DOLAT CAPITAL

India Research

Tyre Sector
Tread gains...!!!
Navin Matta Harshal Patil
Research Analyst Research Associate
+9122 4096 9752 +9122 4096 9725 September 2007
navin@dolatcapital.com harshal@dolatcapital.com
 DOLAT CAPITAL

The tyre industry has witnessed an evident upturn since the beginning of the current year. The primary reason
being, the softening of natural rubber prices (42% of total raw material cost). Furthermore, the high capacity
utilizations by most of the leading players and small additions in bias capacities in the next 2 to 3 years would
result in a better pricing power scenario. The demand environment continues to look positive with high growth
expected from the Replacement and Exports segments.

Buoyant capacity utilizations to render pricing power

The Indian tyre industry has been operating at a capacity utilization rate of around 90% in the last 3-4 years. Currently
almost 70-80% of the vehicles (in terms of weight) in India are on bias tyres. The eventual shift in preference from bias
to radial tyres is deterring any player to put up major bias capacities. Going forward for the next 2-3 years, we expect
small capacity additions in the bias segment only by way of de-bottlenecking. Therefore, the tight demand supply situation
would ensure a better pricing power scenario.

Radialisation in the Truck & bus segment to gather pace

Though radial tyres have several benefits such as better fuel efficiency, longer life and better road grip, the higher upfront
cost (around 25%) has limited radial penetration in the T&B segment to 4%.
Government’s focus on development of road infrastructure would encourage the use of radial tyres. We expect radial
penetration in the T&B segment to reach at least 12% by 2010, based on which the revenues from T&B radials would
increase by 55% CAGR over 2007-10

Natural Rubber prices slipping to comfort zone

The tyre industry is highly raw material intensive with natural rubber accounting for 42% of the total raw material cost. In
the last three years, NR prices have been on an unabated up trend, from a yearly average price of Rs 47 per kg in 2003
to Rs 89 per kg in 2007. This was mainly on account of tight demand supply dynamics and depleting stock levels in the
domestic market. However, the strong linkage of international and domestic rubber prices would suggest stable NR
prices on the back of higher stock levels, both domestically and internationally.

Improving financials health

The recent price hikes by most players, coupled with softer raw material cost has enabled the industry to post better
financial numbers in the past 2-3 quarters. The average operating profit margins have improved to almost 10% from a
low of 6.6% in the previous year while the PAT margins are at 4% from a low of 1.50%. The improving financial health of
the sector would partially fund the capex plans, which have been announced by most of the large players.

Strong financial health coupled with a well thought out growth stratergy makes Apollo Tyres Ltd ( ATL) our top
pick amongst its peers. We initiate coverage on ATL with a BUY recommendation and a 12 months price target
of Rs 49 based on 12xFY09E fully diluted earnings.

The consistent financial performance, coupled with a extensive product portfolio in the niche OHT segment
makes Balkrishna Ltd an interesting play. We expect the stock to be a re-rating candidate on the back of continued
high earnings growth coupled with the recent de-merger of the non tyre businesses into separate companies.
We initiate coverage on the stock with a BUY recommendation and a 12 months price target of Rs 840 based on
12xFY09E fully diluted earnings.

Valuations matrix
Particulars CMP MCAP Net Sales OPM-% Net Profit EPS (Rs) PER (X) ROE-% ROCE-%
Rs in Mn Rs. FY08E FY09E FY08E FY09E FY08E FY09E FY08E FY09E FY08E FY09E FY08E FY09E FY08E FY09E
Apollo Tyres 38 17,633 47,928 54,203 9.4 10.0 1575 1926 3.1 4.1 12.2 9.4 15.0 17.1 16.2 18.0
J K tyres* 127 3,911 29,151 31,175 8.1 8.4 510 607 12.4 14.8 10.5 8.8 7.6 7.9 10.3 10.6
Ceat 164 7,488 23,503 25,456 7.5 7.8 704 817 15.4 17.9 11.0 9.2 17.2 17.5 18.2 18.5
Balkrishna Industries 598 11,580 10,851 13,800 21.6 20.7 1124 1462 51.3 70.0 11.7 8.6 23.4 26.0 20.9 25.0
* Fig for Sep07 & Sep08

26 September, 2007 1
 DOLAT CAPITAL

Porters Five forces Model:

Barriers to Entry:

• Highly capital intensive

• Long payback period

Supplier Power: Inter –firm Rivalry

Buyers Power:
• Low value added product
• Possibility of substituting NR • Pricing power with OEM on
with high competition
with SR is minimal account of low switching cost
• Supply concerns weigh on • Low brand loyalty observed as
• 75% of market share with
NR prices. the Replacement markets
top 4 players
• Crude based raw materials offers wide brand choice at
subject to high price comparable price points in
• Consolidation expected
volatility. each product segment
as the industry nearing
maturity.

Threat of substitutes:

• Import of Chinese tyres.

• Retreading option to postpone repurchase.

26 September, 2007 2
 DOLAT CAPITAL

Buoyant capacity utilizations to render pricing power

The Indian tyre industry is operating at high capacity utilization rates of around 90-95% in the past 3-4 years. Excluding
the passenger vehicles segment, a significant proportion of vehicles (approx 75-80% in value terms) are still on bias
tyres. Majority of the players operating bias capacities are running at near peak capacity (principally in the T&B bias
segment).

Furthermore, none of the tyre manufacturers are willing to undertake major capacity expansions in bias tyre facilities,
owing to the eventual shift in preference from bias to radial tyres. Going forward for the next 2-3 years, small capacity
additions in bias tyres segment, if any, would be primarily through brown-field expansions or de-bottlenecking
route.Meanwhile radial pentration is expected to increase only upto 12% from the current 4%.

Production and Capacity Utilization Trend

80
75 100%
70
65 85%
60
NOS in Mn

55 70%
50
55%
45
40 40%
35
30 25%
25
20 10%
2002 2003 2004 2005 2006 2007 2008E 2009E 2010E

Production-LHS Cap Utilisation-RHS

Source: ATMA, Cris Infac, Dolat Research

We expect a steady demand for bias tyres, mainly in the T&B segment to continue for the next 2 to 3 years. Supply
growth being diminutive in the following years, we anticipate a favorable pricing scenario for bias tyres.

Radialisation in Truck & Bus segment expected to gather pace

Currently the radial penetration in the T&B segment is barely 4%. Although, there are several benefits of using radial
tyres, such as better fuel economy, longer life and better road grip, the higher upfront cost compared to bias tyres is the
main deterrent . T&B radial tyres cost approximately 25% higher as compared to bias tyres. Radial tyres have softer side-
walls because of which they are prone to damage on poor road conditions existing in India.

Radial Penetration trend

100 Passenger Car LCV Truck & Bus
90
80
70
60
per cent

50
40
30
20
10
0
2002 2003 2004 2005 2006 2007

Source: ATMA, Dolat Research

26 September, 2007 3
 DOLAT CAPITAL

The increased emphasis on building road infrastructure and ban on overloading is expected to trigger a higher radial
penetration in the T&B segment. The NHDP has estimated infrastructure spent on roads at Rs 2474 Cr by the year end
2012. This would be dedicated towards building of 45,974 kms of road.

Radial tyre sales from Truck & Bus (T&B) Segment:

Particulars 2005 2006 2007 2008E 2009E 2010E
Tyre Volume (mn nos) 60.10 65.93 71.58 74.76 81.41 88.67
T & B tyre volume ( mn nos) 11.00 11.90 12.17 12.71 13.84 15.07
Share of T & B tyres in Total Tyre production 18% 18% 17% 17% 17% 17%
Radial Tyres in Truck & Bus segment-(mn nos) 0.22 0.24 0.49 0.76 1.25 1.81
Truck & bus Radialisation penetration* 2% 2% 4% 6% 9% 12%
Avg wt(Kg)-Radial tyre 60 60 60 60 60 60
Total Wt.-Radial Tyre(Tons) 13,200 14,280 29,205 45,755 74,735 108,531
Avg realisation for radial tyre* 145 145 165 165 165 165
Sales from T & B radial tyres (Rs Bn) 1.91 2.07 4.82 7.55 12.33 17.91
* Dolat Research Estimates, Cris Infac, ATMA
*- realization for radial tyres assumed 25% higher than bias tyres.

We expect radial penetration in the T&B to increase to 12% by 2010 from the current levels of 4%. Our base estimates
peg the demand for radial tyres to reach 1.81 mn tyres in the next 3 years. Based on the average weight and realization
per kg of a radial tyre, we arrive at total sales from radial tyres of around Rs17.9 bn by 2010 (approx ~ 10% of total market
share). This translates into a 55% CAGR over 2007-10.

Natural Rubber prices slipping to comfort zone

The tyre industry is highly raw material intensive with natural rubber accounting for 42% of the total raw material cost.
Consequently, the fortunes of the industry are largely linked to natural rubber prices. In the last three years, prices have
been on an unabated up trend. This has caused a dent in the margins of the all the tyre manufacturers.

Raw Material profile (percentage in terms of cost)

17%

3%

5%

42%

11%

22%

Natu r al Ru b b e r Nylo n T yr e C o r d Fab r ic C ar b o n Black P BR SBR Oth e r s

Source: ATMA

26 September, 2007 4
 DOLAT CAPITAL

Domestic NR production and consumption

11,000 Production (LHS) Consumption (LHS) 100
Bangkok Intl prices - Rs/kg (RHS)

80
9,000
(in '000 MT)

60
7,000
40

5,000
20

3,000 -
2003 2004 2005 2006 2007P
Source: Rubber Board of India, Dolat Research

The past few years have seen a tight demand supply situation at the domestic level, hence NR prices have been moving
upwards, from a yearly average price of Rs 47 per kg in 2003 to Rs 89 per kg in 2007. During FY07, although the supply
outstripped the demand comfortably, prices rose sharply mainly on account of concerns regarding weather disruptions in
Thailand and certain speculative activities.

Quarterly world stocks and NR prices

2,200 120

1,900
100

1,600

80
1,300

1,000 60
Q1CY06 Q2CY06 Q3CY06 Q4CY06 Q1CY07

World Stock (LHS) Bangkok Intl prices - Rs/kg (RHS)*

Source: IRSG, Dolat Reseach
The world stock levels have been steadily increasing hence pushing NR prices downwards from Q2CY06 onwards. The
stock levels over CY05 have risen by almost 30% at the end of CY06. The average NR prices for Q2CY07 have come
down to Rs 87 per kg.

Domestic Import – Export of NR coupled with domestic and international prices

21,000 140
18,000 120
15,000 100
(Rs/kg)

12,000 80
(in mt)

9,000 60
6,000 40
3,000 20
0 0
May'06

June'06

July'06

Oct'06

Nov'06

Dec'06

Jan'07

Feb'07

Mar'07

May'07
Sept'06
Apr'06

Aug'06

Apr'07

Imports (LHS) Exports (LHS)

Domestic prices (RHS)* Bangkok Intl prices - Rs/kg (RHS)*

Source: Rubber board, Dolat Research

26 September, 2007 5
 DOLAT CAPITAL
The domestic NR prices are closely linked to the international NR prices. The exports rise when there is a significant
parity between international and domestic NR prices. However, since the beginning of the current year, the imports have
increased substantially while the exports are steadily on a declining trend.

Under the advance license and DEPB drawback scheme, the landed cost of rubber works out lower than domestic prices
for the Indian tyre manufacturers . Therefore, the comfortable NR stock levels in the international markets, should curb
any major rise in NR prices. Also, the high degree of linkage between domestic and international prices, should see the
NR prices around the current range of Rs 85 - 95 per kg.

…… however, other raw material prices remain a concern

100 70 210
90
60 180
80
70 50 150

Prices per Kg
Prices per Kg

$ per Brent
60 40 120
50
40 30 90
30 20
60
20
10
10 30
0 0
0
FY02 FY03 FY04 FY05 FY06 FY07
FY02 FY03 FY04 FY05 FY06 FY07
Carbo n B lack SB R-LHS
P B R-LHS Crude Oil (B rent)-$ -RHS Nylon Tyre cord-LHS Caprolactum

Source: CMIE, Dolat Research

The continuous rise in crude prices is impacting the crude related raw materials. PBR, SBR, Carbon Black and Caprolactum
have oil based inputs and hence the movement in crude is driving their prices upwards. Crude oil is at its all time high of
$ 80 per barrel, hence we expect the crude related raw material prices to remain firm in the near term.

Improving Financial Health

The tyre industry had been under pressure from 2003 onwards due to their inability to pass on the substantial rise in raw
material prices. The operating margins dipped below 6% and the net profit margins were a dismal 1.5 – 2% during this
period. The top 4 players sacrificed profitability in an attempt to maintain or increase market share.

Industry Financial Snapshot

45 12%
40 10%
35
8%
30
25 6%
20 4%
15
2%
10
5 0%
0 -2%
Jun-04 Sep-04 Dec-04 Mar-05 Jun-05 Sep-05 Dec-05 Mar-06 Jun-06 Sep-06 Dec-06 Mar-07 Jun-07

Sales (Rs bn)-LHS PBDIT-margin-RHS PAT-margin-RHS

Source: CMIE, Dolat Research

However, during the last financial year, the sharp rise in natural rubber prices compelled all the tyre manufacturers to
take price hikes of close to 5 to 10% in two tranches (partial roll back subsequently) . Since then, the NR prices have
cooled off from its peak of Rs 120 per kg to around Rs 80-85 per kg, consequently improving contribution per ton of tyres sold.

Topline growth has been steady over the last 12 quarters with operating margins almost touching 12% for the quarter
ended March 07. With most of the frontline tyre manufacturers announcing massive capex plans, the improving cash
flow from operations would facilitate part funding through internal accruals.

26 September, 2007 6
 Apollo Tyre Ltd. DOLAT CAPITAL
CMP: Rs 38
Target Price: Rs 49 Tyre / Buy
Heavy Duty...
Favorable industry dynamics coupled with a well thought-out growth strategy for accelerated growth, makes
Apollo Tyres (ATL) our preferred bet amongst its peers in the industry. We initiate coverage on ATL with a BUY
recommendation and a 12 months price target of Rs 49 based on 12xFY09E fully diluted earnings.

BSE Sensex 16921 Investment rationale

NSE Nifty 4940 Early entrant in the T&B radials segment
Scrip Details
ATL with the expertise of Dunlop Tyres, South Africa would be one of the early
entrants in the T&B radials space. We feel that the company has timed its foray
Equity Rs.464mn
into T&B radials perfectly, considering our expected sales from T&B radial sales
Face Value Rs.1/-
to reach Rs 17.91 bn which is an increase of 55% CAGR. (Refer – Sales from
Market Cap Rs.18.09bn
Radial T&B segment – pg 4). ATL has announced a Rs 2.5 bn capex plans to set
US$452.4mn
up a green-field T&B radial facility with an installed capacity of 100 TPD.
52 week High/Low Rs.42.70/25
1-Month Avg. Volume (Daily) 412483 Focus to continue on the high growing exports segment
BSE Code 500877
ATL would continue to leverage on well established exports markets. Thrust on
NSE Symbol APOLLOTYRE
exports over the last five years has resulted in an increase of 37% CAGR for the
Bloomberg Code APTY IN
period. Apollo’s share of exports stands at 18% of the total industry exports,
Reuters Code APLO.BO
which is driven by the passenger car tyre exports(53% share based on volume)
Business Group - Raunaq Singh
and the Truck & Bus tyre exports(19% share based on volume).

Reinforced Business model with strategic initiatives

Shareholding Pattern as on June’07(%)
Dunlop Tyres Ltd (DTL) South Africa acquisition: ATL acquired Dunlop
Promoter 32.4
Tyres Ltd (DTL), South Africa, in April 2006. The synergies generated on
MF/Banks/FIs 30.2
FIIs 9.3
account of this acquisition include product rationalization possibilities, joint
Corporate Bodies 6.2
sourcing of raw material and sharing of technical know-how.
Public / Others 21.9 Entry OTR segment: ATL plans to enter the high growth OTR segment through
a tri-party arrangement with BEML & J K tyres. OTR segment yields high
A P L relative to B SE Sensex margins on account of higher level of customization required. OTR project
130
will require an investment of Rs 100 mn and would host a capacity of 10 TPD.
APL
120 B SE Sensex
The massive infrastructure investment to be made in the next 3-4 years would
call for increased demand for OTR tyres.
110
Retreading: ATL is the only player in the organized sector to set up a dedicated
100 facility for Retreading of tyres. The facility operates with an installed capacity
90
of 10TPD. ATL plans to set up three new Retreading facilities, which will be
located near transport hubs to capture the Retreading opportunities.
80
Superior margins and capital efficiency ratios
70
From 2005 onwards, ATL has shown a consistent rise in its operating margins
60 despite an unfavorable raw material pricing scenario. . The premium pricing on
Sep-06 Dec-06 M ar-07 Jun-07 Sep-07 some of its established products coupled with tight control on operating expenses,
has enabled the company to steadily increase its margins. ROCE for 2007 at
17.1% is one of the best in the industry despite continious expansions undertaken.

Year Net Sales Growth-% EBITDA OPM-% Net Profit Growth-% EPS (Rs) Growth-% PER (X) ROE-% ROCE-%
2005 22,255 16.0% 1,556 7.0% 627 -12.5% 1.6 -12.5% 23.3 10.7 10.7
2006 26,255 18.0% 2,267 8.6% 897 43.1% 2.3 40.7% 16.2 14.6 12.5
2007 42,992 63.7% 3,942 9.2% 1,173 30.7% 2.5 8.7% 15.0 15.0 17.1
2008E 47,928 11.5% 4,523 9.4% 1,575 34.3% 3.1 24.0% 12.2 15.1 16.2
2009E 54,203 13.1% 5,408 10.0% 2,046 30.0% 4.1 32.3% 9.4 17.1 18.0
Rs in Mn

26 September, 2007 7
 DOLAT CAPITAL

Investment Rationale:
Early entrant in the T&B radials segment
ATL is one of the few players to set up a dedicated facility for Truck & bus radials with an installed capacity of 100 TPD
(Tones per day) & is expected to commence operations by the end of FY 09. The total cost of the project is Rs 2.5 Bn.
At present, there are very few players who have the technical know-how to manufacture T&B radials. ATL with the
expertise of Dunlop Tyres (DTL), South Africa would be one of the early entrants in the T&B radials space. We feel that
the company has timed its foray into T&B radials perfectly considering on our estimated sales from T&B radial sales to
reach Rs 17.91 bn which is an increase of 55% CAGR. (Refer – Sales from Radial T&B segment – pg 4).
Apollo having a dominant market share in T&B bias tyres segment, we expect the company to leverage the same to
capture a sizable share from the T&B radial segment. Fast paced improvement in road infrastructure, coupled with
institutionalization of fleet operators could drive faster than expected radial penetration.

Focus to continue on the high growing exports segment :

The exports have grown by a 37% CAGR over the past five years on account of a continued focus on growing its niche
in the ultra high performance tyre market. Apollo currently exports to Asia-Pacific, Middle-East, South America & European
countries & is constantly focusing on new markets.

Apollo’s Share in Industry Exports:

(based on volumes)

3,000 60%

2,500
50%

2,000
Thousand's

40%
1,500
30%
1,000

20%
500

- 10%
2003 2004 2005 2006 2007

P ass Car expo rts-LHS Truck & B us Expo rts-LHS

A TL's share- P ass Car-RHS A TL's share-T&B -RHS

Source: Company, Dolat Research.

The passenger car segment has been the growth driver for Apollo tyres in the export market with a volume based share
of 53%. To cater to the higher end exports market, ATL has launched the W-speed rated high performance tubeless tyre
aimed at enhancing the share in the passenger car tyre segment.

Hence, new product launches in the high growing passenger car segment & Truck & Bus segment, will help Apollo to
further increase its offering in the export markets. ATL’s continued focus on exports has enabled certain amount of de-
risking against domestic demand slowdown.

Reinforced Business model with strategic initiatives

Synergies from DTL SA acquisition

Aligned with the goal of being a USD 2 Bn Company by FY 2010, based on expansion through the organic and inorganic
route, ATL acquired Dunlop tyres, South Africa in April 2006 in an all cash deal amounting to Rs 2.90 Bn.

The acquisition is expected to yield several synergies, which include, product rationalization, joint sourcing of raw material
for better bargaining power, joint research and development for product upgrades and introduction of new products and
most important of all is sharing of technical know-how and best practices.

26 September, 2007 8
 DOLAT CAPITAL

Entry in the OTR segment:

Apollo tyres have entered in the high growth OTR (Off the road) tyre segment through a tri-party agreement with Bharat
Earth Movers Ltd. & J K tyres. The OTR segment yields a higher margins as greater level of customization is required to
be done. As per the agreement BEML would source its requirement of earthmoving tyres from Apollo. The OTR facility
would entail an outlay of Rs 100 Mn with an installed capacity of 10 TPD.

Re-treading:
Apollo Tyres is the only player in the organized market to set up a dedicated facility for re-treading of tyres. Apollo has a
re-treading facility with an installed capacity of 10 TPD located at Haryana. ATL plans to set up three new retreading
facilities, located close to the transport hubs so as to cater to the fleet owners requirement.

Re-treading market consists of just four players in the organized sector who supply retreading material, while the un-
organized sector consists of approx. 10,000 players. The organized sector players supply the tread material to the
unorganized sector players, who in turn re-tread the tyres.

Superior margins and capital efficiency ratios

20% 11%

17%
9%
14%
7%
11%
5%
8%
3%
5%

2% 1%
2004 2005 2006 2007 2004 2005 2006 2007

ROCE Apollo JK tyre Ceat MRF * OPM Apollo JK tyre ceat MRF *

*MRF data for FY 2003-2006 *MRF data for FY 2003-2006

From 2005 onwards, ATL has shown a consistent rise in its operating margins despite an unfavorable raw material
pricing scenario. It has the highest margins amongst its competitors in the industry. The premium pricing on some of its
established products coupled with tight control on operating expenses, has enabled the company to steadily improve its
margins. In 2007, the company had margins of 9.2% and the same has moved up to almost 12% during the first quarter
of the current financial year.

ATL has also shown its ability to manage capital efficiently. It has the highest ROCE in the industry of around 17% in
2007. With major capacity expansions planned for most of the leading players, we feel the ability to maintain decent
ROCE will be absolutely crucial.

26 September, 2007 9
 DOLAT CAPITAL

Company background
ATL is a market leader in the Truck & Bus tyre segment with around 29% market share. The company has an overall
market share of 22%, making it the second largest player in India. Post the acquisition of DTL in April 2006, ATL is ranked
15th on a global level. Apart from two wheeler tyres, the company has presence in all the other major segments. The
company operates three plants with an overall capacity of 710 tpd. It has recently sold its tubes facility at Ranjangaon.

ATL has three plants in India with an installed capacity of 710 TPD, which manufactures wide variety of tyres.

Particulars Baroda Cochin Kalamassery Total

Installed Capacity-Tpd 350 280 80 710
Tyres manufactured Pass.car radials Truck bias tyres Truck bias tyres
Truck Bias tyre LCV bias tyres LCV bias tyres
Truck Radials Farm bias tyres Farm bias tyres
LCV Bias tyres
Light truck radials
* Capacity in tons per day(TPD)

Product Segmentation: Market Segmentation

(share based on value) (revenue based)

8%
8% 9%

26%
9%

75%
65%

MHCV LCV Passenger Vehicles Tractor-Rear OEM Markets Replacement Market Exports

Source: Company Source: Company

Apollo’s business is dominated by the Commercial Vehicle tyres as they account for 75% of revenues. With the major
growth in demand expected from the commercial vehicle tyre segment and the increasing radial penetration in the T&B
tyre segment, ATL would be the key beneficiary.
“Regal” brand of Truck & Bus radials launched by Apollo is on the technical platform provided by DTL. Regal has made
its foot prints in the Indian markets and is perceived as a high quality product in the Indian markets.

Replacement segment to drive the growth…

ATL has its presence in all the three segments, with replacement market accounting for 65% share of the total revenues.
Replacement market is lead by the truck & bus segment which generates a repurchase demand as early as 20 months,
as compared to the passenger car segment, which generates a repurchase demand after 4 years.
Commercial Vehicles sales have grown at a CAGR of 26.38% over FY 03 to FY 07. This sales will boost an equal amount
of repurchase demand in the Commercial vehicles tyre segment.

Apollo continues to dominate the T&B segment with a focus on expansion in other segments. Sales in volume have
exhibited a 17% CAGR over the past five years. ATL ensures a prompt delivery of its product through a strong dealer network
of 4032 outlets, of which 3000 are exclusive outlets. This also ensures an enhanced brand value for all of ATL products.

ATL’s OE client base in the Truck & Bus segment, includes Tata Motors, Ashok Leyland, Eicher Motors, etc.
In the passenger car tyre segment, ATL caters to Maruti Udyog Ltd., Tata Motors, M&M, General Motors.

26 September, 2007 10
 DOLAT CAPITAL
Company Background - Dunlop Tyres Ltd, South Africa
DTL operates two facilities in South Africa with an installed capacity of 150 TPD. The State of the art Durban Facility
manufactures Truck Radials & bias tyres, OTR (off the road) tyres while the Ladysmith plant manufactures hi speed
passenger car radials. Dunlop Zimbabwe, a wholly owned subsidiary of DTL, South Africa, is in to Radial & bias tyres &
also has a re-treading plant in Harare.

Market Shares for DTL South Africa: Market shares of major tyre players in South Africa:
(shares based on value) (Shares based on FY 06 Sales.-Value based)

90%
80% 18% 26%

70%
60%
50%
40%
30%
20% 29%
10% 27%
0%
FY02 FY03 FY04 FY05 FY06
Dunlop Bridgestone Goodyear Continental
PCR LCV Truck Farm

Source: Company Source: Company

DTL dominates the truck & bus tyre segment with a 28% market share followed by passenger car segment with 23%
market share. Through a strong distribution network of more than 900 dealers & an esteemed OE client base, DTL owns
a 26% overall market share in the South African markets. DTL‘s OEM client base includes major auto companies like
Toyota, Nissan & Volkswagen.

Synergies generated on account of acquisition by Apollo tyres, coupled with the better industry and operating condition,
have helped Dunlop Tyres improve their EBIDT margins from 7.7% in the first quarter to 12.4% in the second quarter.
“Regal”, Truck & Bus radial tyre launched in India from Apollo’s stable is based on the technical know how provided by
DTL.

DTL SA Standalone Financials:

Particulars (Rs mn) Dec-03 Dec-04 Dec-05 Mar-07(15m)

Net Sales 7,504 9,907 9,504 10,120
EBIT 502 487 549 545
PAT 197 146 223 192
EBIT % 6.7% 4.9% 5.8% 5.4%
NPM % 2.6% 1.5% 2.3% 1.9%
Source : Apollo QIP Document, Dolat Reseach

DTL SA performance has been modest in the 15 month period ended Mar’07. While the topline growth has been moderate,
the EBIT has fallen marginally on account of increasing raw material prices. With ATL’s ability to improve operational
performance, DTL SA is expected to show better results from this year onwards.

26 September, 2007 11
 DOLAT CAPITAL

Capacity to increase to more than 1000 MT per day by 2010

Particulars Capacity-TPD Capex - Rs mn Est. completion
ATL India
Current capacity 710
Greenfield T&B Radials 100 2,500 FY 2009
OTR 10 800 -
Brown Field Project* 17 700 FY 2008
ATL India - Total 837
DTL SA
Current capacity 150
De-bottlenecking 50 500 FY 2008
DTL SA - Total 200
Total Capacity (FY 2010) 1037
*- De-bottle necking at Baroda Facility in the PCR segment.

Financial Outlook – Consolidated Financials

Revenues growth for the next two years estimated to be 12.5% CAGR
We expect the revenue growth to be driven primarily by volumes growth. During FY07-09E, we estimate a 10% CAGR
growth in tonnage sales. On the back of recent price hikes in FY07, we feel the realizations in FY08 would remain more
or less flat. However, in FY09, with the inclusion of radial T&B into ATL’s product portfolio, weighted realizations should
move up.

Revenue and Tonnage trend between FY07 – FY09E

Net Sales (LHS) Tonnage sold (RHS)
60,000 450

400
50,000
(in Rs mn)

(in '000 MT)

350
40,000
300

30,000
250

20,000 200
FY'07 FY'08E FY'09E

ATL has spelt out its ambition to reach USD 2 bn revenues by 2010. For achieving this aggressive target, the company
may look at acquiring companies in and outside of India.

Margin expansion by around 100 bps by FY09

The softening of NR prices should see a further expansion in operating margins. Furthermore, the joint raw material
sourcing strategy with DTL SA should enable the company to have a better bargaining power. The company has around
9% revenues coming from exports. Therefore, the company has a choice to procure from international markets under
Advance Licesnce/DDB or from domestic markets based on whichever is cheaper at any point in time.

26 September, 2007 12
 DOLAT CAPITAL

OPM viz-a-viz RM/Sales movement

12% OPM (LHS) RM/Sales(RHS) 68%

66%
10%

64%
8%
62%

6%
60%

4% 58%
FY'05 FY'06 FY'07 FY'08 E FY'09 E

Source: Company

Even a marginal improvement in operating margins has a significant impact on the high revenue base. We expect RM/
Sales ratio to reduce marginally from 63.1% in 2007 to 62.3% in 2009.

Valuations
ATL has carved out an impressive growth strategy which includes product portfolio expansion, by way of its foray into
T&B radials and OTR segment. Acquisition of DTL South Africa has enabled the company to expand into different
geographic locations. Furthermore, ATL’s continued focus on exports to de-risk against domestic slowdown is also paid
off well by way of gaining 19% share in total T&B exports and 53% share in total PCR exports from India.

Favorable industry dynamics coupled with a well thought out growth strategy for accelerated growth, makes ATL our
preferred bet amongst its peers in the industry. We initiate coverage on ATL with a BUY recommendation and a 12
months price target of Rs 49 based on 12xFY09E fully diluted earnings.

26 September, 2007 13
 DOLAT CAPITAL

INCOME STATEMENT Rs.mn IMPORTANT RATIOS Rs.mn

Particulars Mar’06 Mar’07 Mar’08E Mar’09E Particulars Mar’06 Mar’07 Mar’08E Mar’09E
Net Sales 26,255 42,992 47,928 54,203 Cost Analysis (%)
Operating Expenses 23,988 39,050 43,405 48,795 Excise/Gross Sales 12.5 10.1 10.0 10.0
Operating Profit (excluding O.I) 2,267 3,942 4,523 5,408 Net Raw Material Cost/net sales 67.4 63.1 62.9 62.3
Other income 56 157 165 217 Employee Cost/net sales 6.3 9.5 9.8 9.8
Operating Profit (including O.I) 2,323 4,099 4,687 5,624 Selling & Distribution & Admin exp/net sales 7.5 8.4 8.2 8.3
Interest 505 962 1,019 1,035 Power & Fuel/net sales 4.6 3.5 3.5 3.5
Gross Profit 1,818 3,137 3,669 4,589 Other Mfg exp/net sales 5.6 6.4 6.2 6.3
Depreciation 730 1,172 1,318 1,535
Profit Before Tax 1,214 1,965 2,350 3,054 Operational Performance (%)
Tax 317 792 776 1,008 Operating Profit Margin (excl. O.I.) 8.6 9.2 9.4 10.0
Profit After Tax 897 1,173 1,575 2,046 Operating Profit Margin (incl. O.I.) 8.8 9.5 9.8 10.4
Earnings per share 2.3 2.5 3.1 4.1 Other Income/net sales 0.2 0.4 0.3 0.4
Interest / Sales (x) 1.9 2.2 2.1 1.9
BALANCE SHEET Dep/Gross Block 5.6 6.0 6.0 5.9
Particulars Mar’06 Mar’07 Mar’08E Mar’09E Gross Profit Margin 6.9 7.3 7.7 8.5
Sources Of Funds Tax/PBT 26.1 40.3 33.0 33.0
Equity Capital 383 464 504 504 Net Profit Margin 3.4 2.7 3.3 3.8
Reserves 5,957 8,767 10,083 11,903
Share Premium Account - 117 1015 - Financial Performance
Net Worth 6,340 9,348 11,602 12,407 Average Cost Of Debt (%) 7.8 12.2 12.0 12.0
Secured Debt 3,810 6,500 6,500 6,250 Debtors Period (days) 24.3 31.2 33.0 33.0
Unsecured Debt 3,690 1,732 2,250 2,250 Closing stock (days) 75.1 74.3 75.0 75.0
Loan Funds 7,500 8,232 8,750 8,500 Fixed Assets Turnover (x) 3.1 3.4 3.5 3.3
Deferred Tax Liability 1,052 1,701 2,000 2,100 Creditors Period (days) 82.3 106.6 100.0 95.0

Total Sources of Funds 14,892 19281 22352 23007 Working Capital Turnover (days) 17.2 -1.1 8.0 13.0
Cash Collection Period (days) 17.2 -1.1 8.0 13.0

Application Of Funds Non-Cash Working Capital 338.5 356.7 450.7 575.9

Gross Block 13,106 19,734 21,975 25,975 Current Ratio (x) 2.3 1.6 1.7 1.6

Depreciation 4,699 6,812 8,130 9,666

Net Block 8,407 12,922 13,844 16,309 Other Ratios

Cap. Work-in-Progress 779 801 2,250 500 Debt / Equity (x) 1.2 0.9 0.8 0.7

Investments 5 54 54 54 Interest Coverage (x) 4.6 4.3 4.6 5.4

Current Assets ROE (%) 14.6 15.0 15.1 17.0

Inventories 4,194 6,387 7,146 8,022 ROCE (%) 12.5 17.1 16.2 18.0

Sundry Debtors 1,751 3,674 4,333 4,901

Cash and Bank Balance 2,314 1,935 1,695 385 Per Share Data

Loans and Advances 1,844 2,133 2,346 2,698 EPS 2.3 2.5 3.1 4.1

Other Current Assets 2 1 1 1 CEPS 4.2 5.1 5.7 7.1

Current Assets-Sub total 10,105 14,130 15,522 16,007 Dividend Payout (%) 19.2 17.8 14.4 11.1

Current Liabilities Book Value (Rs.) 16.4 20.1 23.0 24.6

Current liabilities 4,157 7,939 8,570 9,001 E-estimtes

Provisions 250 688 750 863

Current Liabilities Sub Total 4,407 8,628 9,320 9,863
Net Current Assets 5,698 5,502 6,202 6,144
Misc. Expenses 3 1 2 0
Total Assets 14,892 19,281 22,352 23,007
E-estimates

26 September, 2007 14
 Balkrishna Industries Ltd. DOLAT CAPITAL
CMP: Rs 598
Target Price: Rs 840 Tyre / Buy
Its different...
Balkrishna Industries (BIL) currently has 3% market share in the $7.5 bn OHT market. BIL has displayed its
ability to consistently deliver strong growth in the past few years. The company is present in a niche segment
and has a definite competitive advantage in terms of low employee cost as compared to its international peers.
The company has built a strong product portfolio with over 1700 SKU’s, which acts as a key entry barrier in the
OHT segment. The recent introduction of OTR radials would further strengthen its offerings and profitability.

BSE Sensex 16921 Investment Rationale

NSE Nifty 4940 Presence in the niche segment with high entry barriers
Scrip Details Off highway tyres (OHT) is a niche segment in the overall tyre industry. The OHT
Equity Rs.193mn
segment focuses on highly customized requirements as compared to the standard
Face Value Rs.10/- specifications of a highway tyre. Over the years, Balkrishna Tyres (BKT) has
Market Cap Rs.11.5bn developed over 1700 SKU’s to offer a wide range of offerings. With strong R&D
US$289mn capabilities, the company rolls out around 150 new products/sizes every year.
52 week High/Low Rs.690/415 Since revenues are primarily being driven by replacement demand, the company
1-Month Avg. Volume (Daily) 4302 has established a robust distribution network in Europe, USA and Middle East
BSE Code 502355 countries. Collectively, these factors have enabled BKT to be well placed in the
NSE Symbol BALKRISIND
segment
Bloomberg Code BILIN
Reuters Code BLKI.BO
Margins well above international peers
Business Group - Poddar BKT’s margins are far superior as compared to its international peers. This being
the case despite BKT’s aggressive pricing strategy in the export markets. The
Shareholding Pattern as on June’07(%) primary reason for BKT’s higher margins is on account of lower employee cost
Promoter 54.1 of around Rs 4500 per ton as compared to excess of Rs 25,000 per ton in the
MF/Banks/FIs 13.0
developed countries. Additionally, the company has been able to bring down its
FIIs 23.1
power and fuel cost from Rs 13,400 per ton in 2005 to Rs 9,700 per ton in 2007.
Corporate Bodies 1.2
Public / Others 8.6
Established brand and competitive pricing driving market share
B IL relative to B SE Sensex growth in export markets
130
B IL The company has customers spread out across in more than 100 countries.
120 B SE Sensex BKT has established its brand in some of its key markets including Europe and
110
the USA. . It sells 82% of its tyres under the ‘BKT’ brand name. BKT’s competitive
pricing strategy (almost 25% lower than its competitors), has enabled the company
100 to penetrate some of the established export destinations.
90
The company is currently trading at 8.2xFY09E fully diluted earnings of Rs
80
70. We expect the stock to be a re-rating candidate on the back of continued
70 high earnings growth coupled with the recent de-merger of the non tyre
businesses into separate companies. We initiate coverage on the stock
60
Sep-06 Dec-06 M ar-07 Jun-07 Sep-07 with a BUY recommendation and a 12 months price target of Rs 840 based
on 12xFY09E fully diluted earnings.

Year Net Sales Growth-% EBITDA OPM-% Net Profit Growth-% EPS(Rs) Growth-% PER(x) ROE-% ROCE-%
2005 4,884 34% 1,066 22 573 82 46.3 82% 12.4 36.3 26.6
2006 6,200 27% 1,400 23 700 22 36.2 -22% 16.5 31.4 24.0
2007 8,777 42% 1,775 20 876 25 45.3 25% 13.2 20.0 21.3
2008E 10,851 24% 2,228 21 1,029 18 51.3 13% 11.7 23.4 20.9
2009E 13,805 27% 2,826 20 1,405 36 70.0 36% 8.6 26.0 25.0
Rs in Mn

26 September, 2007 15
 DOLAT CAPITAL

Investment Rationale
Presence in the niche segment with high entry barriers
The company manufactures Off Highway Tyres (OHT) for agricultural, industrial and certain other specialty applications.
The OHT segment is approximately 10% of the total world tyre sales. The industry is highly concentrated with top three
players contributing 50-55% of the market. Tyres are designed to suit particular vehicle specification in each of the
segments. The low volume coupled with high customization requirements makes OHT a niche segment.

Over the years, Balkrishna Tyres (BKT) has developed over 1700 SKU’s to offer a wide range of offerings. The company
rolls out around 150 new products/sizes every year. Export revenues contribute 90% of the total tyre sales. Since revenues
are primarily being driven by replacement demand, the company has established a robust distribution network in Europe,
USA and Middle East countries. Collectively, these factors have enabled Balkrishna to be well placed in this niche
segment. With a market share of 3%, BKT ranks amongst the top 10 OHT manufacturers.

Margins well above international peers

Owing to the nature of the business, OHT margins are better as compared to regular highway tyre manufacturers. In the
OHT segment, BKT has superior margins as compared to its international peers including Michelin and Titan International.

In India, besides BKT, there are no major players in the OHT segment. Even in the international markets, there are very
few pure play OHT manufacturers. Large tyre manufacturers such as Michelin and Bridgestone include these tyres in
their wide range of offerings under the specialty tyre segment.

Operating margins for some Off highway tyre manufacturers

25.0%

20.0%

15.0%

10.0%

5.0%

0.0%
2005 2006 2007

BKT Michelin (Speciality tyres) Titan International

Source: Company Annual Reports, CMIE

* Michelin and Titan Intl - Y/E December (CY 2006)

In comparison to some of its global peers, BKT’s operating margins are far superior at around 20% for the financial year
ended March 2007. The primary reason for BKT’s higher margins is on account of lower employee cost of around Rs
4500 per ton as compared to excess of Rs 25,000 per ton in the developed countries. Additionally, the company has been
able to bring down its power and fuel cost from Rs 13,400 per ton in 2005 to Rs 9,700 per ton in 2007.

During the last year, natural rubber prices were up by 35% at Rs 88 per kg, however BKT has managed to maintain its
operating margins above 20%. In the June 07 ended quarter, natural rubber prices had come down to an average of Rs
85 per kg which provides an opportunity to the company to increase its inventory of natural rubber (as per the company’s
policy) and hence benefit from lower raw material cost going forward.

26 September, 2007 16
 DOLAT CAPITAL

Established brand and competitive pricing driving market share growth in export markets
BKT has been steadily expanding its presence in the export markets. In 2007, exports sales contributed 74% of the total
sales of the company and 90% of its total tyre sales. Almost 65% of the export sales are derived from the European
markets. The company is consciously looking to diversify its geographical presence in-order to de-risk itself from demand
downturn in any one region. It currently has customers in over 100 countries worldwide.

Exports as percentage of Sales Geographical Revenue Break-up

10,000 80%
LHS RHS
12%
70%
10%

Exports as % of sales
8,000
60%
Sales (mn)

6,000 50% 13%

65%

40%
4,000
30%

2,000 20% Europe USA Aus,NZ & ME Others

FY03 FY04 FY05 FY06 FY07

Source: Company Annual Report, Presentation

The company has strengthened its brand visibility in most of the above export markets. It sells 82% of its tyres under the
‘BKT’ brand name. The high growth in exports to Europe, which is a highly quality conscious market is testimony of the
fact that the company is capable of delivering desired quality.

Another reason for the high growth in exports is the aggressive pricing strategy adopted by the company. Owing to its low
cost manufacturing destination, Balkrishna is able to price its products lower by around 20-25% as compared to its
international counterparts. These key factors have enabled the company to corner a market share of 3% of the OHT
market till date and going forward it is looking to expand its share in an industry which is expected to grow at approximately
3 to 5% in the following few years.

26 September, 2007 17
 DOLAT CAPITAL

Company Background
BIL is a flagship company of the Rs 18 bn Siyaram Poddar Group. It is leading tyre manufacturers from India focused on
the off highway tyres segment. The company has established its presence in this segment with over 1700 SKU’s for
Agricultural, Industrial & Construction and Earthmoving applications. With a current capacity of 1 lac tones per annum,
BKT exports almost 90% of its total tyre production.

The company operates in three business segment i.e. Tyres, Paperboard and Textile processing. The tyre business is
the key segment which contributed 84% of revenues in FY07. In the last three years the tyre segment has grown by 51%
on a CAGR basis. However, the other two segments have witnessed sluggish growth rates with thin margins.

Segmental revenue break-up

Paperboard
13%

Tyre
84% Textile
processing
3%

Source: Company Annual Report

Paper Division
The Paper and Paper Board segment operates in the “Coated Duplex/Triplex Boards “. The segment has an installed
capacity of 54,000 MT per annum and turnover of Rs 118 crores in FY07. Operating margins have been falling in the
last three years from 8% in FY05 to 4% in F07. During the year, the company has introduced “Premium Super Chromo
Board” that is considered as a premium product. The company plans to increase focus on value added products which
have better margins and lesser competition.

Textile Processing Division

The division primarily undertakes job work from Siyaram Silk Mills (group company). With capacity of 24 mn meters per
annum, the turnover is a modest Rs 28.5 crores and operating margins are negative for the year ended 2007.

Transfer of non tyre businesses to separate subsidiaries

The company has announced its plans to transfer its Paperboard and Textile processing business to two separate
wholly owned subsidiaries – Balkrishna Paper Mills and Balkrishna Synthetics respectively. Each of the newly formed
subsidiaries would be run by separate management teams.

This move is in line with the company’s strategy to have a greater focus on the tyre business. Furthermore, the financial
performance ex non tyre businesses would bring to light the impressive growth rates and margins of the tyre business.
This would act as a trigger for better valuations.

Tyre Division
BKT is the largest producer and exporter of “Off Highway Tyres” from India. The tyre segment contributes 84% of the
total revenues of the company. During FY04-07, the division’s revenues have grown by a CAGR of 44%. The total
installed capacity in FY07 is 1 lac tones per annum spread across three plant locations – Bhiwadi, Chopanki and Waluj.

26 September, 2007 18
 DOLAT CAPITAL

Focus on the core business

BIL enjoys around 3% market share in the world off highway tyres segment. The company operates in a niche product
range containing more than 1700 SKU’s. The company primarily caters to Agriculture, Industrial and Construction tyres.
With high degree of customization requirement, every year BKT adds 150 to 160 new products/sizes to its existing offering.

Product Category Wise Revenue Split BKT – Product Mix by Segment

Agricultural Industrial/Construction Others
34% Steering Wheel (Tractor) Forklift Truck High Speed Trailer
Implement & Tralier Skid Steer ATV
Flotation Excavator Lawn & Garden
Tractor Bias Compactor Golf cart
Tractor Radial Backhoe Loader
Flotation Radial Earth Mover
Source: Company
62% 4%

Agriculture Indl. Others

Source: Company, Dolat Research

Agricultural segment contributes 62% of the revenues of the company. Increasing need for productivity improvements is
a driving factor for using sophisticated applications, consequently boosting demand for Off highway tyres. In Europe the
farmer population is on the decline while the farms are large in size hence necessitating usage of Tractors and other
agriculture related applications.

BKT has identified this opportunity and hence already started manufacturing Agri Radial Tyres. Currently there are only
eight players in the global Agri Radial tyre market and since BKT has a comparative cost advantage, the growth from this
segment should be robust. The company has outlined an expansion plan which includes setting up an OTR Radial facility
of 11,500 tonnes per annum. (Refer Annex - 2)

Capacity Expansion Plans

BKT has been continuously adding capacity on a step basis in the preceding years. From 40,000 MT in FY04, the
capacity has been increased by 2.5x to 100,000 MT as on June ’07.

The company has outlined another round of capex of Rs 1.4 bn to take the capacity upto 1.29 lac MT by the financial year
ended 2008. Expansion plan includes, setting up an 11,500 MT OTR radial plant at Chopanki along with increasing the
current capacity by 13,500 MT. The Bhiwadi plant capacity would also be augmented by 4,500 MT to 52,500 MT.

BKT – Production capacity build-up

140,000

120,000 34% CAGR

capacity (in mt)

100,000

80,000

60,000

40,000

20,000
FY04 FY05 FY06 FY07 Q1FY08 FY08E
Source: Company Annual Report

26 September, 2007 19
 DOLAT CAPITAL

Separation of Key Management Personnel

BKT has witnessed separation of its key management resource – Mr Yogesh Mahansaria (wef – July 8, 2006), who
was primarily looking after the OHT business. Being the operational kingpin and the face to the outside world, the exit
of Mr Mahansaria does remain an adverse development for the company.
However, our interactions with the industry suggest that the fundamentals of the business are well entrenched.
Furthermore, the current management is well equipped to carry forward, the good work done by Mr Mahansaria (sales
and profit growth momentum).
We believe, the key ingredients i.e. product innovation, service, distribution network and technology are not privy to
any one key personnel, hence the company should continue to perform well based on sound fundamentals.

Acquisition of Alliance Tire Company

Yogesh Mahansaria along with Warbug Pincus have acquired Alliance for a consideration of USD 150 mn (22xAnnualized
Mar’07 Qtr). Alliance operates in the OHT and derives 79% of its revenues from Europe. The company has around 8%
operating margins at present.

BIL should not be adversely affected by this development since it is a small player with only 3% market share.
Furthermore, the company has a well established brand in its export markets, which would be difficult to displace.

Financial Outlook
Strong revenue growth to continue with 22% CAGR over FY07-09
As per our estimates, the company’s topline growth would primarily be fueled by tonnage sales of 26% CAGR over FY07-
09. We expect the realizations to be more or less constant on account of the company’s strategy to maintain its pricing
advantage against its peers. Furthermore, BIL’s expansion in the OTR tractor radials should fetch higher realizations;
however any increase in realizations would be negated by the impact of the appreciating local currency.

Revenue viz-a-viz tonnage sales trend

14,000 Net Sales (LHS) 100,000

Tonnage Sales (RHS)

11,000 80,000
(in Rs mn)

8,000 60,000 (in MT)

5,000 40,000

2,000 20,000
FY05 FY06 FY07 FY08E FY09E

OPM expected to increase marginally by FY09

We expect a marginal improvement in operating margins from 20.2% in FY07 to 21.5% in FY09. Expansion in margins
is on account of further saving in power and fuel cost. The installation of windmills has contributed to savings on account
of power and fuel cost.

26 September, 2007 20
 DOLAT CAPITAL

Power Cost saving to drive margin expansion

15,000 8.5%

8.0%
12,000
7.5%

7.0%
9,000
6.5%

6.0%
6,000
5.5%

3,000 5.0%
FY05 FY06 FY07 FY08E FY09E
Pow er Cost per MT (Rs) - LHS Pow er & Fuel cost/Net sales - RHS

Power cost per MT has been brought down from Rs 13,394 per ton in FY05 to Rs 9,675 per ton in FY07. Going forward,
we estimate the power cost per ton to lessen to Rs 8,264 by FY09.

Net profits growth for the next two years are expected to be very healthy
We expect the net profits to grow from Rs 870 mn in 2007 to Rs 140 mn by 2009 ~ CAGR 26%. The growth is expected
to be driven by the recently introduced OTR radials. The penetration of radials in agri tyres is expected to increase rapidly
in the two key markets – Europe and North America.

For the other two divisions, we have assumed flattish growth rates for the next two years. However, the transfer of the
two businesses with separate managements into separate companies may result into better performance from each of
the divisions

Valuations
BIL’s has displayed its ability to consistently deliver strong growth in the past few years. The company is present in a
niche segment and has a definite competitive advantage in terms of low employee cost as compared to its international
peers. The company has built a strong product portfolio with over 1700 SKU’s, which acts as a key entry barrier in the
OHT segment. The recent introduction of OTR radials would further strengthen its offerings and profitability.

The company is currently trading at 8.5xFY09E fully diluted earnings of Rs 70. We expect the stock to be a re-rating
candidate on the back of continued high earnings growth coupled with the recent de-merger of the non tyre businesses
into separate companies. We initiate coverage on the stock with a BUY recommendation and a 12 months price target of
Rs 840 based on 12xFY09E fully diluted earnings

26 September, 2007 21
 DOLAT CAPITAL
INCOME STATEMENT Rs.mn IMPORTANT RATIOS Rs.mn
Particulars Mar’06 Mar’07 Mar’08E Mar’09E Particulars Mar’06 Mar’07 Mar’08E Mar’09E
Net Sales 6,200 8,777 10,653 13,139 Cost Analysis (%)
Operating Expenses 4,800 7,001 8,425 10,314 Excise/Gross Sales 2.0 2.4 2.4 2.3
Operating Profit (excluding O.I) 1,400 1,775 2,228 2,826 Net Raw Material Cost/net sales 50.1 54.8 54.4 53.6
Other income 53 89 64 79 Employee Cost/net sales 3.2 2.8 2.8 3.0
Operating Profit (including O.I) 145 186 229 290 Power & Fuel/net sales 7.0 6.3 6.0 6.0
Interest 117 170 248 271 Other Expenses/net sales 17.2 15.9 15.9 15.9
Gross Profit 1,335 1,694 2,044 2634
Depreciation 273 360 485 537 Operational Performance (%)
Profit Before Tax 1,062 1,334 1,560 2097 Operating Profit Margin (excl. O.I.) 22.6 20.2 20.9 21.5
Tax 362 458 530 692 Operating Profit Margin (incl. O.I.) 23.4 21.2 21.5 22.1
Net Profit 700 876 1,029 1405 Other Income/net sales 0.8 1.0 0.6 0.6
Earnings per share 36.2 45.3 51.3 70.0 Interest / Sales (x) 1.9 1.9 2.3 2.1
Dep/Gross Block 7.0 6.4 6.4 6.8
BALANCE SHEET Gross Profit Margin 21.5 19.3 19.2 20.0
Particulars Mar’06 Mar’07 Mar’08E Mar’09E Tax/PBT 34.1 34.4 34.0 33.0
Sources Of Funds Net Profit Margin 11.3 10.0 9.7 10.7
Equity Capital 193 193 201 201
Reserves 2,682 3,281 4,110 5,314 Financial Performance
Share Premium - - 997 - Average Cost Of Debt (%) 5.0 4.9 6.5 7.5
Net Worth 2,875 3,474 5,308 5,515 Debtors Period (days) 42.5 51.6 60.0 55.0
Secured Loans 1,781 2,927 2,927 2,927 Closing stock (days) 88.5 78.0 76.0 75.0
Unsecured Loans 1,188 1,081 681 681 Fixed Assets Turnover (x) 2.4 2.2 1.9 2.5
Loan Funds 2,969 4,008 3,608 3,608 Creditors Period (days) 59.4 57.7 58.0 60.0
Deferred Tax Liability 374 451 451 451 Non-Cash Working Capital 211.2 310.6 321.2 382.6
Total Sources of Funds 6,218 7,933 9,366 9,573 Current Ratio (x) 3.3 2.8 2.6 2.7

Application Of Funds Other Ratios

Gross Block 3,904 5,643 7,601 7,901 Debt / Equity (x) 1.0 1.2 0.7 0.7
Depreciation 1,307 1,650 2,134 2,672 Interest Coverage (x) 12.4 11.0 9.3 10.7
Net Block 2,598 3,994 5,467 5,229 ROE (%) 31.4 20.0 23.4 26.0
Cap. Work-in-Progress 689 758 300 100 ROCE (%) 24.0 21.3 20.9 25.0
Investments 51 22 22 22
Current Assets Per Share Data
Inventories 1,069 1,224 1,456 1,762 EPS 36.2 45.3 51.3 70.0
Sundry Debtors 796 1,687 1,815 2,145 CEPS 50.4 63.9 75.5 96.8
Cash and Bank Balance 768 54 365 396 Dividend Payout (%) 0.0 23.2 19.5 14.3
Loans and Advances 1,490 1,949 2,144 2,358 Book Value (Rs.) 16.4 20.1 23.0 24.6
Other Current Assets 4 1 1 1 E-estimates
Current Assets-Sub total 4,127 4,915 5,782 6,661
Current Liabilities & Provision
Current Liabilities 531 747 1,095 1,220
Provisions 716 1,008 1,109 1,220
Current Liabilities & Provisions-Sub total 1,247 1,755 2,204 2,440
Net Current Assets 2,880 3,160 3,578 4,222
Total Assets 6,218 7,933 9,366 9,573
E-estimates

26 September, 2007 22
 DOLAT CAPITAL

Annexure-1:

Industry Background
The world tyre market is estimated to be USD 100 bn and is expected to be growing at 2 to 3% per annum. The world tyre
Industry is highly concentrated with the three largest manufacturers, Bridgestone, Michelin and Goodyear accounting for
55% of the total world sales.

The Indian tyre industry is estimated to be Rs 164 bn. In the last three years, the industry has grown at a CAGR of 13%
on the back of strong growth of the automobile sector. Going forward, during the Eleventh Plan, the tyre industry is
expected to grow at an average rate of 7% per annum. The Automotive Mission Plan 2006-2016 has laid down in its
vision statement a targeted output of USD 145 bn by 2016 from the current level of USD 45 bn, a growth of almost 14%
on CAGR basis. With the overall economy remaining buoyant and the high growth expected from the auto sector, the
outlook for the tyre industry also appears positive.

No. of Passenger Cars Per 1000 Inhabitants

Country/Region 2006 2011E
Western Europe 507 532
Eastern Europe 186 217
Brazil 102 116
China 12 23
India 8 12
Source: Michelin Annual Report – 2006

The under penetration of passenger vehicles population of 8 per thousand provides a vast opportunity for the automobile
sector. Tyre being derived demand from automobiles is well placed to ride the opportunity wave.

Product Segmentation
(percentage in terms of value)

3.3
8.7

8.8

9.1
59.6

10.5

Truck & bus Passenger Car Tractor LCV 2 Wheelers others

Source; Cris Infac

In value terms, T&B segment accounts for almost 60% of the entire industry. The growth of this segment being highly
correlated to the economic trends of the country, should witness above average growth for the next 2 to 3 years. Passenger
cars and LCV segment together is peculiarly lower at 19.3% as compared to the world standard of 61%.

26 September, 2007 23
 DOLAT CAPITAL

Market Segmentation

17%

23%
60%

Replacement Market OEM Exports

Source: Cris Infac

The replacement market accounts for a substantial share of 60% of the total tyre sales. This being the case, the tyre
sector is subject to less cyclicality as compared to the automobile industry. However, the homogeneity of the final product
makes switching relatively easier in the replacement market. Brand loyalty being low, pricing policy becomes a key
determinant for a customer. The growth in this segment is currently higher than the OEM and export markets.

The OEM segment is not as lucrative as the replacement market in terms of margins. Additionally, the current slowdown
in auto sales have led to reduced traction in this segment. For the June’07 ended quarter, the overall sales were down by
0.5% on a YoY basis. The two wheeler segment showed a negative growth of 6.7% for the quarter. The industry is
expected to revive during the second half of the current financial year.

Replacement Demand Cycle

Particulars T&B Passenger Car
Life of new tyre-(kms) 60,000 48,000
Average running per day (kms) 200 30
Running per Month-(kms) 6,000 1,050
Life of a new tyre -(months) 10.0 45.7
Avg Retreaded tyre life (kms) - 2 times retreading 58,500 -
Life of Retreaded tyre (months) 9.8 -
Probable Replacement demand after (months) 20 46
Source: Industry, Dolat Research

We carried out a basic calculation to determine the replacement demand cycle for the T&B and Passenger cars segments.
For T&B bias tyres, the life of the tyre including retreading is estimated to be 20 months, whereas it is 46 months for a
passenger car tyre. Based on these ballpark figures, the CV growth witnessed in the past two years should reflect to a
certain extent in the following year.

26 September, 2007 24
 DOLAT CAPITAL

Tyre Exports Segmental OEM Tyre Sales – April to June’07

3000 April-June 2006 April-June 2007

2500 2 Wheeler -6.74%

CAGR-21.23%

2000 Tractor -4.01%

Rs in Cr.

1500
LCV 15.24%

1000
PV 13.24%
500
T&B 0.06%
0
2003 2004 2005 2006 2007 - 1,000 2,000 3,000 4,000 5,000
fig in ('000 nos)
Source: ATMA
Source: ATMA, Dolat Research

In the previous year, exports took a back seat in light of the growing domestic demand. In the T&B segment, most tyre
manufacturers were operating at peak capacities and hence preferred catering to domestic requirement. Having established
its presence in more than 65 countries and quality acceptance in most of the developed nations, there is immense scope
for accelerating exports in the future. However, exports have exhibited a 21.23% CAGR in value terms over the past five years

The exports segment has shown moderate growth in the last 4 to 5 years. For the last 10 years the growth in value terms
has been approximately 12% on CAGR basis. In the T&B category, the exports have been in the range of 18-20% of the
domestic production whereas only 6% for the passenger car segment.

The OEM segment is not as lucrative as the replacement market in terms of margins. Additionally, the current slowdown
in auto sales have led to reduced traction in this segment. For the June’07 ended quarter, the overall sales were down by
0.5% on a YoY basis. The two wheeler segment showed a negative growth of 6.7% for the quarter. The industry is
expected to revive during the second half of the current financial year.

Oligopolistic constitution
The tyre industry in India is highly concentrated where the top 4 players constitute 70-75% of total market share. Prima
facie, if these players collaborate, they could pass on the increase in raw material cost to the end users. However, all the
players appear to be in a quest for gaining market share by keeping prices constant and thereby suffering on the margins front.

26 September, 2007 25
 DOLAT CAPITAL

Assuming A&B are the top two major players, the above table illustrates the result of collaboration versus acting on stand
alone basis. For the precedent periods, the industry functioning could be represented by the bottom right quadrant,
where the incessant increase in raw material prices was not being passed on with the apprehension of loss of market share.

However, the last year saw most players take price hikes to cover for the rising raw material costs. The effect of these
hikes has visibly improved the financial performance of most of the tyre manufacturers. The direction of the arrow in the
above table reflects the result of collaboration for common benefit. Although the industry has shown indications of moving
to the top left quadrant, the shift cannot be established until the trend can be observed for a reasonable period of time.

Industry Market Share

100
90
80
70
60
50
40
30
20
10
0
2001-02 2002-03 2003-04 2004-05 2005-06

MRF Tyres Apollo Tyres JK Industries CEAT Others

Source: Company Annual Reports, Dolat Research

The market share of the top four players have increased from 64% in 2001 to 74% in 2006. The increased market share
of Apollo and JK in 2003-4 is partially on account of acquisition of Premier tyres and Vikrant tyres respectively.

Low product differentiation and comparable price points in each product category have resulted in an even market share
trend over the years. MRF is a market leader with a strong hold in the passenger car (17%) and two wheeler (28%)
segment. Apollo has a substantial share of 28% in the T&B segment.

Imports scenario
Imports from China have been rising at an alarming pace. The price differential between an Indian and Chinese T&B tyre
is around 25 to 30%. Approximately 5.5 lac T&B tyres were imported from China between April and December 2006
against 3 lac units during the entire financial year 2005-06.

Radial Tyre Imports vis-à-vis Total Radial Tyre Sales Bias Tyre Imports vis-à-vis Total Bias Tyre Sales

10% 40%
PCR T&B 20.0% 4.5%
18.0% 4.0%
8% 16.0%
30% 3.5%
14.0% 3.0%
6% 12.0%
2.5%
20% 10.0%
2.0%
4% 8.0%
6.0% 1.5%
10% 4.0% 1.0%
2%
2.0% 0.5%
0.0% 0.0%
0% 0%
2003-04 2004-05 2005-06 2006-07
2003-04 2004-05 2005-06 2006-07
Passenger Car (LHS) T&B (RHS)

Source: ATMA, Industry, Dolat Research

26 September, 2007 26
 DOLAT CAPITAL

The T&B radial tyre imports in 2006-07 have crossed 30% of total T&B radial tyre sales in India. Some of the major Indian
CV manufacturers have off late started importing Chinese radial tyres. The apparent reason for tyre imports by CV OE’s
is more with the view to establish a back up supplier in China, rather than seeking for cheaper alternatives. The current
T&B radial manufacturing capacity in India is only 100 tpd. Going forward, some of the major Indian tyre manufacturers
have already announced expansion plans of approximately 170-180 tpd, which are expected to come up by 2009-10.

In the bias tyre segment, the imports are much lower as a percentage of total sales for both the passenger car and T&B
segment. The share of imports in the passenger segment has come down considerably from 18% in 2003-04 to 10% in
2006-07. In 2005-06, the CV segment witnessed an unexpectedly high growth, which resulted into a high demand for
T&B bias tyres. Since most tyre manufactures were operating at near peak capacities, the supply could not be met
domestically. Consequently imports jumped up from 1.5% in 2004-05 to 4% in 2005-06.

Brakes on Imports…
Ø Incentives withdrawn by Chinese government: - Recently the Chinese government has withdrawn 5% export
subsidy and simultaneously increased the freight charges by 20%. This would lead to an approximate 15% increase
in the landed cost of the tyres from China.

Ø Anti-Dumping duty increase: - Under the reference pricing formula for Anti-Dumping duty calculation, the reference
price has been increased from USD 99 per unit to USD 135. Although the revised price is redundant in light of the
sharp rise in raw materials through the last year, the regulators have showed willingness to revisit these reference
rates.

Ø Quality concerns: - A New Jersey based importer was directed by the federal authorities to recall 4.5 lac Chinese
radial tyres based on quality issues. This incident has highlighted the safety concerns regarding Chinese tyres. Tyres
exported to India have complains of cheap raw material usage to maintain the price differential of 30%.

26 September, 2007 27
 DOLAT CAPITAL

Annexure-2:
Off Highway Tyres – Industry Overview
The global Off Highway Tyres (OHT) market accounts for 10% of world sales and estimated to be around USD 7.5 bn.
Akin to regular highway tyre industry, the OHT segment is highly concentrated with top 3 players enjoying 50-55% of the
industry market share. Contrasting for the highway tyres, OHT requires high degree of customization depending on the
application. Consequently, having a variety of product offering and strong R&D competence for new product development
is extremely crucial.

Major OHT Applications

Quarrying Mining Earth Moving Construction Agricultural

The growth of this segment is highly correlated to the economic growth rate. On a global level, the growth is expected to
be in the range of 3 to 5%, developing countries are expected to have a much higher growth rate. Driven by growing
international trade, strong raw material demand and infrastructure development, the handling equipment market offers
bright prospects, as does the large earthmover tire market, in particular those used in mining operations. Opportunities
to equip high-powered agricultural machinery, extra-large or highly compact equipment, and, more generally, radial tire
applications are also substantial.

Radialisation in Agricultural Tyre Markets Segmental World Agricultural Tyre Market

Source: Michelin Factbook 2007

Besides Europe and North America, radialisation has barely reached 7% level for the Agricultural tyre market. In Europe
and North America, agri-tyre radialisation is expected to increase to 69% and 32% respectively by 2010 as compared to
56% and 26% respectively in 2004.

26 September, 2007 28
 DOLAT CAPITAL

The ratings are based on the absolute upside of our target price from the current price.
Upside Ratings
> 25 % Buy
15% - 25% Accumulate
0% - 15% Reduce
<0% Sell

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This report contains a compilation of publicly available information, internally developed data and other sources believed to be reliable. While all reasonable care has been taken to
ensure that the facts stated are accurate and the opinion given are fair and reasonable, we do not take any responsibility for inaccuracy or omission of any information and will not be liable
for any loss or damage of any kind suffered by use of or reliance placed upon this information. For Pvt. Circulation & Research Purpose only.

26 September, 2007 29