Buy JK Tyre & Industries Ltd For Target Rs.170 - ICICI Direct
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Return ratios set to improve, inexpensive valuations…
About the stock: JK Tyre (JKT) is a leading tyre manufacturer with annual capacity pegged at 5.75 lakh MT. It serves various automotive segments via India, Mexico plants with dominance in truck/bus radial (TBR) space domestically.
FY21 segment mix – truck/bus 56%, PCR 23%, 2-W, 3-W 5%, others 16%
FY21 channel mix – aftermarket 64%, OEM 18%, exports 18%
Q3FY22 Results: The company reported a steady performance in Q3FY22.
Consolidated net sales were up 3% QoQ to | 3,076 crore
EBITDA margins slid 90 bps QoQ to 8.9% amid a rise in other expenses
Consequent PAT was at | 57 crore, down 14.5% QoQ
What should investors do? JKT’s share price has grown at ~2.3% CAGR over the past five years (from ~| 116 levels in February 2017), in tandem with Nifty Auto index
We retain BUY rating given deleveraging thrust, expected return ratio uptick
Target Price and Valuation: Introducing FY24E, we now value the company at | 170 i.e. 5.2x average EV/EBITDA on FY23E-24E basis (earlier target price | 185)
Key triggers for future price performance:
Beneficiary of expected domestic CV cyclical upswing courtesy high market share in TBR, ~63% sales contribution from the space (India operations)
Combined with network expansion (~750 dealers added in 9MFY22), good PV outlook & higher exports, we build 15.9% FY21-24E net sales CAGR
Planned deleveraging (~45% reduction of term debt by FY25) to strengthen b/s with consequent debt: equity expected at 1.1x by FY24E (1.7x in FY21)
With calibrated capex spends and focus on exports, return ratio profile is seen improving with consequent RoCE expected at ~ 14.5% by FY24E
Alternate Stock Idea: Besides JKT, in our ancillary coverage we like Apollo Tyres.
India CV revival beneficiary focused on debt reduction, higher return ratios
BUY with a target price of | 270
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