Update: JK Tyre & Industries :: Business Line

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JK Tyre: Buy :: Business Line

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Good replacement demand and improving sale of truck and bus radials promise good prospects for the company.

Softening natural rubber prices, expected pick-up in replacement demand and improving sale of truck and bus radials promise good prospects for JK Tyre and Industries (JKT), a company with about 20 per cent market share in the Indian tyre industry.

Investors with a two-to-three year perspective can buy the stock. At Rs 89, it trades at a price to earnings ratio of about 5 times its estimated FY13 earnings. This is at a discount to bigger players such as Apollo Tyres and MRF.

RAW MATERIAL PRICES EASE

Raw material costs account for 70 per cent of the turnover for tyre companies. Of this, 45-50 per cent is natural rubber cost. Beginning December 2009, domestic rubber prices marched upwards.

By April 2011 prices of RSS 4 variety used by the tyre industry had peaked at around Rs 240 a kg.

While international prices at certain times during this period were relatively attractive, companies were not able to take advantage due to high import duties as well as rupee depreciation.

Price of crude oil from which raw materials such as synthetic rubber and nylon tyre cord fabric are derived too had moved up last year.

The tough times are now seen changing for the better. Rubber prices have fallen off its peak in the last few months and is hovering around Rs 190-200 a kg currently.

With the lag effect of previously high input prices beginning to fade away, operating margins, which had taken a hit so far, will expand.

Already, operating margins for JKT in the third quarter (October-December 2011) have improved to 5 per cent from 2 per cent in the second quarter.

REPLACEMENT DEMAND

Considering that tyres are replaced every two years, robust auto sales in 2009-10 and 2010-11 will lead to replacement demand for those vehicles now. Higher margin-yielding replacement market sales bring in more than half the revenues for any tyre manufacturer.

Hence, the expected pick-up in replacement demand is a positive for JKT. Softening of interest rates is likely to spur new vehicle sales as well.

So, top-line growth will also be supported by higher volume growth in the current year .

The company has recently added Bharat Benz (Daimler India CVs) to its clientele. Daimler will launch its trucks in mid-2012.

JKT will benefit from the rapidly improving radialisation levels for CVs in addition. From about 14 per cent two years ago, radialisation in CVs stands at 20-25 per cent currently.

With fast improving highway infrastructure, ban on overloading of vehicles and the move towards a hub and spoke model that will encourage use of radial tyres, this is expected to go up further.

These tyres offer better fuel efficiency, have longer life and turn out to be cheaper in the long run. Its Chennai plant for radial tyres has gone on-stream in February 2012 and is expected to reach maximum capacity in six months time.

The additional volumes from this plant will help absorb costs better and will lower the impact of the high interest cost (on borrowings for setting up the same) on its profitability.

FINANCIALS

For the quarter ended December 2011, net sales grew by 21 per cent year-on-year to Rs 1418 crore. JKT recorded a loss of Rs 21 crore in the third quarter.

In addition to high input and interest costs, its profitability took a hit due to marked to market loss on foreign currency transactions. Adjusting for this, profits grew by 44 per cent to Rs 17 crore. Its debt/equity is about two times.

Buy JK Tyre and Industries; Target : Rs 96 :: ICICI Securities, (pdf link)

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http://content.icicidirect.com/mailimages/ICICIdirect_JKTyres_Q3FY12.pdf


T i m e   f o r   r e v e r s a l   i n   f o r t u n e s ! ! !
JK Tyres and Industries’ (JKTIL) Q3FY12 performance was in line with our
expectations. The topline came in at | 1422.9 crore reflecting a 20.7%
YoY growth (I-direct estimate: | 1407.4 crore). EBITDA margins surprised
positively at 5.1% (up 297 bps QoQ) reflective of the softening rubber
prices and on account of lower other expenses (down 2.4% QoQ). The
raw material cost as proportion of revenues declined 82 bps sequentially
to 75.3% driven by a moderation in rubber prices from ~| 211/kg (RSS-4)
in Q2FY12 to ~| 205/kg (RSS-4) in the current quarter. There was a forex
loss to the tune of | 38.2 crore arising on account of MTM translation of
forex liabilities. However, given the recent appreciation of the rupee, a
reversal  of  the  same  is  expected  in  Q4FY12.  The  company  posted  a  net
loss of | 21.3 crore (I-direct estimate: loss of | 23.8 crore) with interest
cost at | 45.2 crore dampening profitability further.
Highlights of the quarter
The current fiscal has been a challenging one for JKTIL on account of
issues ranging from commodity pressure, labour unrest, demand
slowdown and adverse currency movement. The profitability is under
serious pressure with margins contracting severely. However, Q3FY12
performance is showing early signs of trend reversal. JKTIL is one of the
largest players in the radial truck and bus segment (TBR) & car radial
segment (PCR). We remain optimistic on the demand outlook as interest
rate sensitive PV & CV segments are likely to witness a rebound given the
possibility of monetary easing by H2CY12 coupled with increasing radial
penetration in TBR segment. We have factored in a reversal of currency
impact in Q4FY12E and expect margins to improve in FY13E to ~7.7% on
the back of softening rubber prices and higher operating leverage.
V a l u a t i o n
We maintain our positive stance on the demand outlook and expect an
enhancement in revenues coupled with margin expansion. However, an
unexpected rise in rubber prices and depreciation of the currency remain
an  overhang  on  margins.  At  the  CMP  of  |  83,  the  stock  is  trading  at  3.5x
FY13E EPS. We have valued the stock at 4.0x FY13E EPS of | 24.0 to
arrive at a target price of | 96. We maintain BUY rating on JKTIL.

Buy JK Tyre and Industries; Target :Rs 88 ::ICICI Securities

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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

Buy JK Tyres and Industrie; Target : Rs 118:: ICICI Securities

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M a r g i n s   s l i d e ,   a s   r u b b e r  p r i c e s   t e s t   p a t i e n c e
JK Tyres and Industries (JKTIL) reported a muted Q1FY12 performance
with margin shrinkages due to higher RM costs. The topline was in line
with our estimates coming in at | 1401.7 crore (I-direct estimate: | 1392.4
crore). It grew 20.5% YoY and 4.7% QoQ due to reasonable growth in the
TBR and PV segment. The EBITDA margin continued to slide at 4.6% (Idirect estimate 5.8%), a 169 bps YoY decline due to high rubber prices
(average cost of ~| 228/kg. However, declining margins were supported
by a lower than anticipated employee expense (4.8% of net sales) coming
in at | 67.7 crore. The bottomline shrunk to | 0.96 crore (I-direct estimate:
| 16.2 crore) owing to higher tax rates.
Highlights of the quarter
JKTIL is the market leader in the radial truck and bus segment (TBR) along
with the car radial segment (PVR). The quarter saw low up-tick in volume
demand from the OEM side. However, with radial demand continuing to
be on the upswing and with the  TBR segment increasing, radial
penetration is incrementally expanding its capacities. The ascending input
prices for tyre companies have led to severe margin pressures with
JKTIL’s margin shrinking by 169 bps YoY. Rubber prices (RSS-4), which
had begun the surge in prices since Q2FY11 have remained at elevated
levels with average prices up ~38% YoY at  ~| 230/kg. The sluggish
tapping process has led to a rise in rubber costs but prices are expected
to moderate with fresh supply kicking in.
V a l u a t i o n
We remain positive on the long-term growth prospects of the automotive
industry. However, in the near term, sticky rubber prices remain a
concern. We remain cautiously optimistic on the decline of rubber prices
from the peak prices of |230 though would await a confirmation for the
same  before  an  earnings  upgrade  of  the  stock.  At  the  CMP  of  |  98,  the
stock is trading at 7.5x FY12E EPS and 3.8x FY13E EPS. We have valued
the stock at 4.6x FY13E EPS of | 25.9 to arrive at a target price of | 118.
Our target price implies an upside of 20%. We have maintained our BUY
rating on the stock.

JK TYRES:: Angel Broking Top Pick: June 2011

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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.

52-WEEK FLOP: JK TYRE & INDUSTRIES: Business Line

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Robust automobile sales notwithstanding, tyre manufacturers in the country have been facing rough weather during FY-11. Unabated rise in the price of natural rubber, a key raw material due to tight supply conditions and increase in other crude-based inputs have dampened their margins and earnings. JK Tyre, among the top five tyre producers in the country, with about 18 per cent market share has been no exception. Given the strong demand, the company has been able to pass on some portion of the material cost increases to customers through periodic price increases. Nevertheless, for the nine months ended December 2010, while net sales grew about 32 per cent year-on-year, net profits have fallen from Rs 137 crore to Rs 49 crore. Raw material costs as a percentage of sales for the first three quarters of 2010-11 have jumped to 77 per cent from 58 per cent seen in the same period last year.

However, as radialisation catches on, having the first mover advantage in radial tyres for commercial vehicles would stand the company in good stead over the next few years. JK Tyre's dominant position will strengthen further once its dedicated greenfield capacity for radial tyres in Chennai goes on-stream in late 2011. A lot, nonetheless, will depend on how rubber prices move.

JK Tyres Q3FY11 Post Results Conference Call Transcript : Emkay

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Moderator:
Ladies and gentlemen good morning and welcome to the Q3FY11 post results conference call of JK Tyre & Industries Limited
hosted by Emkay Global Financial Services. We have with us today Mr. A. Kinra, Finance Director and Mr. K. Manik, General
Manager Finance of JK Tyre. As a reminder, all participant lines will be in the listen-only mode. And there will be an
opportunity for you to ask questions at the end of today’s presentation. Should you need assistance during this conference
call, please signal an operator by pressing * and then 0 on your touch tone telephone. Please note that this conference is
being recorded. I would now like to hand the conference over to Mr. Chirag Shah at Emkay Global. Thank you and over to you
Mr. Shah.

JK Tyres: Rubber continues to batter profitability :: ICICI Securities

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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.

JK Tyres & Industries Ltd Price hikes the key, ACCUMULATE : Emkay

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JK Tyres & Industries Ltd

Price hikes the key, lower rating to ACCUMULATE

ACCUMULATE 

CMP: Rs 108                                       Target Price: Rs 118

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n     Results below est. due to lower tonnage off take and higher other expenditure and interest cost. Tonnage sales at 64350 MT (+25% YoY and 1% QoQ) vs est. of 66950 MT

n     EBIDTA per ton at Rs 9,619 (-49%/-17% YoY/QoQ) was below est of 11,251. High rubber prices (> Rs 220/kg) remains a concern.  Price hikes are necessity to protect margins

n     Capacity expansion plans on course with total capex of ~ Rs 11bn in FY11 and FY12. Tornel reported Sales of USD 250mn and PAT of USD 2.5mn in CY10

n     Lower our FY11E/FY12E standalone EPS by 44%/36% to Rs 14.7/22.1. Lower our rating to ACCUMULATE due to higher rubber prices and limited price hike

Buy JK Tyre – 3QFY2011 Result Update Angel Broking

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  JK Tyre – 3QFY2011 Result Update

Angel Broking recommends a Buy on JK Tyre with a Target Price of Rs. 166.

JK Tyre reported a mixed set of results for 3QFY2011, with strong top-line growth

following higher offtake in OEM volumes; however, the bottom line was down

significantly due to contraction in EBITDA margin. The company’s EBITDA margin

declined substantially due to the sharp increase in rubber prices. However, the

stock is available at attractive valuations due to the recent correction in

the stock price. We recommend Buy on the stock.

JK Tyre and Industries- Concall Invite 28 January 2011 at 11:30 AM (Emkay)

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JK Tyre- 3QFY2011 Result Rreview: Angel Broking

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JK Tyre - 3QFY2011
JK Tyre reported a mixed set of results with a strong top-line growth; however, the bottom
line was down significantly. Net sales during the quarter reported robust 47% yoy growth to
`1,179cr (`802), in line with our estimates of `1,172cr. On the operating front, the company
posted a 36% yoy and 11.5% qoq decline in operating profit to `62cr (`97cr) for
3QFY2011. Operating margin dipped by substantial 681bp yoy and 89bp qoq, primarily
due to unabated and unprecedented spurt in rubber prices, leading to a substantial 901bp
yoy increase in raw-material cost at 71.3% (62.3%) of sales in 3QFY2011. However, margin
erosion was arrested due to a 175bp and 40bp yoy reduction in staff cost and other
expenditure, respectively. Net profit dipped by 75% yoy and 55% qoq to `9cr (`37cr) for the
quarter, against our estimates of `16cr, primarily on account of margin contraction. At `120,
the stock is trading at 3.9x FY2011 and 3x FY2012 earnings. Currently, the stock rating is
under review and we shall revise our numbers post the conference call with the management
and come up with a detailed result update.

JK Tyre & Industries to hike product prices by 2–4%: Angel broking

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JK Tyre & Industries to hike product prices by 2–4%
JK Tyre & Industries has decided to hike product prices by 2–4% in an attempt to offset the
effect of rising input costs, especially natural rubber. The price hike comes on expected lines
as prices of natural rubber are at an all-time high. Domestic prices of RSS-4 rubber in
Kottayam on January 17, 2011, stood at `225/kg. Rubber prices increased by ~65% yoy in
3QFY2011; while on a qoq basis, prices grew by ~10% in 3QFY2011. We expect rising
raw-material costs to pose a major challenge to the company to maintain its operating
margins. At the CMP of `122, the stock is trading at attractive valuation of 3x its FY2012E
earnings. We maintain Buy on the stock with a Target Price of `202.

JK Tyres : Revenue, margins under strain-, Elara

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Revenue, margins under strain

Lower cement prices burden the bottom line
JK Cement reported a net loss of INR294mn as compared to our
estimates of INR31mn due to lower than expected revenue. JKCEM
posted a 2.7% YoY decline in the revenues mainly due to drop in
realizations. EBITDA margins contracted by 2,550bps YoY to 1.3% due
to the negative EBITDA from the Karnataka unit. Due to lower
revenues and margins, EBITDA weakened by 95.4% YoY to INR53mn.

JK Tyre – 2QFY2011 Result Update: Angel Broking

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JK Tyre (JK) reported decent top-line growth for 2QFY2011 following higher
off-take in OE volumes. However, EBITDA margin declined substantially due to
the sharp increase in rubber prices and other input cost. As a result, the company
recorded a substantial dip in net profit despite the hike in product prices.
We maintain a Buy on the stock owing to attractive valuations.

Research Update with Emkay; 3 November, 2010

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n        Research Update Included

Motherson Sumi Q2FY11 Result Update; Below expectation, Lower rating to Accumulate; Target: Rs 200

n    Results below expectation due to lower sales/profitability at SMR/other subsidiaries. Standalone entity delivers stellar performance

n    SMR’s FY10 performance driven by repeat business for old/existing models. Business from new programs from 2011

n    Demand outlook remains strong across geographies adjusting impact of incentive schemes of last year

n    Lower FY11/FY12 EPS by 18%/4%. Lower rating to ACCUMULATE

JK Tyre & Industries Ltd Q2FY11 Result Update; Lower sales hinder performance, maintain BUY; Target: Rs 195

n    Results below est. due to lower tonnage offtake. Tonnage sales at 64,000 tons (+1.5% YoY and -8% QoQ), despite QoQ increase in utilization rate by 100 bps to 93% hinder

n    EBIDTA per ton improve 11% QoQ despite 10% increase in rubber prices. High rubber prices (> Rs 190/kg) remains a concern.  Price hikes are necessity to protect margins

n    Capacity expansion plans on course with total capex of ~ Rs 24 over next four to five years. Capex in first phase is Rs 930 mn funded in the ratio of 2:1 D/E

n    Lower our FY11E EPS by 19% to Rs 26.9 due to higher rubber prices. Expect price hike with a lag, fine tune or FY12 EPS to Rs 39.5 (-3%). Retain BUY with a TP of Rs 195

Punj Lloyd Q2FY11 Result Update; Slow But Sure, Maintain HOLD; Target Price: Rs 132

n    Punj Lloyds performance exceeds expectations – APAT at Rs239 mn versus expectation of Rs182 mn

n    Reports impressive Ebidta margins of 9.2%- highest in last 8 quarters- despite UK 1.2 mn provision in Simon Carves

n    Revenues of Rs1.7 bn booked on Libya project – progress underway but remains below expectations

n    Confident on current order backlog and negates repetition of past concerns – retain FY12E estimates and Maintain HOLD rating with price target of Rs132/Share

JK Tyres & Industries Ltd Lower sales hinder performance, BUY: Emkay

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K Tyres & Industries Ltd

Lower sales hinder performance, maintain BUY

BUY

CMP: Rs 162                                       Target Price: Rs 195

---

n     Results below est. due to lower tonnage offtake. Tonnage sales at 64,000 tons (+1.5% YoY and -8% QoQ), despite QoQ increase in utilization rate by 100 bps to 93% hinder

n     EBIDTA per ton improve 11% QoQ despite 10% increase in rubber prices. High rubber prices (> Rs 190/kg) remains a concern.  Price hikes are necessity to protect margins

n     Capacity expansion plans on course with total capex of ~ Rs 24 over next four to five years. Capex in first phase is Rs 930 mn funded in the ratio of 2:1 D/E

n     Lower our FY11E EPS by 19% to Rs 26.9 due to higher rubber prices. Expect price hike with a lag, fine tune or FY12 EPS to Rs 39.5 (-3%). Retain BUY with a TP of Rs 195

JK Tyres and Industries: Concall Q2FY11 Results; 1st Nov' 10 at 14:00 PM :: Emkay

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JK Tyres and Industries Ltd. Concall Invite Q2FY11 Results; 1st November 2010 at 14:00 PM