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JK Tyres: Rubber continues to batter profitability…
JK Tyres and Industries (JKTIL) reported its Q3FY11 results that were a
mixed bag as topline came in at | 1174.4 crore (I-direct estimate |
1060.8 crore). It grew 47.0% YoY but declined 3.6% YoY due to the
growth in TBR and PV segment and higher realisations YoY. On the
negative front, the EBITDA margin came under serious pressure at 5.3%
(I-direct estimate 5.0%), a 920 bps YoY decline due to skyrocketing
rubber prices (average cost of | 194/kg) accentuated by higher other
expenses (150 bps sequentially higher). However, the presence of low
cost inventory (| 80.8 crore) helped arrest a further decline in margins.
The bottomline, already stunted with lower margins, was further
eroded with higher interest costs and tax rates coming in at | 9.1 crore,
which is a decline of ~75% YoY and 54.7%QoQ.
Business growth outlook remains robust
JKTIL being the market leader in the radial truck and bus segment (TBR)
along with the car radial segment (PVR) has seen 8% and 15% YoY
growth, respectively. Radial demand continues to be on the upswing with
TBR segment radial penetration having reached 17.8%. Also, even the
replacement TBR demand has increased with large scale fleet operators
shifting to the radial tyre segment. JKTIL is on time in incrementally
expanding capacity by 25 lakh PV and 8 lakh TBR tyres by Q1FY12.
High input prices cause for concern
The ever rising input prices for tyre companies have led serious concerns
on margins. Rubber prices (RSS-4), which had begun the surge in prices
since Q2FY11, have gone up making a new lifetime high at | 235/kg with
average prices up ~63% YoY, 9% QoQ. The slow tapping process in the
Q3 season has led to supply shortages. Also, with minimal tapping in Q4,
prices would tend to be firm for at least a couple of months.
Valuation
With strong automotive growth, the long-term outlook continues to stay
positive. However, in the near term, surging input prices would remain an
overhang. At the CMP of | 116, the stock is trading at 12.0x FY11E EPS
and 2.8x FY12E EPS. We have valued the stock at 3.0x FY12E EPS of
|39.2 to arrive at a target price of | 125. Our target price implies an upside
of 9%. We have changed our rating on the stock from BUY to ADD.
Outlook and valuation
Outlook
The strong growth in the domestic automotive segment (~28% YTD) has
led to the strong growth in the TBR segment along with the PV radial
segment in both the OEM as well as replacement markets. The company
is nearing the completion of one of its plants in Chennai. This is going to
add 25 lakh PV radial tyres and 4 lakh TBR segment by February 2010. In
another expansion in the Vikrant plant, JKTIL is expected to raise the TBR
capacity by 2 lakh units and would become operative in Q1FY12. The
complete capex would be ~| 1130 crore of which ~| 530 crore would be
incurred in FY11 and | 600 crore in FY12. The key monitorable has to be
rubber prices as the management has strong confidence on the demand
side in the OEM as well as replacement market. The management has
reflected on the rubber prices rise to ~|235/kg and expects it to
normalise in Q4 to ~| 175-180/kg so as to see a more balanced growth
for all parties. However, the company has raised prices further by ~3.5-
4.0% in January in all segments, which would provide marginal comfort
Valuation
With strong automotive growth, the long-term outlook continues to
remain positive. However, in the near term, surging input prices would
remain an overhang. At the CMP of | 116, the stock is trading at 12.0x
FY11E EPS and 2.8x FY12E EPS. We have valued the company at 3.0x
FY12E EPS of | 39.2 to arrive at a target price of | 125. Our target price
implies an upside potential of 9%. We have changed our rating on the
stock from BUY to ADD.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
JK Tyres: Rubber continues to batter profitability…
JK Tyres and Industries (JKTIL) reported its Q3FY11 results that were a
mixed bag as topline came in at | 1174.4 crore (I-direct estimate |
1060.8 crore). It grew 47.0% YoY but declined 3.6% YoY due to the
growth in TBR and PV segment and higher realisations YoY. On the
negative front, the EBITDA margin came under serious pressure at 5.3%
(I-direct estimate 5.0%), a 920 bps YoY decline due to skyrocketing
rubber prices (average cost of | 194/kg) accentuated by higher other
expenses (150 bps sequentially higher). However, the presence of low
cost inventory (| 80.8 crore) helped arrest a further decline in margins.
The bottomline, already stunted with lower margins, was further
eroded with higher interest costs and tax rates coming in at | 9.1 crore,
which is a decline of ~75% YoY and 54.7%QoQ.
Business growth outlook remains robust
JKTIL being the market leader in the radial truck and bus segment (TBR)
along with the car radial segment (PVR) has seen 8% and 15% YoY
growth, respectively. Radial demand continues to be on the upswing with
TBR segment radial penetration having reached 17.8%. Also, even the
replacement TBR demand has increased with large scale fleet operators
shifting to the radial tyre segment. JKTIL is on time in incrementally
expanding capacity by 25 lakh PV and 8 lakh TBR tyres by Q1FY12.
High input prices cause for concern
The ever rising input prices for tyre companies have led serious concerns
on margins. Rubber prices (RSS-4), which had begun the surge in prices
since Q2FY11, have gone up making a new lifetime high at | 235/kg with
average prices up ~63% YoY, 9% QoQ. The slow tapping process in the
Q3 season has led to supply shortages. Also, with minimal tapping in Q4,
prices would tend to be firm for at least a couple of months.
Valuation
With strong automotive growth, the long-term outlook continues to stay
positive. However, in the near term, surging input prices would remain an
overhang. At the CMP of | 116, the stock is trading at 12.0x FY11E EPS
and 2.8x FY12E EPS. We have valued the stock at 3.0x FY12E EPS of
|39.2 to arrive at a target price of | 125. Our target price implies an upside
of 9%. We have changed our rating on the stock from BUY to ADD.
Outlook and valuation
Outlook
The strong growth in the domestic automotive segment (~28% YTD) has
led to the strong growth in the TBR segment along with the PV radial
segment in both the OEM as well as replacement markets. The company
is nearing the completion of one of its plants in Chennai. This is going to
add 25 lakh PV radial tyres and 4 lakh TBR segment by February 2010. In
another expansion in the Vikrant plant, JKTIL is expected to raise the TBR
capacity by 2 lakh units and would become operative in Q1FY12. The
complete capex would be ~| 1130 crore of which ~| 530 crore would be
incurred in FY11 and | 600 crore in FY12. The key monitorable has to be
rubber prices as the management has strong confidence on the demand
side in the OEM as well as replacement market. The management has
reflected on the rubber prices rise to ~|235/kg and expects it to
normalise in Q4 to ~| 175-180/kg so as to see a more balanced growth
for all parties. However, the company has raised prices further by ~3.5-
4.0% in January in all segments, which would provide marginal comfort
Valuation
With strong automotive growth, the long-term outlook continues to
remain positive. However, in the near term, surging input prices would
remain an overhang. At the CMP of | 116, the stock is trading at 12.0x
FY11E EPS and 2.8x FY12E EPS. We have valued the company at 3.0x
FY12E EPS of | 39.2 to arrive at a target price of | 125. Our target price
implies an upside potential of 9%. We have changed our rating on the
stock from BUY to ADD.
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