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Tyre industry - Set for a structural shift: Currently, manufacturing
radial tyres is far more capital intensive than cross-plys. Investment
per tonne per day (tpd) is 3.2x of cross-ply at `6.1cr/tpd. On the
other hand, the selling price of radial tyres is ~20% higher than
cross-ply tyres. Thus, higher capital requirements will help protect
margins from the upward bound input costs, as the business
model evolves bearing in mind final RoEs rather than margins.
With the sector set for a structural shift and apparent pricing
flexibility, it will result in an improvement in RoCE and RoE of
tyre manufacturers going forward.
Favourable product mix: Commissioning of the new T&B radial
capacity (up from 0.4mn to 0.8mn tyres) and increase in the
OTR segment in FY2010 coupled with expansion of the PCR
capacity by 10% to 5mn tyres in FY2011 are working in favour
of JK Tyre. Given the shortage of radial tyres in the T&B segment,
the company is in pole position to fully utilise its enhanced capacity
at higher realisations (60–65% of India’s total truck/bus radial
tyre production).
Key risks - Volatility in rubber prices dampening industry
performance: With the Rubber Board scaling down its projections
for natural rubber growth in the country, the tyre industry has
expressed dismay over the impending rubber crisis. As per
Automotive Tyre Manufacturers Association (ATMA), India has
scaled down the supply anticipated for this year to 844,000
tonnes from the earlier forecast of 879,000 tonnes, largely on
account of unseasonal heavy rains during October. Thus, the
supply is anticipated to grow at a much slower rate of 2.9% as
against 7.2% anticipated earlier. The scaling down of natural
rubber growth projections will lower rubber availability in the
country, as the gap between availability and its offtake has been
widening. Currently, rubber prices have been ruling at elevated
levels of `225/kg (RSS-4 grade as on June 7, 2011).
Outlook and valuation: We estimate JK Tyre to post EPS of `19
for FY2012E and `29.5 for FY2013E. At `100, the stock is
available at attractive valuations of 3.4x FY2013E earnings,
respectively. We maintain Buy on the stock with a target price of
`133, valuing the company at 4.5x FY2013E earnings. At our
target price, JK Tyre will trade at 0.5x and 5.0x FY2013E
P/B and EV/EBITDA, respectively.
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
Tyre industry - Set for a structural shift: Currently, manufacturing
radial tyres is far more capital intensive than cross-plys. Investment
per tonne per day (tpd) is 3.2x of cross-ply at `6.1cr/tpd. On the
other hand, the selling price of radial tyres is ~20% higher than
cross-ply tyres. Thus, higher capital requirements will help protect
margins from the upward bound input costs, as the business
model evolves bearing in mind final RoEs rather than margins.
With the sector set for a structural shift and apparent pricing
flexibility, it will result in an improvement in RoCE and RoE of
tyre manufacturers going forward.
Favourable product mix: Commissioning of the new T&B radial
capacity (up from 0.4mn to 0.8mn tyres) and increase in the
OTR segment in FY2010 coupled with expansion of the PCR
capacity by 10% to 5mn tyres in FY2011 are working in favour
of JK Tyre. Given the shortage of radial tyres in the T&B segment,
the company is in pole position to fully utilise its enhanced capacity
at higher realisations (60–65% of India’s total truck/bus radial
tyre production).
Key risks - Volatility in rubber prices dampening industry
performance: With the Rubber Board scaling down its projections
for natural rubber growth in the country, the tyre industry has
expressed dismay over the impending rubber crisis. As per
Automotive Tyre Manufacturers Association (ATMA), India has
scaled down the supply anticipated for this year to 844,000
tonnes from the earlier forecast of 879,000 tonnes, largely on
account of unseasonal heavy rains during October. Thus, the
supply is anticipated to grow at a much slower rate of 2.9% as
against 7.2% anticipated earlier. The scaling down of natural
rubber growth projections will lower rubber availability in the
country, as the gap between availability and its offtake has been
widening. Currently, rubber prices have been ruling at elevated
levels of `225/kg (RSS-4 grade as on June 7, 2011).
Outlook and valuation: We estimate JK Tyre to post EPS of `19
for FY2012E and `29.5 for FY2013E. At `100, the stock is
available at attractive valuations of 3.4x FY2013E earnings,
respectively. We maintain Buy on the stock with a target price of
`133, valuing the company at 4.5x FY2013E earnings. At our
target price, JK Tyre will trade at 0.5x and 5.0x FY2013E
P/B and EV/EBITDA, respectively.
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