ET Intelligence Group : Continued demand for tyres for farming equipment in Europe may lend more credence to volume visibility at Balkrishna Industries (BKT), a maker of off-highway tyres (OHT) used in tractors and heavy mining vehicles.

Improved demand from the farm sector will have the more pronounced impact on earnings growth of BKT as it derives nearly two-thirds of its sales from farm equipment machinery.

The BKT stock trades at a 30 per cent average premium over prominent Indian tyre makers, with nearly double the operating profit margins. Better volume visibility and superior margins may aid in maintaining premium priceearnings multiples.

BKT’s volume growth in the December quarter stood at 24 per cent, the highest in at least 18 quarters, thanks to a 35 per cent rise in business from farm equipment manufacturers in Europe and 17 per cent growth in Off-the-Road (OTR) tyres in the mining sector. In the nine months of FY18, volume grew 15 per cent to 145,211 tons. The company has guided for volume growth of 11-13 per cent for the current fiscal after the second quarter results, which look achievable given the traction in demand for OHT tyres.

The Street has been pricing volume growth of 15 per cent a year in the next three years.

The buoyancy in demand can be gauged from revenue growth of OHT tyres segment of the global tyre major Michelin. OHT revenue at Michelin rose between 11 per cent and 29 per cent in the past four quarters of 2017. Similarly, other leading global OHT companies - Trelleborg and Titan International - have been witnessing decent improvement in revenue growth.

The company is gradually increasing its presence in the OTR segment—the mining and construction sectors. BKT is gradually becoming an approved vendor to all leading vehicle makers and expanding its network. In order to tap mining segment, it has launched more than 39-inch mining tyres using its own R&D, and the product has been well accepted in both the OEM and replacement markets.

Operating margins in December 2017 dropped to 30.3 per cent from 33.4 per cent a year ago due to one-off expenditure on shifting plant and machinery to Bhuj plant from Waluj. Margins could remain in the range of 32-33 per cent in the medium term owing to richer product mix as the share of higher margin mining tyres rises.