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My Best Pick
22 December 2017 / Outlook BUSINESSI
think building a strong equities portfolio is
like building a winning cricket team. You
want to create a team with a diverse set of
players who will win in all types of condi-
tions and pitches. More importantly, you want players
who thrive in adverse conditions and stressful situa-
tions when many, who may be comparable in favour-
able conditions, are not able to survive for long in
such an environment.HOW I FOUND MY PLAYER
I have been closely following Balkrishna Industries
(BKT) since 2012 , when I fi rst met the management,
but ended up investing in the company only aft er four
years, at the start of 2017 , when they had completely
proven me wrong.
In 2012 , I had concluded that the company was
going in for a huge capital expenditure (almost dou-
bling its capacity) at the wrong time when the com-
modities cycle had peaked. But, more importantly,
the incremental return on capital was sub-par. From
2011 to 2016 , owing to a slowdown in commodities,
mining, construction and agriculture, the global off -
highway tyre (OHT) market had contracted by 30 %.
Though my thesis for the industry turned out to be
accurate, BKT made a mockery of it by increasing its
sales by 50 % with improving operating margin and
working capital days. At a time when global competi-
tor, Titan International, almost went bankrupt, BKT
increased its operating margin from less than 18 % to
over 35 %. I had now found the key player in my team.IN A LEAGUE OF ITS OWN
Founded in 1987 , Balkrishna Industries is a leading
global manufacturer in the OHT segment with 5 %
market share. It focuses on specialist verticals such
as agriculture, construction and mining, and off ers a
product range of over 2 , 400 SKUs. The company sells
its products in 130 countries through a network of 300
distributors. While its major market is Europe, BKT
is underpenetrated in India and the US, contributing15 % of sales each. The company owns fi ve state-of-
the-art production sites in India with a capacity of
300 , 000 MTPA and employs more than 7 , 000 people.
Yet, its employee cost at 7 % of sales compared with
over 25 % for global competitors, makes BKT the low-
est cost producer that generates the highest margin.
BKT entered the OHT business in mid- 1990 s, mainly
targeting the replacement market. It off ered its tyres
at 50 % discount to global branded players. Aft er 20
years, the company generates 25 % of its sales from
OEMs and the discount has narrowed to 15 %- 20 %. In
addition, BKT has to face trade barriers in terms of
countervailing duty in the US. This is exact opposite
of the protection that domestic passenger or com-
mercial vehicle (PV/CV) players get. Because its cost
of manufacturing is 40 %- 45 % lower compared with
tier I competitors, even aft er such steep discounts
and trade barriers, BKT is signifi cantly profi table
compared with competitors.DIFFERENT DYNAMICS
The global annual tyre market is worth more than
$ 160 billion. OHT makes up for just 10 % of the overall
market and also the business dynamics are very dif-
ferent compared with the PV/CV tyre business. OHT
tyres are made-to-order and in very small batches.
Compare this with PV tyre companies, which carry
a few SKUs and can produce million units. Mass pro-
duction in the OHT business is extremely diffi cult
and, hence, automation and China are not a threat.
Many competitors have tried to enter this segment,
but haven’t been able to gain much traction owingIn 2012, I concluded that BKT
was going in for a huge capital
expenditure (almost doubling its
capacity) at the wrong time when
the commodities cycle had peakedNote: Market related data as on December 1, 2017; Financials for
FY17; Consolidated fi nancials considered wherever applicable
Data: Ace EquityCY17 RETURN90%
TTM P/E(X) 30
stock price#2 , 099
pat# 717 cr
M-CAP#20 ,285cr
ROE22.69% roce22.5%
net sales#3 ,727cr