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    Rise in tyre demand, product mix to drive Balkrishna’s growth

    Synopsis

    Recovery in off-highway tyre market to help co in boosting its revenue

    ET Bureau
    The possibility of better earnings growth, supported by an uptrend in global off-highway tyres (OHT) and better margins, could sustain investors’ interest in Balkrishna Industries (BKT), a manufacturer of OHT tyres used in farming and mining.

    The combined impact of pricing advantage, network expansion, and new product launches could help the company benefit from recovery in the global OHT demand. That’s why BKT, buoyed by volume growth across geographies, has revised its own volume growth guidance upwards for the current fiscal. BKT is expecting a volume of 190,000-195,000 tonne for FY18, compared with the earlier guidance of 185,000-190,000, which implies a growth of 13% year-on-year from 10 per cent earlier.


    In the September quarter, BKT’s volume grew 16 per cent, thanks to 29 per cent and 35 per cent growth in the US and rest of world, respectively. The company is seeing good traction for highersized tyres used in mining, which is helping it improve its product mix. As a result, the realisation in the September quarter grew by 6 per cent.

    The recovery in the global OHT tyres is real because the company’ peers, such as Michelin (specialty tyre division) and Trelleborg have been reporting substantial revenue growth in the past four quarters. Michelin’s speciality tyres division reported more than 20 per cent revenue growth in the past two quarters.

    BKT’s volume growth is supported by its rising market share in the mining tyres segment with its new product launches and network expansions through tie-ups with mining service providers. The segment, in which the company enjoys a low single-digit market share, shows strong growth potential.

    The revenue growth will also be driven by changes in the product mix over the medium term. Firstly, the share of revenue from vehicle makers is expected to improve to 35 per cent from 23 per cent; secondly, share of off-the-road (OTR) tyres revenue may increase from 35 per cent to 45 per cent, and lastly, its India business revenue is likely to increase to 25 per cent from 15 per cent.

    Image article boday



    Tyre Demand, Product Mix to Drive Balkrishna’s Growth

    The street is pricing volume growth of 15 per cent a year in the next three fiscal years.

    On the margin front, the company is taking multiple steps to expand margin further. The company is setting up carbon black plant at its Bhuj plant with an annual capacity of 60,000 MT at an investment of Rs 150 crore. The new plant will help to reduce 10 per cent carbon black sourcing cost. Currently, the carbon black accounts for nearly 27 per cent of the total raw material basket. The backward integration exercise is expected to increase 2 per cent to overall EBITDA margins. The operating profit margin (EBITDA) expanded 500 basis points to 31.9 per cent on the sequential basis in the September 2017 quarter. Also, the rising proportion of OTR tyres, the southward trend in the rubber prices, favourable hedges and lower fixed cost per unit will support margin expansion.

    The company’s stock rose 50 per cent in the past three months and trading at 22 times of its projected earnings of FY19.



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    Download The Economic Times News App to get Daily Market Updates & Live Business News.

    Subscribe to The Economic Times Prime and read the Economic Times ePaper Online.and Sensex Today.

    Top Trending Stocks: SBI Share Price, Axis Bank Share Price, HDFC Bank Share Price, Infosys Share Price, Wipro Share Price, NTPC Share Price

    ...more
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