BUSINESS ANALYSIS AND VALUATION

Balkrishna Industries Ltd. (Tyres)

Assignment Part IA

9/29/2013

Group 1, Section B
Joga Preetam M Divya Deepthi Parth Kosada Piyush Gulati Sakshi Yadav Shetti Sridevi Ashok

Contents

Balkrishna Industries (Tyres) .............................................................................................................. 2 ROE, ROIC ......................................................................................................................................... 3 Assumptions........................................................................................................................................ 3 Industry Outlook ................................................................................................................................. 4 SWOT Analysis .................................................................................................................................. 4 Sustainable ROE ................................................................................................................................. 5

Balkrishna Industries (Tyres)

Balkrishna Industries (Tyres) is a niche play on the off highway tyres (OHT) segment with 3.5% global market share. It is the flagship company of Siyaram Poddar Group. Balkrishna Industries has three businesses under its umbrella : tyre, paper and textile processing. 100% subsidiaries of Balkrishna Industries are: Balkrishna Paper Mills Limited Balkrishna Synthetics Limited BKT Tyres Limited BKT Exim Limited

More than 80% of the Balkrishna Industries total business comes from the tyres business and hence tyres business is Balkrishna Industries core business. BKTs 80% of sales comes from replacement business, 14% from OEMs and the rest from job work. The company (BKT) is in the business of Off-Highway Specialty tyres. These specialty tyres are meant for Agricultural, Industrial, Material Handling, Construction, Earthmoving (OTR), Forestry, Lawn & Garden Equipments and All Terrain Vehicles BKT is a highly export oriented company. More than 90% of the revenues are from exports to more than 120 countries, majority of which are in Europe (47% by revenue), USA (43% by revenue), Asia. The company is hedged for EUR at 70-71 for net exports for next 12 months. However, the companys entire loan book is unhedged. (High foreign currency exposure) Balkrishna Industries has 4 tyre manufacturing facilities, two near Alwar (Rajasthan) and one each in Gujrat and Maharastra. It is also commissioning a new tyre plant in Bhuj which would lead to a capacity addition of 70%. The company also has done backward integration by setting up a mould manufacturing unit to cater to all its mould requirements Basic financial data of the tyre business alone (FY13): Revenues: Rs 3190.57 crs (growth of 13% YoY) PAT: Rs 355.83 crs (growth of 32.5% YoY) Volumes sold: 138339 MT Major raw materials required by value in rupees Rubber 62% and Carbon black 13%. Raw material costs are volatile because prices of rubber (actively traded on commodities market) and crude oil (Carbon black is a derivative of Crude oil) are highly volatile. This is a majorly labour intensive business. The low labour costs in India lead to Balkrishna industries having only 1/5th the labour cost compared to its global peers (since the company is mainly an exporter, this gives it a major cost advantage) The manufacturing being in India also gives the company the advantage of being close to the major rubber producing countries India, Indonesia, Malaysia and Thailand As on June 2013, Promoter Holdings: 58.3% | Foreign Institutional Investors: 10.91% | Institutions: 19.67% | Non Promoter Corp. Hold.: 3.11% | Public and others: 8.02% Board of Directors include 8 (>50%) non-executive and independent directors out of 13 directors.

ROE, ROIC
Case 1 (Reported) Case 2 (Adjusted) Reported Reported Total Networth Total Capital Market Cap ROIC Networth (in Rs Capital (in Rs cr) ROE ROIC (in Rs cr) (in Rs cr) (in Rs cr)* 10.60% 1,418.97 3,493.40 34.69% 13.26% 1018.08 2787.29 2612.68 10.45% 1,080.09 2,753.27 33.47% 15.67% 799.28 1830.51 2497.17 13.88% 831.77 1,438.80 31.05% 17.67% 579.82 1098.96 1288.94 19.35% 660.77 1,125.10 41.70% 19.95% 435.37 960.57 1235.68 10.23% 467.83 940.64 12.43% 7.67% 376.33 954.12 262.62 13.23% 411.1 945.94 27.18% 14.40% 343.83 789.69 1046.81 347.45 12.92% 748.25 33.20% 15.33% 207.76 542.06 878.63 Market Cap as on 29 September 2013 2321.26

ROE 25.08% 24.86% 22.31% 31.59% 15.03% 25.68% 23.91%

* Cl os i ng ma rket pri ces a s on NSE (refer excel s heet for detai l ed ca l cul a tion)

Assumptions
The market data has been taken from NSE India website. The corporate tax rate figures have been taken from KPMG database. To calculate the market capitalization values, closing stock prices as on 31st March of the respective year (or the trading day just before that in case of 31st March being a holiday) as on NSE has been taken.

Industry Outlook
The market size of the Off Highway Tyres (OHT) industry is estimated at ~USD15 billion. This comprises of around 8-10% of the global tyre market including all categories. The OHT market has grown at a steady 5% CAGR over the past five years. This growth rate is expected to continue in future keeping in mind the GDP growth rate expectation and a growing demand for mechanization in agriculture due to scarcity of suitable land. Currently, the OHT market is dominated by the big four players (Michelin, Bridgestone, Continental and Pirelli) which hold ~60% of the global market share.

SWOT Analysis
Strengths Backed by a well-known conglomerate Siyaram-Poddar group Owns captive power plant in Rajasthan which helps them to reduce power costs Extensive Distribution network: 200 distributors in 120 countries BTK operates in a capital and labour intensive segment which makes it unattractive for fresh investments by major players. Moreover, the segment is not exposed to any technological obsolescence and wild fluctuations in demand of its products.

Weakness Raw materials costs account for 70% of turnover of which 45-50% is natural rubber cost. Rubber prices are highly volatile since it is an actively traded on commodities market. Company is not well diversified. It operates mainly in one segment that is Off -Highway Specialty Tires

Opportunities Global majors are exiting off highway tyres business because it is very labour intensive and cost intensive. BTK has in house engineering facilities and enjoys lower labour costs in India. This provides a good opportunity to increase the market share in off highway tyre market. First company in India to set up an all-steel OTR radial tyre plant at its Chopanki (Rajasthan) to take advantage of shift from bias to radial tyres

Threats Operates in one single segment Faces a lot of competition from players like: o MRF Limited o Ceat Limited o Falcon Tyres Ltd o JK Tyre & Industries Ltd

Possible slowdown particularly in Europe & America can have a major impact on the company since they are the major markets for the company The company holds large amount of un-hedged foreign currency exposure which substantially increases the currency risk 90% of revenue comes from exports with 47% EUR and 43% in USD. Moreover most of the raw materials and capital equipment required by the company are imported which could increase the risk due to currency fluctuations

Sustainable ROE
Method 1: Reproduction Cost of Asset Method Cost of Bhuj Plant Capacity Current Capacity Current Valuation Current Valuation Less: Value of Debt Value of Equity Current PAT Average ROE 1200Crores 25000Tonnes 140000Tonnes 67,20,00,00,000.00 6,720.00Crores 3,687.18 3,032.82 355.83 12%

Method 2: Market share feasibility

2012-13 2013-14 E 2014-15 E 2015-16 E 2016-17 E 2017-18 E 2018-19 E 2019-20 E 2020-21 E 2021-22 E 2022-23 E Projected PAT 355.83 448.30 564.80 711.57 896.48 1129.45 1422.96 1792.74 2258.62 2845.56 3585.03 Sales Turnover (in Rs cr) 3,220.20 4460.75 5619.96 7080.41 8920.38 11238.50 14159.02 17838.50 22474.15 28314.46 35672.48 Market Share of BKT 3.50% 4.62% 5.54% 6.65% 7.98% 9.57% 11.48% 13.78% 16.53% 19.84% 23.80% Industry Size (in Rs cr) 92005.71 96606 101436.3 106508.1 111833.5 117425.2 123296.5 129461.3 135934.3 142731.1 149867.6 *With the current RoE of 30.17% the growth rate comes to around 26% which leads to a market share of 24% by FY23 which is infeasible because of high competition in the industry Projected PAT Sales Turnover (in Rs cr) Market Share of BKT Industry Size (in Rs cr) 366.96 3,220.20 3.50% 92005.71 462.32 582.46 669.83 770.31 885.85 1018.73 1171.54 1347.27 1549.36 1781.77 4600.28 5795.75 6665.11 7664.88 8814.61 10136.80 11657.32 13405.92 15416.80 17729.32 4.76% 5.71% 6.26% 6.85% 7.51% 8.22% 9.00% 9.86% 10.80% 11.83% 96606 101436.3 106508.1 111833.5 117425.2 123296.5 129461.3 135934.3 142731.1 149867.6

*The company would grow at a rate of 26% till FY15 with an RoE of 30.17%. After FY15 the company will grow at a rate of 15% approx till FY23 with an average RoE of 15.8%. (95% retention ratio assumed because the company is on an aggressive growth plan and is using internal accruals rather than external borrowings for capex expansion *Beyond FY23 the company will grow at an industry growth rate of 5% since it would be difficult to gain a market share of more than 12-15%