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We initiate coverage on JK Tyre (JKI) with a BUY and 55% upside, at 10x FY25E PER; we believe JKI’s stock price can potentially double over 3 years. Amid tyre industry’s structural improvements (curtailed imports, enhanced export competitiveness, premiumization, calibrated capex), JKI has been outperforming peers over past 12 quarters (vs. over 20% underperformance in FY13-20) via structural transformation in: i) competitive position (higher-thanpeer spends on R&D, marketing; distribution expansion), ii) operating efficiencies, iii) financial discipline (calibrated capex). We build-in around 8%/58% rev./PAT CAGR for FY23-26E; this, with sizeable deleveraging (~1.4x net debt/EBITDA in FY26E vs. 3.5x in FY23), should boost FY26E RoCE to ~21% (FY23: 11%), driving valuation convergence towards larger peers

JK Tyre: Financial Snapshot (Consolidated)

Industry structure improving: healthy growth, lower imports, calibrated capex Over 80% drop in TBR, PCR imports since FY20 (on Government’s push for domestic industry protection), sharp rise in export competitiveness (China +1, India’s inherent labor cost advantage), premiumization (e.g., SUV tyres) and controlled capex (largely brownfield expansions/de-bottlenecking) have improved the tyre industry’s underlying structure. We expect stable-to-positive medium-term growth prospects (~7% volume CAGR till FY26E; outpacing capacity additions) amid general focus on calibrated capex.

JKI’s outperformance to sustain, on R&D, distribution and marketing efforts JKI delivered over 20% under-performance vs. peers over FY13-20 but has been outperforming since FY21 (refer Exhibit 10); we believe this is set to continue, driven by competitiveness-enhancing efforts to win in high-growth high-margin segments (larger PCR/SUV tyres, exports), spanning: i) R&D (overcame gap vs. peers with multiple innovative launches like ‘Puncture Guard’ tyres, ‘Smart tyres’, Green tyres, EV tyres (largest supplier to E-buses), etc., ii) distribution expansion (over 60% since FY18), and iii) recalibrated marketing spends (towards branding rather than short-term promotions).

Multiple margin initiatives, controlled capex to accelerate deleveraging Better competitive standing, premiumization efforts (targets 45% from larger PCR vs. ~25% now; similarly sharp fall in economy brand share) and cost controls to drive FY26E margins to 14% (Q1FY24: 12.3%). Judicious capex (20-40% lower outgo in ongoing programs vs. the past) and deleveraging thrust (targeting 25% long-term debt reduction by FY26) to lead to net debt/EBITDA of 1.4x in FY26E vs. 3.5x/4.7x in FY23/FY22.

Valuations to converge towards larger peers on all-round improvement We believe that consequent to i) strong 58% EPS CAGR, ii) improved B/S with FY25E FCF yield/net D/E of ~8.1%/~0.8x and iii) accelerated ESG/sustainability efforts, JKI’s valuation multiples would start converging towards that of peers/industry average. We initiate coverage with BUY and 1Y upside of 55% (10x FY25E PER vs. ~19x for industry). Key risks: Sharp demand slowdown, major spike in RM, adverse outcome in CCI ruling. 

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