Questions for Balkrishna Industries Management
1. POST-EXPANSION PRODUCTION CAPACITY OF 276,000 BY FY2015. SINCE WE TALKED LAST TIME IN JULY 2011, BKT'S AMBITIONS HAVE GROWN MULTI-FOLD. THERE IS FURTHER CAPACITY EXPANSION OF 30,000 MT WITH AN OUTLAY OF 400 CR. THERE IS A NEW MIXING PLANT FOR 100 CR, AND A TOWNSHIP ~ANOTHER 100 CR. 600 CR OUTLAY IN ADDITIONAL PLANS IN A YEARS TIME.
You seem to be in a hurry to consolidate your position. It looks like your FY12 performance and developments/feedback from the Market has fired more ambition for BKT. Is this a sign of a more confident/more aggressive Management?
It's been a natural normal advancement in our plans. You know that we were making small quantities of OTR Radial in FY12 from existing plants. We received very encouraging feedback from the OEMs. That led us to fast-tracking some of the plans on that front. We also saw that the Captive Power plant which we were putting up at Bhuj could now have full utilisation with this additional plant (in earlier case, we would have had to sell spare power to the Grid).
The other important aspect we were dealing with was about attracting and retaining talent. The plant is 30 Km away from Bhuj City - with no good educational facilities, etc. We realised an Integrated Township will go a long way in help addressing these.
What are the risks according to you?
Unforeseen demand crash! That's the only risk so far as we can see.
2. FUNDING FOR ADDITIONAL CAPEX OUTLAY OF 600 CR. ON 31ST MAR FY12, LONG TERM DEBT POSITION STOOD AT ~900 CR. YOU HAVE MENTIONED ANOTHER $100 MN FUNDING TIED UP AT LIBOR+320 BPS.
You must be looking to draw this soon. Long-Term Debt to Equity would cross 1.4x, probably for the first time. There is also Short Term borrowings of ~750 Cr. Is the company comfortable with these figures?
Yes the new 500 Cr Loan will take the total debt to about 2100 Cr. If you take out the Working Capital borrowings, long term debt would still be at ~1.3x. We are comfortable with that, even if that figure goes up to 1.4x we are okay.
In FY13 you will be spending ~800 Cr in Capex. Do you envisage a consolidation phase in FY14 and FY15, or further capex/borrowings are pretty much the order?
There will be 600-700 Cr capex in FY13 and the balance 500-600 Cr in FY14. Any fresh Capex will not be needed before FY16.
Also you should note that we have about 280 acres of land in Bhuj. Currently we have utilised only about 125 acres. Further Capex will be at lower levels.
3. SIGNS OF A SLOWDOWN IN KEY EUROPEAN MARKETS. YOU HAVE MENTIONED SEEING A SLOWDOWN IN EU REGION IN THE FIRST 2 MONTHS. YOU HAVE ALSO MENTIONED SLUGGISH OEM DEMAND.
How are you factoring this in? To maintain its position in the EU market, BKT may have to further reduce its price advantage of 20%?
That was a general statement acknowledging the state of the economy. We are growing. We have a good visibility.
Paring prices at this stage will be an aggressive move, and not warranted. We have no such plans. We would rather be conservative.
While Rupee depreciation effect on RM may be neutralised by US$ sales, this must be queering the pitch for Euro zone sales booked in Euros. Your RM import bill is probably 15-20% higher vis-a-vis major competitors in EU. Isn't the competitive advantage degrading fast for your comfort?
Actually no such thing. All our imports are in US$. The competitors also have to import in US$. As far as the Euro is concerned we had average realisations of Rs 63-64 to the Euro. In FY13, the average realisation is ~Rs 70 to the Euro, so we are in a better position.
All our pricing is in US$ or the Euro. Rupee has nothing to do. If we managed very well when Rupee was at 39 to the dollar, we should be able to manage much better at current levels.
We have a natural competitive hedge in Europe. With a falling Euro their imports starts going up; becomes uncompetitive for the bigger players. Yes if Euro-US$ PARITY, if that happens, we might face problems with a falling Euro as realisations will be going down. But that doesn't seem to be happening at the moment. US $ remains strong with $ at 0.81 Euro.
In FY12 we had 40% revenue growth. 20% of this was driven by volume growth. We had taken a 6-7% price hike, so the balance is all from currency growth.
How are you looking to mitigate these effects? You have mentioned the US market making up for some of the loss from EU. Will we see a major drive to increase penetration in the US market and RoW markets?
See in 2007 we had US Sales of $15 Mn. That contributed 6-7% of our sales. In 5 years we are at 100Mn in US sales which is now ~25% of Sales. This is a natural progression. As we have more capacities, we will penetrate more markets.
4. GUIDANCE FOR FY13 AT 160,000-165,000 MT. THIS IS AGAIN BASICALLY A 20% GROWTH IN VOLUME TERMS, SIMILAR TO FY12. HOWEVER THE COMPANY HAD REGISTERED A 40% GROWTH IN SALES IN FY12 BY VIRTUE OF PRICE HIKES AND A BETTER PRODUCT MIX.
FY13 may turn out to be very different? Rubber prices have corrected by some 20% in last 6 months and are expected to correct even further as mentioned by you.
Yes we may have to pass on some price reduction benefits later in the year, depending on the competitive activity. So far we have not seen any such moves. There is also the lag effect. Earlier Inventory was of 4-5 months. So this may become relevant only in subsequent quarters.
We remain confident of a revenue growth of 38-40% depending on the currency.
Where do you see price realisations stabilising in FY13? Is it correct to assume that price hikes are less likely? Better product mix may drive up realisations a bit? By how much?
Yes Price hikes are not on in the current scenario. Better realisations from Product Mix will start reflecting from next financial year. This year the new plant will only contribute probably 10-15000 MT of OTR radials and some from our existing plants - which may not be significant.
5. MARGINS & PROFITABILITY
Where do you see Operating margins stabilising for the next 2-3 years?
We are pretty comfortably placed for FY13. In the coming years too we should be able to operate within our historical range 18-21% EBITDA levels.
In a depreciating rupee scenario, do you foresee the revised Schedule VI norms for Forex accounting taking a further toll on margins?
No it works to our advantage. We are a net Forex earner.
The currency fluctuations occur because we book Sales at the Customs rate when goods go out of the factory, and realisations happen at the forward contract rate. This difference was earlier attributable to Sales but now need to be recognised as Forex gains/loss in Other Income (as per Schedule VI norms).
On the other hand, the Mixing Plant at Bhuj is supposed to bring in efficiencies and savings on transportation & logistics costs. There is also a co-generation plant contributing to power savings. What order of savings is this likely to bring in?
There should be a differential of 2-3%.
Interest cost capitalisation benefits for this phase of Capex may be over soon? That will see a spurt in interest costs and exert further pressure on Net margins. Where do you see Net Margins stabilising at?
Today we have access to funds at pretty low costs. Our net cost of borrowing was only 3%. Working Capital borrowings are at 2%. We also take advantage of buyers credit.
The next tranche of loan is also at low cost 3.2 +3m Libor which is 0.45, so 3.65% or so. In FY13, the interest costs will be applicable only for half year. In FY14, interest costs for the full year will be ~60-70 Cr.
We should be able to main PAT at 9-10% levels.
Could you explain 3m/6m Libor terms?
Basically refers to the interest payment cycles. 6 month Libor would mean interest payments are due every 6 months, which are at 0.75%. 3 month Libor is at 0.45% with interest payments due every quarter.
This seems like a big advantage. Not many companies are able to manage finance costs at these levels, are they?
Actually everyone should be able to access funds at 3.5%+ Libor. So that translates to 4.25% to atmost 5% costs.
But yes, smaller loan amounts probably come at a higher cost.
6. 30,000 METRIC TONNES OF LARGE AND ULTRA-LARGE SPECIALTY OTR TYRES
Kindly tell us a little more on what this means for the company in the coming years? Are you looking at expanding the presence in this segment in a big way?
OTR -all steel radial is a technology advancement. Just like it moved from cross-ply to normal radials (Nylon cords), now the technology has moved to all steel radials.
The total demand is ~$13-14 Bn globally, growing at 4-5%. Of this $4Bn is Agri demand. The balance $8-10 Bn is non-Agri - mostly Industrial, Mining, Construction - what we call OTR (Off the Road) And these require large and ultra-large specialty OTR tyres.
As you are aware our current mix is 33% OTR, 63% Agri. So this is very big incremental opportunity for us. The results of our initial attempts have been very encouraging. We should be able to encash on that.
We had a 3.5% market share 5 yrs back. We are at 5-6% market share currently. We should get to a 10% market share by 2020 or before.
This will start contributing from FY14? What kind of realizations are possible in this segment?
These will start contributing from FY15. 30000 MT should get us a top line of 750 Cr, or ~@250
What is the total size of the land available at Bhuj facility? And how much of this will have been utilised by the new plant, mixing facility and Township?
as mentioned before, total area is 280 Cr. We are using up only 125 acres for all above.
In the interim, Agri segment remains the biggest segment for BKT. How is BKT's Agri business affected by recession, monsoons?
Recession affects the OEM segment first. As you are aware our business model caters mainly to the Replacement market. In recession people stop buying new equipment, but they continue operating old equipment - for that they need replacement tyres!
Also Agri/Food business is recession proof. It is evergreen whether it is US, EU or rest of the globe. Someone has to produce, right? Certain countries like Israel are not monsoon dependent. Drip-Irrigation is very advanced.
We are not dependent on the Indian market for Agri segment.
7. ORDER BOOK POSITION. FOR THE LAST FEW QUARTERS WE HAVE BEEN NOTICING THE COMPANY MAINTAINING AN ORDER BOOK POSITION OF ~65000 MT OR ABOUT 5-6 MONTHS OF SALES AT THE CURRENT RUN RATE OF 12000 MT A MONTH.
