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Targeting industry outperformance in FY24E

View & Valuation

We visited JKI’s TBR and PCR plant during our recent visit to Chennai. We believe, company to likely see revenue growth outperformance at 10-15% in FY24E (v/s high single digit growth as indicated by peers), led by commercialization of new capacities. JKI indicated continued improvement in return ratios led by margins expansion (product, RM and cost savings led) and moderate capex. Demand commentaries for domestic market remained mixed while it expects healthy exports in FY24E. While maintaining leadership in TBR segment continued to be in focus, in line with industry it expects premiumization within PCR to drive growth with share of premium products would be 30-35%. We believe, key factors for sustained industry profitability ahead to be watched out for are, 1) continued priced discipline, 2) RM decline, 3) moderate capex and 4) all round recovery from the replacement volumes. The continued re-rating for the tyre stocks is contingent upon sustenance of the above factors. Not rated.

Key takeaways from interaction

? Demand outlook (India business) - We believe, led by healthy offtake across segments, FY24E revenue growth can be at 10-15%. OEM, replacement, and exports demand is looking better with good order book for exports. Second quarter volumes will be lower than 1Q led by seasonality due to rains.

? Mexico operations outlook is improving QoQ - Business in Mexico is seeing sequential volume uptick, though it has some headwinds yet to subside. Volume mix - ~59% replacement/ ~41% is export. Trading volumes were high in Mexico last financial year. Product mix - TBR - 16%, PCR - 55%, Non truck bias - 28%. Mexico operations reported ~8% blended EBITDA margins for Mexico operations in 4QFY23. Expect 15-20% volume growth in Mexico in FY24E.

? RM led margins expansion expected over 1HFY24E - Seeing sequential improvement in margins due to RM stabilizing. In 4QFY23, RM benefit was limited due to absorption of higher priced inventories. RM under recoveries still at 5-6% currently, however do not anticipate any price corrections by the competition. Believe, fixed over heads are at par with competition and trying to minimize the overall cost through digital transformation. Targeting ~0.5% cost savings over and above RM, mix related benefits. It would largely come from digital initiatives. Current exports margins are at par with replacement.

? Looking at premiumization within PCR for growth – within PCR looking at high margin +15-inch trims for growth ahead. Supplying to Hyundai Creta (large share of business for top end variants), Alcazar and Kia Seltos. Believe, market share in SUV for leader would be 17-18%. ASP difference for higher trims 17-18' inch to 15'inch is about 15-20%.

? PCR sales mix - ~85% replacement and ~15% OEMs. Share of premium products would be 30-35% for PCR segment.

? Capex – current focus is to stabilize PCR capacity expansion which is underway with focus on more premium products for both domestic and exports. Radial capacity utilization at 85-90% across products segments and for Bias the same remains at 80-85%. Project capex underway is Rs8b of which Rs5.3b for PCR (commercial production by 4QFY24) and Rs2.6b for TBR (commercial production by 2QFY24). Of the total Rs8b, ~Rs3b spent in FY23.

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