Will India’s Second Largest Tyremaker’s Dream Run Continue?

Balkrishna Industries Ltd. has surged past analyst expectations as investors bet on its industry-beating margins and an uptick in demand for off-highway tyres.

Shares of India's second-largest tyremaker more than doubled this year. It's now trading at close to Rs 2,400 apiece, 15.5 percent higher than the Bloomberg consensus target of Rs 2015. But will the rally continue?

Demand for agriculture and mining tyres hit a bottom but is now showing signs of a pick-up as large mining companies are reporting an increase in capex for the first time in four years, HSBC said in a December 6 note. The bank is bullish on the stock given the euro's appreciation against the rupee and low rubber prices. Balkrishna Industries is already trading above its target price of Rs 2,280 apiece.

Founded in 1987 as a bicycle tyremaker, Balkrishna Industries' rise over the past decade and a half has been phenomenal after it diversified into making tyres for off-the-road, industrial and construction vehicles. Its shares rose from nearly Rs 2 apiece in 2000 to about Rs 2,384 now. The company, 54 percent owned by Arvind Poddar and family, is valued at over Rs 23,000 crore, second only to market leader MRF Ltd.

The share surge has made the stock expensive compared to its peers. It's trading at 23 times its estimated earnings for the year to March 2019. That compares with 12-15 times for its peers. Its enterprise valuation-to-Ebitda ratio of 15 times is also more than the high single-digit numbers for its rivals.

Exports contribute about 80 percent of Balkrishna Industries' revenue, with a large chunk of it coming from replacement demand. Margins at 30 percent are the highest in the industry.

What worked for the company is that it pared debt to Rs 702 crore in the September-ended quarter from about Rs 2,350 crore in the year ended March 2014, according to the company's annual investor presentation.

With no capex planned in the near term, the tyremaker expects to be net cash surplus. Return ratios are also expected to improve as it plans to increase capacity utilisation from 70 percent to 100 percent. And its base in Gujarat provides a cost advantage for exports.

Balkrishna Industries' volumes rose 17 percent in FY17 after four years of single-digit or negative growth, brokerage Nirmal Bang said. Its earnings are expected to grow at a 17 percent annualised rate on robust margins, benign commodity prices and strong realisations, it said.