JK Tyre & Industries Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Tyres & Allied

Company

JK Tyre & Industries Ltd

Reco Price
Rs. 120.60
Price Target (1 Years)
Rs. 145.00
Upside
20.23%

Date

February 07, 2017
Sensex
28335.16
CNX Nifty
8768.30

Exchange

Code

NSE
JKTYRE
BSE
530007

Capacity Expansion to drive volumes.

Expansions / acquisitions to facilitate a wider presence across categories:
JK Tyre has a consolidated capacity of 2110 tpd (350 lakh tyres pa), with 340 tpd located in Tornel, Mexico. The acquisition of Cavendish (India) has given JK Tyre entry into the 2/3 wheeler category with a dedicated capacity of 63 lakh tyres pa which is a higher margin business. The company has also completed a Greenfield expansion at a cost of Rs. 1430 crores which has increased its TBR (Truck/Bus/Radial Tyres) and PCR/LTR (Passenger/Truck Car Tyres) capacity. Further, expansion at the Mexico project is now complete, at a cost of $22 Million, taking the facility’s capacity to 50 lakh tyres. The company’s sales composition is in the ratio of 56% (replacement demand), 35% (OEM demand)and exports make up for the balance. Truck tyres account for 79% of the revenue mix, while PCR accounts for 15%.

Key beneficiary from CV radialisation:
Owing to benefits like better mileage, durability, overload control among others, radials are finding favor among tyre buyers in the truck/bus segment. Radials now account for a 44% share in total tyre sales in the truck/bus tyre segment as against a meagre 8% share in FY09. CV tyres contributed 79% of JK Tyre’s revenue in FY16 and the company would be a key beneficiary of the radialisation trend gaining pace in the truck and bus segment.

“CHALLENGER” to compete Chinese products:
Although tyre imports from China have undergone some slowdown due to demonetization, they continue to remain a tough competition. The company has launched a product line “Challenger” in TBR, at competitive prices to combat Chinese tyres. The industry is hopeful of an imposition of anti-dumping duty on them, though a defined timeline of such an imposition remains uncertain.

Automobile Industry to boost growth:
JK Tyre is the leader in truck/bus radial tyres segment with a 34% domestic market share along with 30% market share in LCVs segments. Automobile industry sales volumes are expected to register a CAGR of over 11.5% during FY14-FY17E. Around 53% of the tyre industry’s revenue comes from truck and bus tyres. JK Tyre being the leader in the radial segment is expected to benefit a lot from the revival of commercial and passenger vehicle industry.

Debt Levels peaked out:
JK Tyre has completed the acquisition of CIL wherein it has a 64% stake while the remaining 36% has been acquired by JK group’s associates/group companies. The deal size for the same was at Rs. 2,170 crore, with a mix of equity & debt of Rs. 700 crore & Rs. 1,470 crore, respectively. This has increased overall gross debt to Rs. 3,624 crore in FY17E. In the past, the management has guided that debt levels have peaked out and no major capex would be done over the next year or two. This will be accompanied by gradual and steady debt repayment which will directly boost the profitability.

Company will not bear the brunt of increase in raw material prices; To be passed on to consumers:
The recent rise in rubber prices is a serious concern. Rubber prices have risen considerably, from Rs. 120 to Rs. 169 a kg. It expects another 10% rise going forward. Apart from rubber prices, crude prices have also moved up in the recent past. This would further create pressure on tyre manufacturers. However, the company is likely to pass on most of the rise in input cost to consumers, going forward. Further, a better product mix (higher share of radial tyres) will also support margins.

Stock Data

CMP (Rs)
118.35
Face value (Rs)
2
52 Week Range (Rs)
161.40 - 73.80
Market cap (Rs Crores)
2679.80
Price To Book Value (x)
1.44
P/E Ratio (x)
6.56
EV/EBIDTA (x)
4.18

One Year indexed Stock Performance

JK Tyre & Industries LtdSensex
JK Tyre & Industries Ltd
Return (%)
1m
6m
12m
36m
Absolute
3.05
11.86
32.46
319.68
Sensex
6.02
0.54
16.67
39.06

Shareholders

(in %)
31-Dec
Promoter
52.34
Public
47.66
Others
0.00
Total
100

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Industry

Domestic tyre demand is expected to grow by 6-7% over the next three years ending FY19. Automotive industry production which grew by 8% during FY15, decelerated to 2.3% in FY 2016. However, YTD May-16 growth has been robust at 11.3%; structural tailwinds point to sustenance of this trend and an annual production growth of 7% during FY2017. 3% growth in volumes demand from the Original Equipment Manufacturer (OEM) segment, coupled with a 5-6% growth in replacement volume demand is estimated to have resulted in a 4-5% growth in domestic tyre demand in India during FY16. A stronger growth of 7.1% and 21.4% respectively in the OEM and replacement segment pushed up domestic demand by 15% during FY2015; the slowdown in OEM demand was felt across all segments barring CVs. Over the next three years, we expect the domestic tyre demand to report a 6-7% volume growth, supported by a broad based revival in OE demand and economic activity in the country driving urban purchases. Pick up in rural expenditure with good monsoon would translate into higher OEM demand for the rural centric two-wheeler (2W) and tractor segments. Growing fleet on ground and higher miles driven/freight moved would drive replacement sales

Profile

JK Tyre & Industries Ltd, a part of JK organization is an Automotive Tyre, tube and flaps manufacturing company. It is the leader in Radial tyre in India and manufactures passenger car tyres, commercial tyres, farm tyres and off the road tyres. Started with first tyre manufacturing plant in Kankroli, Rajasthan with an installed capacity of 0.5 million tyres p.a., it has 9 domestic plants, 3 of them are located in M ysore, 1 in Banmore, 1 in Kankroli, 1 in Chennai and 3 in Laksar. After the company acquired the Mexican tyre major Tornel (2008) along with their 3 Mexican plants, the company now has 12 plants with an installed capacity of 35 Mn. tyres p.a. in truck/ bus radials, passenger car radials and bias tyres segment. JK Tyre’s products are sold from its wide distribution network of over 141 selling points and 4000+ dealers across India in over 100 countries spread across 6 continents.

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
Mar 14
Mar 15
Mar 16
Mar 17
Mar 18E
Income:-
  • Net Sales
  • Growth (%)
  • Total Expenditure
  • EBITDA
  • % Margin
  • Other Income
  • Operating Profit
  • Interest
  • PBDT
  • Depreciation
  • Profit Before Taxation & Exceptional Items
  • Exceptional Income / Expenses
  • Tax
  • Profit After Tax
  • Share of Associates
  • Consolidated Net Profit
  • Adjusted EPS
  • 7651.76
  • -
  • 6780.45
  • 871.31
  • 11.39
  • 18.32
  • 889.63
  • 276.20
  • 613.43
  • 179.47
  • 433.96
  • -59.52
  • 118.82
  • 255.62
  • 7.40
  • 263.02
  • 12.81
  • 7383.71
  • -3.50
  • 6452.95
  • 930.76
  • 12.61
  • 16.88
  • 947.64
  • 257.41
  • 690.23
  • 157.77
  • 532.46
  • -46.91
  • 161.66
  • 323.89
  • 5.77
  • 329.66
  • 14.54
  • 6953.12
  • -5.83
  • 5811.62
  • 1141.50
  • 16.42
  • 16.70
  • 1158.20
  • 245.37
  • 912.83
  • 196.11
  • 716.72
  • -47.76
  • 215.68
  • 453.28
  • 10.52
  • 463.80
  • 20.45
  • 7460.00
  • 7.29
  • 6186.20
  • 1273.80
  • 17.08
  • 26.10
  • 1299.90
  • 439.70
  • 860.20
  • 291.20
  • 569.00
  • -57.12
  • 163.00
  • 348.88
  • -0.40
  • 348.48
  • 15.36
  • 8290.00
  • 11.13
  • 6916.00
  • 1374.00
  • 16.57
  • 30.00
  • 1404.00
  • 387.50
  • 1016.50
  • 265.00
  • 751.50
  • 0.00
  • 260.40
  • 491.10
  • -0.40
  • 490.70
  • 21.62
Source: Stockaxis Research, Company Data

Valuation

With the expectation of a revival in capex cycle, we are optimistic about the revenue/earnings growth possibilities for JK Tyre – the leader and pioneer in the TBR segment. The capacity constraint in the TBR segment is largely over as the new capacity is already in place and the new CIL acquisition has further provided additional capacity of 1.2 million tyres/per annum. Any positive development on part of the government in terms of restricting imports of Chinese tyres, going forward, will benefit the company. Thus, we value JK Tyre at 3.9x FY18E EV/EBITDA.

 

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