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Deleveraging to further drive re-rating…

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%

Q1FY22 Results: The company’s Q1FY22 results were muted.

* Consolidated net sales declined 10.9% QoQ to | 2,608 crore

* EBITDA margins slid 481 bps QoQ to 10.7% amid RM costs pressure

* Consequent PAT at | 46 crore was lower by 75.7% sequentially

What should investors do?

JKT’s share price has grown at ~5% CAGR over the past five years (from ~| 120 levels in August 2016), outperforming Nifty Auto index.

* We retain BUY rating given deleveraging thrust, expected return ratio uptick

Target Price and Valuation: We value the company at a revised target price of | 185 i.e. 5.25x EV/EBITDA on FY23E basis (previous target price | 180).

Key triggers for future price performance:

* Slated to be outsized beneficiary of expected domestic CV cyclical upswing courtesy high market share in TBR, 62% sales contribution from the space

* Combined with network expansion (>1,600 dealers added in 15 months), good PV outlook & higher exports, we build 18.9% FY21-23E net sales CAGR

* Planned deleveraging (~45% reduction of term debt) to strengthen b/s

* RoCE seen at ~14% (FY23E) on higher asset turnover, prudent capex spend.

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 | 275

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