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Healthy Volume Traction and Margin Expansion ahead

JK Tyre (JKI) has delivered a strong performance in 2QFY23, with EBITDA margin coming in at 7.9% (down 187bps YoY/up 10bps QoQ), broadly in line with our estimate of 8%, while Adj PAT exceeded our estimate by 4%. Higher margin performance in India as well Mexico business improved overall profitability. Its consolidated revenue grew by 26% YoY and 3% QoQ to Rs37.6bn, 4% above our estimate of Rs36.1bn, while EBITDA grew by 2% YoY and 4% QoQ to Rs2.97bn, 2.5% above our estimate of Rs2.9bn, due to better operating leverage and tight cost control despite higher RM prices. EBIT margin of India business contracted 142bps YoY (up 21bps YoY) to 4.9%, while for Mexico business it contracted by 66bps YoY (15bps QoQ) to 7.1%. JKI’s reported PAT stood at Rs513mn while Adj PAT (adjusted for exceptional forex loss and VRS) stood at Rs663mn (up 2% YoY and up 11% QoQ) as against our estimate of Rs637mn. Looking ahead, the management has guided for margin improvement for India as well as Mexico business due to commodity softening. In view of the strong products basket, regular price hikes, likely revival in replacement demand, healthy export potential, margin expansion in India as well as Mexico operations and valuation comfort at 7.6x FY24E, we reiterate our BUY rating on JKI with a revised Target Price of Rs190 (vs. earlier Rs170), valuing the stock at an unrevised P/E multiple of 8.5x.

Healthy Exports, Improving Brand and Replacement Revival to Aid Revenue

JKI has recently increased focus on new product launches with better quality, performance and premiumization. Contribution of high-margin premium products is steadily rising for both the operations. Brand equity of the company has also improved in the last 2-3 years, helping in pricing power. We believe that the new products, better quality and network expansion would support market share gain in the replacement segment, going ahead. Moreover, its rising exports from India as well as Mexico to major markets would provide a decent platform for the next leg of growth. We expect strong revival in OEM with ease on supply of components and strong order book for PVs. The company’s PCR capacity expansion with a capex of Rs5.3bn is on track. The company’s strategy to expand capacity by 35% through de-bottlenecking and capacity expansion over the near term would keep its capex under control, hence debt reduction over the next 2 years would support D/E as well as lower interest outgo. We expect its EBITDA margin to expand 210bps from current level to 10% in FY24E. Moreover, with better asset utilization, we expect its RoE to improve from 7.5% to 16.6% over FY22-FY24E.

Outlook & Valuation

We expect JKI’s consolidated revenue to grow in healthy double-digit in FY23E due to better volumes and higher exports. We expect better volume traction in FY23-FY24 on the back of production ease for OEMs and a better replacement demand in CVs. Largely maintaining our volume estimates but factoring higher than expected price hikes, we increase our revenue estimates by 1%/2% for FY23E/FY24E. We broadly maintain our margins for FY23E and increase it by 70bps for FY24E due better operating leverage and full impact of lower commodity cost. Due to lower interest expense led by slight reduction in FY24 debt level and margin expansion, we increase our EPS estimates by 12% for FY24E, while broadly maintain it for FY23E. In view of the strong products basket, regular price hikes, likely revival in OEM sales, improving replacement demand, healthy export potential, margin expansion in India as well as Mexico operations and valuation comfort at 7.6x FY24E, we reiterate our BUY rating on JKI with a revised Target Price of Rs190 (vs. earlier Rs170), valuing the stock at an unrevised P/E multiple of 8.5x.

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