BLK Industries:

INDUSTRY ANALYSIS :
Understanding the Niche Sector of the Company :
Balkrishna Industries is the flagship company of Mumbai-based Siyaram Poddar Group. It
manufactures and sells OTR (off-the-road) and agricultural tyres. The company is present in
more than 120 companies through a network of 200 dealers. It has 3 per cent share of the
overall world tyre market.
Furthermore, United Nation’s Food and Agriculture Organization (FAO) reports steep Food Price
Index decline during the first four months of 2020, as in April the index drops to the lowest since
January 2019. The commodity price decline is due to the COVID19-related economic recession,
logistical bottlenecks and declining demand from foodservice given the national lockdowns. Sugar
experienced the steepest price declines, largely due to falling crude oil prices leading sugar mills to
redirect sugar cane away from ethanol (gasoline substitute) production

Logistics are also one of the main causes for agricultural activity disruptions during the national
lockdowns, caused by limited ground, air and ocean freight capacities. Underdeveloped online food
delivery markets and lack of accessibility to other B2B channels such as retail are considered key
obstacles for continuity of SME farmers. Moreover, travel disruption for seasonal workers caused
labour shortages and created additional problems for the industry.

Agriculture is not likely to see major structural changes in foreign trade flows. While FAO expects
vegetable production to become more local and less dependent on imports, most traded agri-food
commodities, such as crops and cereals, fruit and meat are likely to sustain current dynamics.
As business confidence took a hit in 2020, investment sentiment in new commercial construction
projects deteriorated. Similarly, elevated layoffs and rising unemployment rates negatively impacted
consumer confidence and demand for new residential construction temporarily froze. In addition,
temporary shutdowns of automotive and machinery factories negatively affected production
volumes of these industries. Overall, the fall in production, and hence, demand from all major
rubber and plastic B2B segments (construction, machinery, automotive) pulled the industry’s
revenues into negative territory in 2020.

The global construction industry is expected to recover to its 2019 level in 2021, as governments and
public authorities are aiming to advance spending on infrastructure projects as soon as social
distancing measures are removed. With interest rates falling to record lows, borrowing costs are
expected to remain at a minimum offering support for another important sector - residential
construction.

Significant decline in coal mining is anticipated in the upcoming years, due to

growing dependence on alternative energies, coupled with
environmental/regulatory pressure. This would drive down the OTR tire demand
from coal miners, thus providing opportunities for other miners to lock their
capacity for the upcoming years and develop an upper-hand in negotiation with
the suppliers

After a strong performance in the March quarter (Q4), off-the-road tyremaker Balkrishna
Industries is expected to gain from robust demand in the agriculture segment across its key
markets. Despite the lockdown towards the end of March, the company posted record
quarterly sales volumes led by Europe, which accounted for 58 per cent of its revenues in
the quarter.

While the firm posted volume growth of 5 per cent, revenues in Q4 were at similar levels as
the year-ago quarter, given the product mix and discounts in the European market The firm
passed on some of the gains from raw material costs to consumers.
40% cheaper than competitor
While the management did not give guidance, it indicated that if there are no
further demand issues, performance in FY21 would be similar to FY20. What should support
volumes this year is the demand for agriculture tyres (60 per cent of sales) in Europe, the
US, and India.

The European market is witnessing good traction after two years of muted growth because
of drought and heatwave. Demand in the US market was also impacted last year, given the
trade war between China and the US.

The situation has improved and demand is now at pre-Covid levels in these markets. Growth
in the Indian market is steady over the past three years and is expected to continue this
year, with demand led by good monsoons and government incentives for the sector.
Analysts expect the replacement channel (70 per cent of sales) to be strong, led by the need
for change of tyres rather than higher spending on replacing the vehicle. While steady sales
growth is key, there are margin triggers for the company. The setting up of a new carbon
black plant is expected to help add 100-150 basis points to margins, while lower raw material
costs (natural rubber, crude oil derivatives) should bring down the cost of the raw material
basket. The company indicated that the excess sale of carbon black output in the market is
fetching good margins.

In addition to market share gains across geographies and steady margins, the other positive
is the strong balance sheet with zero debt and cash of over ~1,000 crore. Investors can look
at the stock, which gained 2 per cent in trade on Monday.

https://commerce-app.gov.in/meidb/com.asp?ie=e HSCODE 4011

Yes, the stock has appreciated ~70% from its Mar’20 lows yet it believes it provides better risk
reward vis-à-vis peers due to its standout earnings strength (expect FY21 to grow 3% YoY). The
industry exports data has provided new insights which renew our confidence on growth rebound in
H2FY21. The latest monthly (Jun’20) industry export data indicates V- shaped rebound across agri
tyres (Ag) at ~44% YoY / 32% MoM and off-the-road tyres (OTR) at -2.4% YoY / ~29% MoM.
Porter 5 Forces:

Threats of New Entrants: Low

BKT has a very strong (Moat) comparing its competitors in the global market in terms of lower cost
(India) and in terms of backward integration to produce Carbon black cheaply. Also, they serve a
very niche segment where the number of SKU’s are high and the volume is less. For a new entrant, it
becomes very difficult since he cannot expect economies of scale in this segment. Also, the capex
investments are huge and the production re-engineering what BKT had done, has helped it to
optimize the entire process at a fraction of cost of other manufacturers. Hence, we feel the threat of
new entrants in this niche sector is low.

Bargaining Power of Suppliers: Moderate

Demand in this niche segment even though is not growing too high, the consistent growth in
demand still outstrips the supply. But it is a price elastic market, and since there is very minimal USP
for brands other than low price, the supplier power is moderate.

Industry Rivalry : Moderate to High

Industry is characterized by low differentiation, no switching cost, and concentration of major

market share with few players. Since there is no brand attachment, price and network are the main
factors that impacts the increase/decrease in the market share. So we feel the rivalry in this segment
is moderate to high.

Bargaining Power of Buyer: Moderate to High

Price is the major factor which affects the buying decision. Also, since there is no switching cost, the
the buyer has options to do the purchase. Even though the market share is concentrated on few
players like, Michelin, Continental, BKT etc, there is no brand attachment. So the bargaining power
for buyer is moderate to high in this segment.

Threat of Substitute Products: Low to moderate

Even though there are quite a few substitutes in the market for the niche segment, at a
comparatively lower price point there are not much substitutes. Especially being a labour-intensive
business when the manufacturer has its plant in cheaper locations like India, It provides a huge
leverage to compete at a lower price and gain market share. So we feel, the substitute threat is low
to moderate.