Published on 27/10/2020 12:14:51 PM | Source: HDFC Securities Ltd

Buy JK Tyre & Industries Ltd For Target Rs.83 - HDFC Securities

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Buy JK Tyre & Industries Ltd For Target Rs.83  - HDFC Securities



Our Take:

JK Tyre & Industries (JKTI) caters to the various user segments including truck & bus (both bias and radial tyres), LCV (bias & radial), Passenger car radial (PCR), farms, off-the-road tyre radials (OTR) with highest revenue contribution from the TBR segment (55% of revenues). JKTI has a widespread distribution network across the country with around 5,000 dealers, 360 distributors and 6,000 touch points. The company also has about 408 exclusive passenger car tyre retail outlets by the name of Steel Wheels and 173 Xpress Wheels for small town and semi-urban markets which also caters to two & three wheelers. It also has 49 fully equipped tyre service centres offering total tyre solutions, called JK Tyre Truck Wheels. Over the years, apart from JK Tyre Truck Wheels service centres, JKTI had taken several initiatives to improve the quality of service such as Fleet Management, and JK Tyre Care centres which offer one-stop solution for truck/bus tyre customers. Company outperformed in both 2-3 Wheelers and OTR segment in India in FY20. It registered 30% growth in 2-3 Wheelers as against ~6% decline in the segment and recorded 20% growth in the OTR as against 2% growth in India.

Company registered robust performance in Q2FY21 across all fronts. Focus on working capital management and reduction in fixed costs (~20% down) helped to register better margins during the quarter. Management said that they want to do optimum utilisation of the existing capacities, therefore has cut all capex plans for FY21. Company plans to cut its debt by Rs 1,800cr over the next 3 years. Company has reduced debt by Rs 660cr led by better working capital management in H1FY21. Management said that they target Net Debt/EBITDA < ~3x in the medium term. Company expects better realisations on the back of better product mix and cost efficiency.

JKTI has been focusing on TBR segment and witnessed steady pace of radialisation in the past few years. TBR segment commands around 20% premium over bias tyres which has driven steady profitability despite fall in revenues in the past. There has been continued increase in revenue contribution from relatively higher margin radial tyres whose proportion in the overall revenue has increased from 58% in FY16 to 64% in FY20. JKTI has launched a new product called Smart Tyre, which is widely aimed at two, three, four and even 16-wheeled vehicles. Company had acquired Treel Mobility, a connected technology company. They have used sensors made by Treel as part of the tyre pressure as well as temperature monitoring system. Treel keeps the driver continuously informed of the five most important variables: tyre temperature and pressure, road condition, road hazards and tyre wear.

With the imposition of additional import duties along with the earlier anti-dumping duty on Chinese imports of cheaper tyres, domestic players have benefited a lot. Being the cheapest and largest player in India’s truck & bus radial (TBR) tyre replacement market, JKTI is likely to be the biggest beneficiary (as visible in Q2 FY21) of this slowdown in Chinese imports.


Valuations and View:

We forecast Revenue/EBITDA/PAT CAGR of ~6%/9%/35% over FY20-22E, backed by strong replacement demand and improvement in OEM sales. We project 70bps margin expansion led by change in product mix and operational efficiencies over FY20-22E. Healthy revenues, better operating performance and lower interest expenses would drive 35% PAT CAGR over the same period. Company has adequate capacity in place to serve demand for the medium term, therefore incremental capex needs appear limited. Company had recorded capacity utilization levels of around 70% in FY20. Deleveraging progress would be very important for the company as it has a highly levered B/S (debt/equity > 2x as of FY20). Factoring in the current situation and high leverage on books, we value the stock at ~40% discount to its peers. We feel that investors can buy the stock on dips to Rs 64.5-66.5 band (6x FY22E EPS) and add more on dips to Rs 58-60 band (5.3x FY22E EPS) for base case fair value of Rs 74 (6.7x FY22E EPS) and bull case fair value of Rs 83 (7.5x FY22E EPS) over the next two quarters.


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