Detailed Rationale

CRISIL Ratings has upgraded its rating on the long-term bank facilities of Balkrishna Industries Ltd (BIL) to ‘CRISIL AA+/Stable’ from ‘CRISIL AA/Positive’ and has reaffirmed its ‘CRISIL A1+’ rating on the company’s short-term bank facilities.

 

The upgrade reflects the sustained strengthening of BIL’s business risk profile, led by its established market position in the off-highway tyres (OHT) segment, geographic and segmental diversification of revenue and strong operating efficiency. The company has developed its product portfolio over the years by venturing into new sub-segments in the OHT space/new tyre specs — its stock keeping units (SKUs) have grown from 2,700 in fiscal 2019 to more than 3,200 currently. Its revenue rose at a healthy compound annual growth rate of 12% over the past five fiscals, supported by increase in volume. While fiscal 2024 saw a downturn in operating performance because of the subdued macroeconomic environment in the key geographies of the EU and the US, exacerbated by geopolitical conflicts (red sea crisis), the company could reduce the impact on its operations through geographic and segmental diversification of revenue, while maintaining healthy operating margin of 25%. BIL’s financial risk profile remains strong, backed by a robust networth of Rs 8,852 crore as on March 31, 2024, and net debt of only Rs 339 crore that has further improved to Rs 84 crore as of September 2024).

 

Revenue de-grew by 4% to Rs 9,476 crore in fiscal 2024 on account of recessionary conditions in the EU and the US, further affected by red sea crisis towards the latter half. The impact was restricted by steady growth in revenue share from India. The demand outlook is now improving, which is apparent in the company’s performance during the first half of fiscal 2025 with volume rising 14% on-year, albeit on a low base.

 

BIL, being a low-cost manufacturer of high-value specialised OHT, commands industry-leading margins. The company has shown a track record of being able to sustain its profitability levels even in the previous fiscal, when demand was subdued. The earnings before interest, tax, depreciation and amortisation (Ebitda) margin recovered to 25% in fiscal 2024 from the decadal low of 20% in fiscal 2023, with softening in raw material and freight costs. The margin is expected to sustain over the medium term, at these levels supported by strong operating leverage, demonstrated product quality and backward integration.

 

BIL’s financial risk profile remains strong. The annual capital expenditure (capex; including maintenance and capacity expansion) of Rs 800-1,000 crore will be funded internally. Net debt was negligible at Rs 84 crore as of September 2024, with no major debt addition expected over the medium term.

 

The strengths are partially offset by the vulnerability of the company’s operating performance to fluctuations in raw material prices, susceptibility to regulatory actions in importing countries, and to volatility in foreign exchange (forex) rates.

Analytical Approach

For arriving at the ratings, CRISIL Ratings has combined the business and financial risk profiles of BIL and its subsidiaries. This is because all the entities, collectively referred to as BIL, are in the same business and have operational synergies.

 

Please refer Annexure - List of Entities Consolidated, which captures the list of entities considered and their analytical treatment of consolidation.

Key Rating Drivers & Detailed Description

Strengths:

• Established market position: BIL’s market share in the international OHT segment has increased steadily over the years to ~6%, backed by association with major global original equipment manufacturers, wide distribution network in more than 160 countries, and a varied product portfolio. Capacity expansion as well as the new carbon black plant should help BIL leverage the benefits of low-cost manufacturing. Supported by its widening distribution network and ability to cater to niche, small order lots, the company has diversified its geographical presence over time, from being a majorly Europe-focussed player (47% of revenue in fiscal 2024), to other geographies such as Latin America and North America (~17% to revenue in fiscal 2024) as well as the Indian market (~27% of revenue in fiscal 2024).

 

• Healthy operating efficiency: Manufacturing OHT is a labour-intensive process, BIL’s presence in low-cost locations results in strong operating efficiency. As the company’s employee cost is lower vis-à-vis most global peers, BIL’s products are competitively priced. Also, the company has maintained operating profitability of over 24% for the past seven years, barring fiscal 2023, when it dipped to 20%, which is still healthy and better compared with peers. Backward integration into carbon black and access to more captive power augur well for the company’s operating efficiency. Besides, BIL is able to quickly cater to small niche order lots from clients, which permits for healthy profitability as well.

 

• Robust financial risk profile: The company’s strong cash generating ability and prudent funding of capex over the years have helped solidify its balance sheet and shore up liquidity as well. Net debt as on September 2024 was negligible, at Rs 84 crore, and no major debt addition is expected over the medium term. The annual capex (including for maintenance and capacity expansion) of Rs 800-1,000 crore will be internally funded.

 

Weaknesses:

• Vulnerability to fluctuations in input prices: Raw materials account for ~70% of BIL’s production cost and the prices of key raw materials, natural and synthetic rubber, are volatile as they depend on global demand, area under cultivation and crude oil prices. BIL’s operating profitability declined to 20% in fiscal 2023 from 27% in fiscal 2022, because of a lag in passing on rising input and ocean freight cost to customers. Thus, operating performance is highly correlated to crude oil prices and the company’s ability to pass on price increases to customers will remain monitorable. 

 

• Exposure to regulatory risks: In March 2017, the US Department of Commerce issued an order levying countervailing duty of 5.36% on BIL. The impact of this levy, however, was limited, given that the company derives only around 15% of revenue from North America. In 2023, the EU announced the European Union Deforestation Regulations (EUDR) to combat global deforestation led by consumption. Adherence to this regulation requires that the natural rubber used in supplies to the EU are sustainably sourced and free from deforestation or environmental harm, tracking of which would increase costs. Additionally, the External Producer Responsibility (EPR) regulations set by the Central Pollution Control Board, part of the Ministry of Environment Forest and Climate Change, require tyre companies to offset their producer obligation through purchase of EPR credits from recyclers that use domestic end-of-life waste tyres. Compliance with these regulations could increase operating costs for BIL. While the cost is passed on to customers, in line with industry practice, BIL’s ability to manage its operating profit amid these regulations will be monitorable.

 

• Volatility in forex rates: Around 50% of the raw material is imported. Also, the entire borrowings are in foreign currency, exposing BIL to the risk of sharp fluctuations in forex rates. However, with the bulk of revenue coming from exports, the exposure to forex risk is largely naturally hedged. Furthermore, the company’s net receivables are covered by staggered forward contracts.

Liquidity: Strong

BIL will maintain strong liquidity, supported by expected adequate annual cash accrual of over Rs 1,800 crore over the medium term against long-term debt of only about Rs 1,042 crore (as of March 2024), raised at low cost. Furthermore, the company has strong liquidity with cash, investments in liquid funds and unencumbered cash and bank balance of Rs 2,756 crore as on March 31, 2024. Bank limits were utilised moderately at 62% on average in the 15 months through June 2024. Cash accrual will more than suffice to meet the annual capex of Rs 800-1,000 crore as well as yearly long-term debt obligation of around Rs 350 crore over the next three fiscals.

Outlook: Stable

BIL is likely to continue consolidating its strong market position globally and sustain its industry-leading operating margin, supported by backward integration initiatives, notwithstanding the temporary tepid business environment, especially in key overseas markets. The company is also likely to sustain its strong balance sheet and solid liquidity, due to its steady cash generating ability and moderate capex plans

Rating sensitivity factors

Upward factors

• Robust double-digit growth in volume on a sustained basis supported by geographic and segmental diversification, resulting in reasonable growth in the global market share, with operating margin sustaining above 26-27%
• Improvement in the return on capital employed backed by healthy profitability and completion of capacity expansion plans.
• Sustained robust financial risk profile, with healthy capital structure and liquid surplus

 

Downward factors

• Revenue de-growth and decline in operating profitability below 20% on a sustained basis, impacting cash generation
• Weakening in the financial risk profile and liquidity, because of large capex or acquisition

 

Environment, social and governance (ESG) profile

CRISIL Ratings believes the ESG profile of BIL supports its already strong credit risk profile.

 

The tyre sector has a significant impact on the environment because of high greenhouse gas emission in core operations as well as waste generation. The sector has a social impact because of its large workforce. BIL has focused continuously on mitigating its environmental and social impact.

 

ESG highlights

• All the company’s plants are implementing various projects to reduce greenhouse gas emissions. The company constantly monitors green energy production processes and outcomes as well as the implementation of emission reduction programmes.
• All the plants have safety committees which identify work-related hazards and assess risks on periodic basis. Any identification of work-related hazard or risk is appropriately addressed as part of the process.
• Governance structure is characterised by 50% of the board comprising independent directors and by the company’s extensive disclosures.

About the Company

Based in Mumbai, BIL manufactures OHTs used in vehicles meant for agricultural, mining, industrial, construction, and earth-moving purposes. Achievable capacity across its plants in Bhuj (Gujarat), Waluj (Maharashtra), Bhiwadi and Chopanki (both in Rajasthan) is 360,000 tonne per annum. The company has a wide product profile and sells in more than 160 countries. It also has over 3,200 SKUs to cater to varied requirements of customers. In fiscal 2024, ~73% of revenue came from exports. The carbon black facility at Bhuj with total achievable capacity of around 200,000 has commenced operations and is running at full achievable capacity.

 

The promoter group, Mr Poddar and his family continues to hold 58.29% of the company.

 

In the first half of fiscal 2025, BIL recorded revenue of Rs 5,386 crore and profit after tax of Rs 837 crore.

Any other information: Not Applicable