JK Tyre and Industries: Poised for strong growth

Benign raw material prices, revival in domestic auto sales and improving radialisation levels in truck and bus tyres spell good times for JK Tyre and Industries (JKT). While the Birla Tyres buy adds to its dominant position in truck and bus radials, the turnaround of its Mexican subsidiary Tornel (15 per cent of revenue) is a sweetener as well.

Investors with a two-year perspective can buy the stock. JKT now trades at around six times its trailing 12-month consolidated earnings.

This is much cheaper than peers such as Ceat and MRF which trade at 12-13 times. It is also at a discount to Apollo Tyres which trades at 9 times.

After a slowdown until early 2014, sale of trucks and buses has picked up sharply. For the year ended March 2015, volumes of medium and heavy commercial vehicles grew 16 per cent, as against the 25 per cent drop in the previous year.

Robust sales are being seen this fiscal year too. An economy on the mend will help sustain commercial vehicle off-take over the medium term.

JKT derives over two-thirds of its revenue from sale of truck and bus tyres and boasts a diversified clientele.

Moreover, the company is the market leader in radial tyres for trucks and buses, which is a fast growing segment.

Radialisation in the commercial vehicles segment is expected to double from the current levels of about 30-35 per cent.

Radial tyres also bring higher margins than bias tyres. Considering the rising demand, the company is in the process of expanding its capacity for truck and bus radials. The recent acquisition of the Haridwar unit of Birla Tyres which also manufactures truck bus radials, strengthens its already dominant position in the market.

Though the business is loss-making currently, JKT’s history of turning around earlier acquisitions such as Tornel and Vikrant stands the company in good stead.

Benign prices of natural rubber and crude oil favour the company. Prices of RSS 4 variety of natural rubber used by tyre manufacturers, which touched a peak of ₹240 a kg in 2011, have been cooling off since late 2013.

They have now stabilised at around ₹120-130 a kg. International prices too have followed a similar trend.

With projections of adequate supply to meet demand this year, a sharp spike in rubber prices is not expected.

Besides, thanks to the drop in oil prices, crude oil derivatives such as synthetic rubber, nylon tyre cord and carbon black have also come down. Due to these factors, JKT has already seen a big expansion in operating margin in the June 2015 quarter.

Consolidated operating margins stood at 16.7 per cent vis-à-vis 10.3 per cent a year ago.

For the quarter ended June 2015, the company’s consolidated net sales at ₹1,760 crore was about 5 per cent lower than the ₹1,854 crore recorded in the same period last year. Price cuts to pass on low raw material costs and competition from Chinese tyres both in the domestic operations and at Tornel have affected top-line growth.

But the benefit of cheap inputs has benefited the bottomline. From ₹54 crore in the June 2014 quarter, consolidated net profit more than doubled in the June 2015 quarter to ₹117 crore.

Higher commercial vehicle sales domestically should help push up volumes in the months to come. With stiff competition from Chinese tyres in the unorganised market, pricing pressures, though, may remain.

But benign raw material costs will continue to support profit growth in the coming quarters. The company has also been gradually reducing debt.

The Birla Tyre acquisition may not be a huge burden on the debt side. Out of the ₹2,195 crore being paid by JKT and group entities, only ₹450 crore will come directly into JKT’s books, according to the company. It may fund it partly from internal accruals too.

COMMENT NOW