HDFC Securities Research Report – JK Tyre & Industries Ltd
JK Tyre & Industries (JKTL) is the flagship company of the JK organization which has other interests in paper, cement, seeds and dairy. It is one of India’s leading tyre brands (pioneer in truck radials) and among the 25 largest tyre companies in the world. JKTL started manufacturing tyres in 1977 with a capacity of 0.5 mn tyres per annum which has grown to 35 mn tyres per annum currently through organic and inorganic route. The company is the market leader in truck/bus radial tyres. It has 9 manufacturing plants in India strategically located across the country – Mysuru, Banmore, Kankroli, Chennai and Haridwar and 3 in Mexico.
Improvement in road infrastructure to drive higher sales of CVs
Cavendish acquisition facilitates 2/3W segment entry and capacities for TBB/TBR
Increasing radialisation in commercial vehicles
Capex completed, revenue growth to kick in
Price hikes taken to compensate increase in rubber prices
Signs of dumping by China fading away
Raw material price volatility
Dumping of tyres by China
Slowdown in automobile growth
High competition from peer companies
Tornell unit could come under US trade restrictions
View and Valuation
The acquisition of Cavendish (from Kesoram Industries Ltd) in April 2016 has given the company entry into the high volume 2/3W segment and additional TBR capacity which would drive its growth in the near term. Capacity expansions at its Chennai has also been completed and capacity utilization has been ramped up. The dwindling threat of Chinese imports should result in higher volumes and better margins for the company. Softening raw material prices and recent price hikes taken would lead to higher revenues and better margins in the coming year/s. The management is focusing on reducing debt which at 2.8x is the highest amongst the listed peer companies. JK Tyres has a successful track record of inorganic growth (Tornell in the past) and would soon succeed in reaping the benefits of Cavendish acquisition.
The whole tyre sector trades at low P/E multiple, we see scope for a rerating of the sector. Easing competitive intensity and price aggression leading to cross‐cycle margin flexibility could lead the rerating for a sector that otherwise enjoys healthy return ratios and has a very high exposure to the lucrative after‐market (like the battery sector, which trades at a 100%+ premium to tyres). JK Tyres quotes at an even lower P/E compared to its peers probably due to the high debt on its books. The brand names of the tyres remain visible in the vehicles resulting in brand recall (contrary to a lot of other auto ancilliary items including Batteries which are hidden in the vehicle).
At CMP of Rs 175 the stock quotes at 7.3x FY19E EPS (5.6xFY19 EV/EBITDA). We feel investors could BUY the stock at the CMP and add on dips to Rs 153-157 band (6.5xFY19E EPS; equivalent to 5.3xFY19 EV/EBITDA) for sequential targets of Rs.203 (8.5xFY19E EPS; equivalent to 6xFY19 EV/EBITDA) and Rs 227 (9.5xFY19E EPS; equivalent to 6.4xFY19 EV/EBITDA) in 2-3 quarters.
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