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Off-highway business keeps Balkrishna in fast lane

 

Logo of Balkrishna

Logo of Balkrishna Industries

 

 

 

The name of tyre maker Balkrishna Industries might not ring a bell in your mind the way Ceat or JK Tyre does. But, this Mumbai-headquartered entity  is the third most valued tyre maker in the country, enjoying a market cap more than Ceat and JK Tyre put together. Specialising in off-highway tyres (OHT), Balkrishna also happens to be the third most profitable company in the segment, though it ranks fifth in sales. 

 

Unlike peers that have a diversified product portfolio, catering to segments such as cars, two-wheelers and commercial vehicles, besides the OHT space, Balkrishna has completely focused on one segment. Two decades ago, the company decided to exit two-wheelers and three-wheelers and worked towards building its capabilities in the OHT space. These tyres are mainly meant for agricultural (tractors and harvesters), industrial and construction (trailers and dumpers) applications. “We had realised that the margins are not good in the two-wheeler and three-wheeler space,” said Rajiv Poddar, joint managing director. 

 

The company now gets 64 per cent of its revenue from the agricultural segment. The rest comes from industrial, construction and earth-moving equipment tyres. While most tyre companies get the bulk of their revenue from the domestic market, it is the reverse for Balkrishna. “About 85 per cent of our revenue comes from exports. Europe happens to be our biggest market, even larger than India. Other markets are the US, Africa and Asia,” said Poddar. In spite of a heavy reliance on the export market, Poddar believes it is better to serve these markets from India than set up manufacturing facilities closer to these customers. 

 

Helped by improving margins and demand, as well as a benevolent raw material (rubber) price, the company more than doubled its annual profit to Rs 567 crore in FY16. In the quarter ended June (latest available data), profit surged 46 per cent to Rs 149 crore and it enjoyed a high operating profit margin of 28 per cent. 

Financials Balkrishna

 

 

 

The stock price has been reacting to improving performance. It hit a record high of Rs 1,200 in early October from a 52-week low of Rs 551 in February. It closed at Rs 926.4 on Tuesday.

 

Poddar said the company was in no mood to venture into car tyres. However, it recently started producing two-wheeler tyres. “We re-entered only to supplement the business of our dealers in rural markets,” said Poddar. This will enable dealers to market two-wheeler tyres to customers who walk in for a tractor or harvester tyre. 

 

The strong fundamentals of this segment are triggering reaction from other tyre companies. Ceat is investing Rs 330 crore to set up a plant to make off-road tyres. Apollo, second biggest tyre company by revenue, is seeing strong prospects from this segment. 

 

“The OHT segment contributes close to 10 per cent of our revenues. Having said that, this is one of the fastest growing product segments in our entire portfolio,” said Satish Sharma, president, (Asia-Pacific, West Asia and Africa) at Apollo. Sharma said the company was converting the truck bias capacity at one of its plants in Kerala to the OHT category.

 

“We have to wait and watch how the competition moves,” said Poddar, whose company has invested $500 million to expand capacity and will be ready with the addition by the end of 2017.

 

Paras Chowdhary, former managing director at Ceat said it is the export market that has kept the domestic OHT tyre segment in demand. 

 

“This segment can do well if US and Europe grows. India has an advantage of being a lower cost of production than these markets.”