Samit Vartak presented his in-depth investment thesis on Balkrishna Industries (India: BALKRISIND or BKT) at Asian Investing Summit 2017.
Balkrishna Industries is a niche play on the off-highway tires (OHT) segment with ~5% global market share. BKT derives 74% revenue from the replacement market wherein margins are 3-5% higher than OEMs. The company has strong global network comprising 200 distributors across 120 countries catering to the replacement market.
BKT is one of the lowest-cost manufacturers of OHT industry globally (due to lower labor cost in India), which allows the company to price its products more competitively. This coupled with strong focus on product quality has helped the company consistently gain market share over the past decade. In the last ten-year period, when global demand for OHT has barely grown at low single digits, BKT has compounded its topline and net profits at an annualized rate of 18% and 24% respectively.
BKT has recently nearly doubled its capacity to 300,000 MTPA and at 57% capacity utilization, generates ROCE and ROE of > 20% and will be debt free within the next six months. Global demand has troughed and many OEMs have seen signs of growth. Given BKT’s cost advantage, we expect the company continue gaining market share and maintaining its historical growth rate.
With improvement in capacity utilization, operating leverage benefits should push the post-tax ROCE above 25% in the next two years. Samit believes that for a company that has consistently delivered and with sustainable ROCE/ROE/EPS growth of > 20% over the next three to five years, a valuation of ~10x one-year forward EV/EBITDA and ~16x one-year forward P/E is attractive.
About the instructor:
Samit Vartak is one of the founding partners and Chief Investment Officer responsible for ensuring SageOne’s adherence to its core investment philosophy and discipline of risk management. His focus is on building long term wealth for the clients even if it means sacrificing short term money making. He believes in risk management not by seeking extreme diversification or buying sub-par businesses at low multiples, but by building a reasonably diversified portfolio of high quality businesses having long term competitive advantages in attractive and high growth industries. Samit returned to India in 2006 after spending a decade in the USA working initially in corporate strategy with Gap Inc. and PwC Consulting, and then with Deloitte and Ernst & Young advising companies on business valuation and M&A. This experience forms the backbone that helps him better understand businesses and their fair value. Samit is a CFA® charter holder, an MBA from Olin School of Business of the Washington University in St. Louis and holds a Bachelor of Engineering degree with Honors from Sardar Patel College of Engineering (SPCE), Mumbai University.
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