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Strong delivery continues, bullishness reloaded…

JK Tyre & Industries (JKT) reported healthy Q4FY21 results. Consolidated revenues rose 63.1% YoY to | 2,927 crore (India up 61%, Mexico up 104%; India formed ~90% of sales). EBITDA margins were at 15.5% (down 260 bps QoQ) on the back of gross margin deterioration of 370 bps even as the company experienced sizeable operating leverage benefits. India EBIT margins fell 220 bps QoQ to 13.1% while Mexico margins were down 60 bps YoY to 7.9%. Consolidated PAT was at | 189 crore vs. loss after tax of | 47 crore in base quarter. JKT declared a dividend of | 2/share for FY21.

CV revival to aid topline; b/s strengthening underway

As of FY21, aftermarket, OEM and exports formed 64%, 18% and 18% of JKT consolidated revenues, respectively, while in terms of segments truck and bus led the way with 56% contribution followed by PV (23%). JKT has a consolidated capacity of 5.75 lakh MT (~ 3.2 crore units) per annum spread across India standalone, Cavendish and Mexico operations, with capacity utilisation in H2FY21 and full year FY21 at ~95%, ~75%, respectively. Post waning of the ongoing second Covid-19 wave, JKT (market leadership in TBR segment) is expected to be a beneficiary of the expected domestic CV revival. Hence, in our view, it has surpassed a cyclical bottom and is enjoying structural tailwinds like the government’s infra spends and pickup in outlook of key industries like mining and road construction. In the near term, margins are expected to dip on account of ongoing sharp commodity cost inflation and Covid impact on volumes in H1FY22E. At the b/s level, however, JKT remains committed to reducing its long term debt by ~45% by FY24E, and has already achieved a reduction of ~| 900 crore in FY21.

Q4FY21 earnings conference call: highlights and key takeaways

JKT said (1) it expects the demand situation to normalise from Q2FY22E onwards; (2) it added >1,400 dealers in FY21; (3) raw material prices are set to steepen by 10-12% QoQ in Q1FY22E. The company is looking to mitigate the same via calibrated price hikes, premiumisation of products, operating leverage gains and capacity debottlenecking; (4) debottlenecking exercise is set to expand capacity by ~10% over the next 2-2.5 years at a cost of ~| 150-200 crore; (5) net debt as of FY21 was at ~| 4,500 crore and JKT is looking to retire ~| 1,500 crore in the next three years; (6) Tornel revenue decline in FY21 was restricted to ~5% YoY despite only functioning for ~8.5 months in the year – with FY22E utilisation levels seen at ~95%; (7) consolidated capex spends, going forward, would be in range of ~| 200 crore per annum; and (8) import content in natural rubber is at ~40%.

Valuation & Outlook

We build 15.4%, 31.8% sales, PAT CAGR, respectively, in FY21P-23E, with margins seen at 12.6% by FY23E. JKT offers a strong play on the impending India CV recovery and is delivering on the critical aspect of b/s deleveraging. We maintain our BUY rating on the stock with an unchanged target price of | 180, 5.25x EV/EBITDA on FY23E numbers.

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