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P o o r p e r f o r m a n c e ; al l u r i n g v a l u a t i o n s
JK Tyres and Industries (JKTIL) reported dismal numbers for Q2FY12. The
topline was hampered (down 8.5% QoQ) by go-slow tactics resorted to
by workmen impacting production (currently resolved). On the EBITDA
margin front, the company witnessed a contraction to the tune of 247 bps
QoQ at 2.1% due to higher employee and other expenses. The raw
material cost as proportion of revenues remained high at 75.8% owing to
firm rubber prices ~| 212/kg (RSS-4) for Q2FY12. However, with
automotive demand slowing down and the supply situation improving,
we expect a correction in rubber price leading to margin expansion. The
profitability was also impacted by forex loss of ~| 44 crore arising on
account of MTM translation of forex liabilities. The company posted a net
loss of | 55.0 crore, which was well below our estimates.
Highlights of the quarter
JKTIL witnessed a tough quarter on account of labour issues, slowdown
in demand, rising costs and adverse foreign exchange movement. The
company is the market leader in the radial truck and bus segment (TBR)
and car radial segment (PVR). The quarter saw a slow up-tick in volume
demand from the OEM sides as multiple headwinds dented consumer
sentiments. However, with improving radial penetration in the TBR
segment, JKTIL is expected to benefit from capacity expansion plans
being on track. Also, with the RBI expected to halt interest rate hikes, the
demand scenario in the PV space should improve benefiting JKTIL. The
labour issues had affected production levels but the problem stands
resolved. The company has witnessed a slide in margins (down 247 bps
QoQ) to 2.1% with rubber prices (RSS-4) remaining at elevated levels at
~| 211/kg for Q2FY12 (up 18% YoY).
V a l u a t i o n
We maintain our optimistic outlook on the long-term growth prospects of
the automotive industry and expect the company‘s revenue performance
to improve with labour issues resolved. However, sticky rubber prices
remain an overhang on margins. At the CMP of | 67, the stock is trading
at 3.0x FY13E EPS. We have valued the stock at 4.0x FY13E EPS of | 22.0
to arrive at a target price of | 88. We maintain our BUY rating on JKTIL
India Equity Research Reports, IPO and Stock News
Visit http://indiaer.blogspot.com/ for complete details �� ��
P o o r p e r f o r m a n c e ; al l u r i n g v a l u a t i o n s
JK Tyres and Industries (JKTIL) reported dismal numbers for Q2FY12. The
topline was hampered (down 8.5% QoQ) by go-slow tactics resorted to
by workmen impacting production (currently resolved). On the EBITDA
margin front, the company witnessed a contraction to the tune of 247 bps
QoQ at 2.1% due to higher employee and other expenses. The raw
material cost as proportion of revenues remained high at 75.8% owing to
firm rubber prices ~| 212/kg (RSS-4) for Q2FY12. However, with
automotive demand slowing down and the supply situation improving,
we expect a correction in rubber price leading to margin expansion. The
profitability was also impacted by forex loss of ~| 44 crore arising on
account of MTM translation of forex liabilities. The company posted a net
loss of | 55.0 crore, which was well below our estimates.
Highlights of the quarter
JKTIL witnessed a tough quarter on account of labour issues, slowdown
in demand, rising costs and adverse foreign exchange movement. The
company is the market leader in the radial truck and bus segment (TBR)
and car radial segment (PVR). The quarter saw a slow up-tick in volume
demand from the OEM sides as multiple headwinds dented consumer
sentiments. However, with improving radial penetration in the TBR
segment, JKTIL is expected to benefit from capacity expansion plans
being on track. Also, with the RBI expected to halt interest rate hikes, the
demand scenario in the PV space should improve benefiting JKTIL. The
labour issues had affected production levels but the problem stands
resolved. The company has witnessed a slide in margins (down 247 bps
QoQ) to 2.1% with rubber prices (RSS-4) remaining at elevated levels at
~| 211/kg for Q2FY12 (up 18% YoY).
V a l u a t i o n
We maintain our optimistic outlook on the long-term growth prospects of
the automotive industry and expect the company‘s revenue performance
to improve with labour issues resolved. However, sticky rubber prices
remain an overhang on margins. At the CMP of | 67, the stock is trading
at 3.0x FY13E EPS. We have valued the stock at 4.0x FY13E EPS of | 22.0
to arrive at a target price of | 88. We maintain our BUY rating on JKTIL
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