Driven by remarkable demand and acceptance from the mining sector, Balkrishna Industries, a leading off-highway tyre (OHT) manufacturer, has embarked on a fresh capital expenditure spend of Rs 1,300 crore over a period of FY24-FY26 for the capacity expansion of its off-the-road/OHT range in a phased manner at Bhuj (Gujrat) plant, a senior company official said.
According to him, BKT proposes adding another 35,000 Metric Tons Per Annum (MTPA) of OHT capacity, through brownfield expansion of its Bhuj facility, as its plants are running at peak capacity utilizations, considering an achievable capacity of 360,000 MTPA.
“We have seen good acceptance and success of our OTR/OHT range. This has given us confidence to add capacity. Accordingly, we are embarking on a new capex spend of up to Rs 1,300 crore for 35,000 metric tons per annum at Bhuj. This will be executed in various phases,” said Rajiv Poddar, joint managing director of the company, during an analyst call last month. He further stated this new product mix expansion will be mainly for the mining segment.
At present, the Bhuj plant has a total capacity of around 195,000 metric tons, and if required, this facility can be expanded by another 100,000–150,000 tons through brownfield expansions.
Previously, the company, that manufactures the OHT range used in specialist segments like mining, earthmoving, agriculture, and gardening, underwent a brownfield expansion in Bhuj at the cost of Rs 800 crore in 2022 to increase the production capacity by 50,000 MTPA. However, this time, the capital is higher for relatively lesser volume addition because of the higher moulds requirement, Poddar mentioned.
BKT is expecting to commission the new expansion by the first half of the ongoing financial year. At optimum utilization, this capacity could do a topline of Rs 300 crore-Rs 350 crore and would yield a 200-300 Bps higher operating margin compared to carbon black, as per company management.
With a current market share of 6-7% in the USD 15 billion global specialty tyre segment, BKT aspires to achieve about 10% of the global off-highway market share in the next four-five years. To achieve this, BKT expects its mix to be evenly spread between agriculture and industrial segments. Its current capex of Rs 1,300 crore for setting up 35,000 metric tons of OHT capacity is in line with its medium-term target.
In addition to this, the company has guided regular maintenance and growth capex of Rs 600 crore-Rs 700 crore for FY25, out of which it has already incurred capex of Rs 200 crore in the first quarter that ended June 30, 2024.
Till date, the tyre maker has invested over Rs 44,000 crore towards expanding capacity in tyres as well as carbon black and modernization and automation in the last three years, a recent company report by Motilal Oswal mentioned. “As a percentage of sales, capex intensity would start moderating in FY25 and FY26 to around 6% of sales as compared to the last five-year average of 16%, driving improvement in free cash flow generation,” the report added.
Financial performance
The Mumbai-based tyre company reported a 47.6% year-on-year (YoY) jump in net profit at Rs 490 crore for the first quarter of the current fiscal year. Meanwhile, the company’s revenue from operations increased 25.7% to Rs 2,714.5 crore compared to Rs 2,159.4 crore in the year-ago. At the operating level, EBITDA jumped 32.5% to Rs 663.6 crore in the first quarter of this fiscal over Rs 501 crore in the first quarter of FY24.
Notably, BKT saw volume growth of 13% on a YoY basis during the quarter under review, primarily due to normalizing inventory days at distributor levels. Its EBITDA margins have exhibited an improvement, rising by 469 basis points on a year on year basis, attributed to better gross margins and operating leverage. On the domestic front, the company achieved a significant volume growth of 21% on a YoY basis. Going forth, the company expects a rise in freight costs to 8% in Q2 FY25 and a rise in raw material costs by 2%–3% due to higher natural rubber prices.
Amidst raw material cost inflation and rising freight costs, BKT is looking for a minor growth in volumes and flat EBITDA margins in FY25. According to the company management, channel inventory is going up, and demand slowdown is seen across the agribusiness and industrial segments. The company is seeing demand weakness due to a combination of geopolitical issues in Europe and the Middle East and US recessionary concerns. However, it sees good acceptance of tyres in the mining segment.
Despite the muted demand scenario, brokerage firms believe that the company will be able to maintain its market share in the global market. “Further the new capacity addition would help it to drive its growth and fulfill market share aspiration on availability of the additional capacities in the future,” a company note from ShareKhan said.