High margins attract fund managers to Balkrishna Industries

Mid-cap fund managers, who prefer to invest in growth-oriented businesses rather than just momentum stocks, appear to have taken a liking to Balkrishna Industries since the start of this fiscal.

Holdings of mutual funds in the manufacturer of specialty tyres - Balkrishna Industries - have risen substantially from less than 15% a year ago to close to 20% at the end of the Dec 2012 quarter despite the ongoing slump in the automobile sector.

Fund managers' interest in this stock is because of the company's presence in the niche off-highway tyres, or OHT segment, where it is the country's leading player and exporter.

Almost 90% of its revenues is derived from the export market, especially the US and Europe where it also enjoys competitive advantage over its global competitors on account of lower costs as manufacturing costs, especially labour costs, are much lower in India.

According to analysts, labour accounts for just about 3% of Balkrishna's operational costs unlike its global peers for whom labour alone accounts for 15-20% of total operating costs.

Moreover, as the high-margin replacement market accounts for a higher share in its product mix, it not only enjoys relatively higher operating margins but the impact of global slowdown has so far been limited.

Balkrishna Industries currently operates at earnings before interest depreciation and tax, or EBITDA, margin of over 20%, which is considered decent in this industry.

Also given its strong presence in infrastructure and farm sectors, where the global demand for replacement tyres is expected to remain strong, it is reasonable to expect the company to continue to operate at these encouraging margins provided raw material prices -- rubber, continue to remain at the current levels.

Analysts say that rubber prices have declined by about 40% in the past two years, which has also helped Balkrishna operate at higher margins. At its current market price of Rs 268-270, Balkrishna operates at a twelve month trailing P/E of 7.5, which is a premium over Ceat and JK Tyre and at par with MRF.