70
My Best Pick
22 December 2017 / Outlook BUSINESSto signifi cantly higher complexity of this business.
Capital expenditure requirement is twice that of PV/
CV tyres. With extremely high labour involved, glob-
al players fi nd managing labour issues in India com-
plex. The non-OHT market is more than 10 x the size
of OHT. Also manufacturing is highly automated.
Therefore, it’s a preferable area for global as well as
domestic players to outsource manufacturing from
India. But, getting on an OEM’s approved vendor list
though takes four to fi ve years. Building a distribu-
tion network across multiple geographies is also an
extremely diffi cult and time consuming process. Not
surprising that BKT took 20 years to build its network.BIG GROWTH OPPORTUNITY
With a market share of less than 2 % in the mining/
construction (OTR) segment and less than 8 % in the
agriculture segment, the growth opportunity for BKT
is humongous. OTR is a high-margin business and the
market is more than 2 x of the agriculture segment.
BKT has only 1 / 3 rd sales in this category. The compa-
ny is now taking steps to target the mining sector: ( 1 )
launch of higher-sized mining tyres through internal
R&D eff orts (the company has launched 39 -inch plus
tyres; earlier it was manufacturing up to 25 inch tyres)
and ( 2 ) network expansion though tie-ups with mining
service providers.
BKT signifi cantly underpenetrated in India as well
as the US, and the company is expanding its distribu-tion network in these two geographies. Contribution
from OEM sales for BKT is currently less than 25 %
though it has doubled in the past seven years. The
company is now an approved vendor with all global
OEMs and as discounts get lower, this segment will be
a big growth driver. Given that it has one of the wid-
est product off erings, BKT will also be able to increase
its market share in the replacement market.CYCLE UPTURN
In FY 17 , the company utilised just 55 % of its total ca-
pacity. Yet, it managed to generate operating margin
of over 35 % and ROE-ROCE of above 20 %. Even aft er
more than # 2 , 700 crore investment, the company is
now net cash positive in terms of debt. Of late, thanks
to the commodity cycle, global demand for OHT has
picked up, input costs are down and the company is
well poised to benefi t from operating leverage as its
capacity utilisation rises. Historically, over the past 5
and 10 years, the company has been able to grow its
earnings by almost 25 %. With a more favourable eco-
nomic environment, BKT is well on its way to repeat
its historical trend.
The company, traditionally, hasn’t commanded
high valuation because it gets clubbed with PV and
CV tyre players whose businesses are not comparable
since their customers, distribution network, manu-
facturing process and competitive intensity are very
diff erent. There are large-scale expansion plans being
announced globally in PV/CV tyres, but that is not the
case in the OHT segment.
BKT’s stock trades at a one-year forward P/E of 23 x,
which is similar to what top tier domestic PV/CV players
are trading at. Given the high entry barriers, growth
potential, and increasing operating leverage, Balkrish-
na’s valuation appears fair if not exactly cheap. b
The writer holds the stock in his personal capacity
and has recommended the stock to his clientsIn FY17, the company utilised
just 55% of its total capacity. Yet,
it managed to generate operating
margin of over 35% and return
ratios of above 20%Leader in its own right
OHT makes up for a small portion of the global tyre market, but BKT has made its mark as a low-cost producerEMPLOYEE COST AS % OF SALES
TrelleborgMichelinContinentalBKT3028237
OTR stands for Off the Road tyres (OHT includes OTR and Agriculture)GLOBAL TYRE MARKET (%) BKT REVENUE BREAKUP (%)(^73)
90
34
66
OTR
Agriculture
Passenger
vehicles &
others
Source: Analyst report