built strong moats with customer relations and R&D in a relatively niche market segment
  • Cost-efficiencies should also help sustain profitability in the foreseeable future.
  • The company has a low debt/Equity ratio of ~17%
  • The company has been able to double EPS every 3-4 years on an average. Cyclicality of the OTR business and input cost fluctuations does impact EPS growth (Eg., Lower mining activity results in lower OEM & replacement demand, thereby affecting volumes). Input price fluctuations also affect margins
  • The stock price has corrected from 2700 levels to ~ 1800 levels now. 
  • Accumulation over a couple of quarters or more can be good strategy to invest in the business (subject to your risk profile).

[Disclosure : Author currently has a small exposure in this stock]

* Investments in stocks are risky and can result in permanent capital loss.