In this article we will try to analyze Balkrishna Industries Ltd. based on previous six years of financial statements viz Balance sheet, Profit and Loss statement and Cash flow statement. With this fundamental analysis we will try to gain insight into the financial health, operating efficiency and profitability of the company and finally try to derive the intrinsic value of the stock using Discounted Cash Flow method and the price at which the stock becomes attractive for long term investment.

Dated: 03 Aug 23
Company: Balkrishna Industries Ltd.
CMP: Rs. 2478.90
Market Capitalisation: Rs. 47921.40 Cr.

Intrinsic Value of Balkrishna Industries Ltd.

Balkrishna Industries Ltd. is India’s largest tire manufacturer. The company specialises in Agricultural, Industrial and Off Road tires (like Articulated Dump Trucks, Underground Mining vehicle, loader, scraper etc.). Since 2021 the company is expanding its operations by capacity expansion of existing facilities, modernisation and technology upgradation. In addition it is setting up new plant at Greenfield, USA.

Note: Here we are carrying out only the quantitative fundamental analysis of the company as the qualitative analysis is more subjective and individual views may vary vastly.

Before we enter into the calculation of Intrinsic value of Balkrishna Industries Ltd. we have to make some logical assumptions based on the previous six years financial statements and ongoing yield for 10y Government Of India bonds.

Assumptions:

Terminal growth rate is assumed to be 0%.
Discount rate is assumed to be 12%.
Since the company has made heavy expenditure in year 2022 and 2023, it has seen a negative free cash flow during these two years. However, we have assumed that the company needs to spend about Rs. 80,000/- lakhs every year towards purchase of property, plant and machinery as in normal course during these years for the purpose of calculation. Based on this the increase in Free Cash Flow is assumed to be Rs. 2621.57 lakhs per year for the first five years and then Rs 1310.79 lakh from sixth to tenth year. The growth rate is projected based on the past growth of Free Cash Flow (refer to figure below). In the past Free Cash Flow has increased at the rate of Rs. 5243.14 lakhs per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.

Fundamental Analysis and Intrinsic Value Of Balkrishna Industries Ltd.(2023)

Increase in Revenue is assumed to be Rs. 52457.34 lakhs per year for the first five years and then Rs 26228.67 lakhs per year for the next five years. This growth rate is based on analysis of previous year’s revenues (refer to figure below). In the past revenue has increased at the rate of Rs. 104914.69 lakhs per year, however, with a conservative outlook we have taken 50% of that figure for the first five years and 25% of that for the next five years.

Free cash flow will be 6% of revenues in future. The FCF/Revenue ratio for the period under consideration has an average of 0.06. We assume that this ratio will hold good for future.

Based on the above assumptions we have arrived at two levels as intrinsic value of the firm. One is based on extrapolation of Free Cash Flow and the other is based on Free cash flows derived from extrapolated values of revenues. Both the methods only differ in how the input values are derived; in both the cases the present value is arrived at using Discounted Cash Flow Method.

Free Cash Flow Growth Model

Intrinsic Value: Rs. 166.34

Stock Entry price with 25% margin of safety: Rs. 124.75

Revenue Growth Model

Intrinsic Value: Rs. 303.34

Stock Entry price with 25% margin of safety: Rs. 227.51

The average of the above two stock entry prices works out to be Rs. 176.13. When the stock starts trading below this price it becomes attractive for long term investment.

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Fundamental Analysis Of Balkrishna Industries Ltd.

Leverage Ratios

Observations:

The company has manageable debt. The debt has seen a rise in 2022 and 2023 as the company is expanding and has incurred heavy investment into Capacity expansion, Modernization, automation and technology upgradation of the existing plants. Additionally the company is also setting up a new production unit in Greenfield, USA.

Operating Ratios

Observations:

Fixed assets turnover ratio and Receivable turnover ratio have remained stable.

Profitability Ratios

Observations:

PAT has shown improvement while the margins have reduced and same holds true for EBITDA. In 2023 the revenue has seen growth however, PAT has reduced owing mainly to increased expenses under Advertisement & Sales promotion, Freight and forwarding and Repairs & Maintenance of buildings etc.