volume no. i issue no. 118 jk tyre & industries ltd. · 2018-06-05 · scrappage policy &...

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Radialisation trend catching up fast…

JK Tyre & Industries Ltd (JK Tyre) has been in the business of manufacturing and

selling tyres since its inception in 1977. Further, JK Tyre derives 86%/14% of its

revenues from Indian/Mexican markets. It commands a dominant market share of

28% in truck tyre segment.

Investment Rationale

Rising CV radialisation levels & recovery in replacement demand bode well: JK Tyre is

well poised to benefit from the radialisation story in India. JK Tyre is the largest player with

28% market share in truck tyre segment. The radialisation levels have increased from 6% in

FY09 to 44% in FY16. Further, radialisation trend (given the fuel & efficiency benefits) in truck

& bus segment is expected to rise at a rapid pace and is likely to reach around 77% by FY21E.

JK Tyre’s share of radial tyres revenue has increased from 46% in FY14 to 58% in FY16. With

the completion of expansion project at its Chennai plant, the TBR/PCR capacity has increased

to 2.3mn/10mn tyres per annum. Further, CIL acquisition would expand its presence in truck

radials segment with an incremental capacity of 1.2mn tyres per annum. Moreover, JK Tyre is

well positioned to reap the benefit from shorter life (avg useful life of ~1 year) of M&HCV

segment tyres on the back of expectation of robust demand from replacement market (77%

to sales) as truck OEM sales saw a recovery in FY15/16 (~20% p.a.). Thus, we expect India

business (contributed 86% to the consolidated revenues in FY16) to witness a CAGR of 10%

over FY17-19E largely driven by rising radialisation levels coupled with volume growth

through capacity expansion & acquisition of CIL.

Foray into two-wheeler segment has completed the portfolio: With the acquisition of

CIL, JK Tyre has forayed into the fast-growing 2/3 wheeler category (6.3mn tyres per annum).

The entry into the 2Ws space not only helps JK Tyre in becoming a full-range tyre maker but

also allows the company in penetrating rural markets. JK Tyre has launched premium two

and three-wheeler tyres under the brand ‘Blaze’. Notably, the product has been received

well in the market. Currently, 2W tyres contribute nearly 5% to the total revenues & the

company is targeting to double the contribution over the next two years.

Turnaround of Cavendish acquisition to drive growth ahead: Within one year of

acquisition, JK tyre has managed to turnaround CIL. CIL turned PBT positive in Q4FY17 led by

employee rationalisation & reduction in conversion costs. While TBR capacity for JK Tyre

(excluding CIL) is being fully utilised, the utilisation level of TBR capacity at CIL has improved

to 70-80% since acquisition. More importantly, CIL acquisition has enhanced the domestic

capacity by 55% to 1,770 tonnes per day. JK tyre got an access to three factories located at

Laksar (Haridwar) where the company would enjoy tax benefits up to 2020.

Leverage ratio set to decline from FY18E onwards as no capex plans on the anvil: As

domestic capacity has increased by 55% with the acquisition of CIL, JK Tyre has no major

capex lined up in the medium term. The debt/equity ratio is estimated to rise from 1.7x in

FY16 to 2.1x in FY17 as the company has funded major part of CIL’s acquisition through debt.

However, the strong free cash flow generation to the tune of Rs1951cr over FY17-19E would

help in improving the leverage ratio from the current level of 2.1x to 1.2x in FY2019.

Valuations: Given JK Tyre’s dominant position in TBR segment coupled with robust brand

equity, we expect revenue to grow at a CAGR of ~10% over FY17-19E. However, PAT is

expected to grow at a CAGR of ~19% on account of low base effect. We initiate JK Tyre with a

‘BUY’ rating with a TP of Rs183 at 6.5x FY19E EPS.

Rating BUY CMP (Rs.) 166

Target (Rs.) 183

Potential Upside 10%

Duration Long Term

Face Value (Rs.) 2

52 week H/L (Rs.) 167/79

Adj. all time High (Rs.) 167

Decline from 52WH (%) 0.7

Rise from 52WL (%) 108.6

Beta 1.1

Mkt. Cap (Rs.Cr) 3,757

Market Data

April 28th, 2017

BSE Code: 530007 NSE Code: JKTYRE Reuters Code: JKIN.NS Bloomberg Code: JKI:IN

Fiscal Year Ended

For private circulation only

Y/E FY16 FY17E FY18E FY19E

Revenue (Rs.Cr) 6,953 7,490 8,132 9,038

Adj. profit (Rs.Cr)

512 448 505 638

Adj. EPS (Rs.) 22.6 19.8 22.2 28.1

P/E (x) 7.3 8.4 7.4 5.9

P/BV (x) 2.1 1.8 1.5 1.2

ROE (%) 32.5 23.1 21.5 22.5

Shareholding Pattern

Mar-17 Dec-16 Chg.

Promoters (%) 52.3 52.3 -

Public (%) 47.7 47.7 -

Source: Company, In-house research

0

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200

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May

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Jun

-16

Jul-

16

Au

g-1

6

Sep

-16

Oct

-16

No

v-1

6

Dec

-16

Jan

-17

Feb

-17

Mar

-17

Ap

r-1

7

JKTYRE Sensex (Rebased)

One year Price Chart

Volume No. I Issue No. 118 JK Tyre & Industries Ltd.

.

JK Tyres: Business overview

JK Tyre & Industries Ltd (JK Tyre) is one of the leading tyre manufacturers in the country. The

company derives 86% & 14% of its revenues from India and Mexico markets respectively. It

commands leadership position in the Indian truck and bus radial tyre segment, with a market

share of 28%. The product profile spans the entire range including passenger cars, utility

vehicles, light trucks, truck & bus, agriculture & off-the road tyres. With the acquisition of CIL,

ATL forayed into two-wheeler segment. Its key brands include JK Tyre, Vikrant and Tornel. JK

Tyre has 12 manufacturing locations spread across India (9) & Mexico (3). It has a total

production capacity of 2,110 tonne per day.

Consolidated revenue break up by geography (%)


A well-diversified product portfolio

The company’s diverse product portfolio spans across the entire range including truck & bus,

passenger cars, light trucks, agriculture & off-the road tyres. With the latest acquisition of

Cavendish Industries, JK Tyre has forayed into two & three-wheeler space. It is the largest

player in the truck tyre segment with 28% market share. Notably, truck & bus segment

contributes the maximum 67% to the total revenue followed by passenger car (15%), light

truck (12%), farm (4%) and OTR & others (2%) segments.

Comprehensive product portfolio

Revenue breakdown by product


India, 86%

Mexico, 14%

Truck, 67%

PCR, 15%

Light Truck, 12%Farm, 4% OTR & others,

2%


Many first to its credit

JK Tyre has a first-mover advantage in introducing cutting edge technology. It was the first

player in India to launch radial technology for entire range (passenger car, LCV, bus, truck and

tractors). Further, it was also the first company to launch V-Rated eco-friendly tyres with high

performance.

Impressive customer base & extensive distribution network

JK Tyre has global presence in 100 countries spread across six continents. The company

generates 35% of its revenue from OEMs, 56% from replacement market and 9% from exports.

It has consistently added new customers and supplies to most of the OEMs in truck, passenger

car, truck, tractor & OTR categories. The company has 143 JK Tyre selling points which service

the growing needs of about 4,000 dealers (1,000 exclusive) across India. Further, the company

markets products through 23 ‘JK Tyre Truck Wheels’ (fully equipped tyre service centre).

Moreover, it has about 200 one stop retail & tyre care outlets called ‘JK Tyre Steel Wheels’

which generate significant portion of PCR sales.

Diversified customer base

New products launched over the years

FY16 121

FY15 63

FY14 65

FY13 62

FY12 40

Consolidated revenue break up by market (%)


Rising radialisation levels to help in sustaining the leadership position

JK Tyre is well poised to benefit from the radialisation story in India. JK Tyre is the largest

player with 28% market share in truck tyre segment. The radialisation levels have increased

from 6% in FY09 to 44% in FY16. Further, radialisation in truck & bus segment is expected to

Replacement, 56%OEMs, 35%

Exports, 9%


increase at a rapid pace and is likely to touch around 77% by FY21E. JK Tyre’s share of radial

tyres revenue has increased from 46% in FY14 to 58% in FY16. Notably, radial tyres enjoy

better margins when compared to margins of bias tyres.

JK Tyre commands leadership position in TBR space

Radialisation trend on the rise


Truck tyre demand to revive

JK Tyre is India’s largest player with 28% market share in truck tyre segment. Importantly,

during the past five fiscals (FY11-16), demand for truck tyre has been almost flat when

compared to long-term average of 6-7%. However, going forward, we expect truck tyre

demand to revive & register a CAGR of ~6% over FY16-19E on account of four factors: (1) shift

towards large trucks, (2) government focus on infrastructure development, (3) stricter vehicle

scrappage policy & (4) shift to stricter emission norms will drive the fleet demand.

India Truck tyre demand to witness a CAGR of 6% during FY16-19E


Cavendish Acquisition – The next growth engine

In 2015, JK Tyre acquired Cavendish Industries Ltd (CIL), a unit of Kesoram Industries, for

Rs2,195cr. Notably, since May, 2016, JK Tyre has started to consolidate the financials of CIL

(acquisition impact) onto the overall financials of the company. The deal has added a capacity

to produce 10mn tyres a year and hence the total manufacturing capacity in India will increase

to 27mn units a year. More importantly, this acquisition has provided JK tyre an entry point

into the fast-growing 2/3 wheeler category. Interestingly, CIL has a capacity of 6.3mn tyres per

annum in this category. The foray into the 2Ws space not only helps JK Tyre in becoming a full-

range tyre maker but also allows the company in penetrating rural markets. JK Tyre has

launched premium two and three-wheeler tyres under the brand ‘Blaze’. Notably, the product

has been received well in the market. Currently, 2W tyres contribute nearly 5% to the total

JK Tyre, 28%

Apollo Tyre, 24%MRF, 13%

Ceat, 5%

Birla, 5%

Others/Imports, 25%

11% 17% 19% 22% 26%33%

44%53%

60%67% 72% 77%

0%

50%

100%

FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E FY21E

16 16 17 18 19 19 20

2014-15 2015-16 2016-17E 2017-18E 2018-19E 2019-2020E 2020-21E


revenues & the company is targeting to double the contribution over the next two years.

Further, this acquisition would expand its presence in truck radials segment with an

incremental capacity of 1.2mn tyres.

…Turnaround of Cavendish to aid growth

Within one year of acquisition, JK tyre has managed to turnaround CIL. CIL turned PBT positive

in Q4FY17 led by employee rationalisation & reduction in conversion costs. Notably, the

utilisation levels of CIL’s units manufacturing truck radials have gone up to 70-80% since

acquisition. JK tyre got an access to three factories located at Laksar (Haridwar) where the

company would enjoy tax benefits up to 2020.

Chinese imports on the downtrend

Imports of the Chinese tyres have been severely hurt by the demonetisation drive. Further,

the government is mulling to impose anti-dumping duty on imported Chinese truck radial

tyres. This can further improve both volumes and realisations for Indian TBR players.

India revenue to grow at 10% CAGR over FY17-19E


Mexican operations to witness an improving trend

Mexico business contributed 14% to the total consolidated revenues in FY16. It has over 85%

market share in Light Commercial Vehicles (LCVs) bias, 88% market share in truck bias and 8%

market share in passenger line radials. It also supplies farm and industrial tyres. It has 3

manufacturing plants in Mexico & the total capacity is around 8.3mn tyres p.a. in PCR, truck bias

and other tyres segments. Over the last 8 years, the capacity utilisation levels have increased

from 40% to 70%. In FY16, JK Tyre has increased capacity in PCR segment by 1.5mn tyres. We

expect the Mexican operations to register revenue CAGR of over 9% during FY17-19E aided by

enhanced capacity.

Mexico revenue to grow at 9% CAGR over FY17-19E


Enhanced capacity to aid JK Tyre’s overall revenue growth

We expect India business (contributed 86% to the consolidated revenues in FY16) to witness a

CAGR of 10% over FY17-19E largely driven by rising radialisation levels coupled with volume

growth through capacity expansion & acquisition of CIL. Further, truck tyre demand is expected

to pick-up owing to robust replacement demand. Notably, truck & bus segment contributes the

maximum 67% to the total revenue. While we expect M&HCV segment to grow at ~8% CAGR

5,9

51

6,1

25

5,8

81

6,3

46

6,8

97

7,6

80

9.6%

2.9%

-4.0%

7.9% 8.7%11.4%

-10.0%

0.0%

10.0%

20.0%

-

5,000

10,000

FY14 FY15 FY16 FY17E FY18E FY19E

Rs.

Cro

res

Revenue Growth YoY (%)

1,7

33

1,2

85

1,1

02

1,1

79

1,2

74

1,4

01

10.3%

-25.9%

-14.2%

7.0% 8.0% 10.0%

-30.0%

-20.0%

-10.0%

0.0%

10.0%

20.0%

-

1,000

2,000


Rs.

Cro

res



over FY16-19E, we expect truck tyre demand to revive & register a CAGR of ~6% over FY16-

19E.

Overall revenue to grow at 10% CAGR during FY17-19E


EBITDA margin to remain tepid While the radialisation levels is expected to inch up to 67% in FY19E, higher natural rubber

prices would arrest any gains in margins. Interestingly, JK Tyre has been undertaking regular

price hikes (increased prices by ~3% in the last 3-4 months) to offset the higher raw material

costs. Thus, we expect EBITDA margins to hover around 16.5% levels in FY18E & FY19E.

EBITDA to grow at 7% CAGR over FY17-19E

c Source: Company, In-house research

PAT to grow at 19% CAGR over FY17-19E In FY16, Adj. PAT stood at Rs512cr, reporting a growth of ~36% CAGR over FY13-16. PAT

margin improved by 230bps to 7.4% YoY in FY16. We expect Adj. PAT to grow at a relatively

moderate CAGR of ~19% over FY17-19E led by higher depreciation & interest costs.

PAT to grow at 19% CAGR over FY17-19E

Return ratios trend


Key Risks:

7,6

52

7,3

84

6,9

53

7,4

90

8,1

32

9,0

38

10.1%

-3.5%-5.8%

7.7% 8.6%11.1%

-10.0%

0.0%

10.0%

20.0%

-

5,000

10,000


Rs.

Cro

res


87

1

93

1

1,1

42

1,2

97

1,3

43

1,4

93

11.4 12.6

16.4 17.3 16.5 16.5

-

5.0

10.0

15.0

20.0

-

500

1,000

1,500

2,000


Rs.

Cro

res

EBITDA EBITDA Margin (%)

32

3

37

7

51

2

44

8

50

5

63

8 4.2

5.1

7.46.0 6.2

7.1

0.0

5.0

10.0

-

500

1,000


Rs.

Cro

res

Adj PAT Adj PAT Margin (%)

32.230.1

32.5

23.1 21.5 22.519.2 19.3 21.3

17.515.1

17.2

10.0

20.0

30.0

40.0


ROE (%) ROCE (%)


Key Risks:

• Any sharp increase in natural rubber prices could negatively impact the margins.

• High competition from China in the TBR segment.

• Weak demand in the M&HCV segment.

Y/E (Rs. Cr) FY16 FY17E FY18E FY19E

Pretax profit 669 633 713 899

Depreciation 196 292 305 314

Chg. in Working Capital (66) (390) 60 (96)

Others 264 520 330 283

Tax paid (160) (179) (202) (255)

Cash flow from operating

activities 903 876 1,205 1,146

Capital expenditure (559) (2,200) (200) (200)

Chg. in investments 3 - - -

Other investing cashflow 50 26 30 34

Cash flow from investing

activities (506) (2,174) (170) (166)

Equity raised/(repaid) - 0 - -

Debt raised/(repaid) - 1,900 (500) (500)

Dividend paid (41) (68) (75) (87)

Other financing activities (381) (401) (359) (318)

Cash flow from financing

activities (422) 1,431 (935) (905)

Net chg in cash (25) 133 100 75

Cash Flow Statement (Consolidated)

Key Ratios (Consolidated)

Y/E FY16 FY17E FY18E FY19E

Growth (%)

Net Sales (6.1) 8.9 8.6 11.1

EBITDA 22.6 13.6 3.6 11.1

Net profit 35.8 (12.4) 12.6 26.5

Margin (%)

EBITDA 16.4 17.3 16.5 16.5

EBIT 13.6 13.4 12.8 13.0

NPM 7.4 6.0 6.2 7.1

Return Ratios (%) RoE 32.5 23.1 21.5 22.5

RoCE 21.3 17.5 15.1 17.2

Per share data (Rs.) EPS 22.6 19.8 22.2 28.1

DPS 2.5 2.5 2.8 3.2

Valuation(x) P/E 7.3 8.4 7.4 5.9

EV/EBITDA 5.7 6.5 5.8 4.9

EV/Net Sales 0.9 1.1 1.0 0.8

P/B 2.1 1.8 1.5 1.2

Turnover Ratios (x)

Net sales/ GFA 1.3 1.1 1.0 1.1

Sales/ Total assets

1.0 0.9 0.8 0.9

Balance Sheet (Consolidated)

Profit & Loss Account (Consolidated)


Paid up capital 45 45 45 45

Reserves and

Surplus 1,703 2,083 2,512 3,063

Net worth 1,748 2,128 2,558 3,108

Minority interest - 151 157 163

Total Debt 2,910 4,810 4,310 3,810

Other non-current

liabilities 385 385 385 385

Total Liabilities 5,043 7,474 7,409 7,466

Total fixed assets 3,753 5,516 5,561 5,497

Capital WIP 106 250 100 50

Goodwill - - - -

Investments 155 155 155 155

Net Current assets 1,185 1,708 1,748 1,919

Deferred tax

assets (net) (436) (436) (436) (436)

Other non-current

assets 280 280 280 280

Total Assets 5,043 7,474 7,409 7,466





Total operating Income 6,953 7,490 8,132 9,038

Raw Material cost 3,869 4,089 4,489 4,989

Employee cost 781 914 992 1,103

Other operating expenses 1,162 1,190 1,308 1,454

EBITDA 1,142 1,297 1,343 1,493

Depreciation 196 292 305 314

EBIT 945 1,004 1,038 1,179

Interest cost 245 401 359 318

Other Income 17 26 30 34

Profit before tax 717 629 708 895

Tax 216 179 202 255

Profit after tax 501 450 507 640

Minority Interests - 6 6 6

P/L from Associates 11 4 4 4

Adjusted PAT 512 448 505 638

E/o income / (Expense) (48) (57) - -

Reported PAT 464 391 505 638

Rating Criteria Large Cap. Return Mid/Small Cap. Return

Buy More than equal to 10% Buy More than equal to 15%

Hold Upside or downside is less than 10% Accumulate* Upside between 10% & 15%

Reduce Less than equal to -10% Hold Between 0% & 10%

Reduce/sell Less than 0%

* To satisfy regulatory requirements, we attribute ‘Accumulate’ as Buy and ‘Reduce’ as Sell.

* JKTYRE.is a mid-cap company.

Disclaimer:

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volume no. i issue no. 118 jk tyre & industries ltd. · 2018-06-05 · scrappage policy &...

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