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JK Tyre (JKI) Q2 results were soft, impacted by ~16% sales decline in Mexico on weak Latin American demand and 10% currency depreciation vs INR. While domestic MHCVs have been weak in H1 (JK is among the segment leaders with 53% CV contribution in consolidated sales), outlook is improving amid expected pickup in infra/capex activity and a favorable base. Further, softening rubber prices (down over 20% from recent peak), pricing action (~3-3.5% YTD), and better mix should aid margin recovery Q4FY25E onwards. Q2 likely represents a bottom quarter with improving outlook for demand and profitability. We cut FY25E/26E/27E PAT by ~18%/10%/8% (factoring in Q2 miss, gradual margin recovery), and retain BUY (revised TP of Rs650 at 15x Sep-26E PER) amid attractive valuations (~8.5x Sep-26E PER vs 17.3 peer average).

Weak performance, impacted by CV softness and RM inflation

Consolidated revenues declined 7% YoY to Rs36.2bn (H1 replacement volumes were down in low-single digit with double-digit decline in OEM and high-single digit growth in exports); JK Tornel (Mexico) revenues declined ~16% on lower demand from Latin American markets and the currency translation impact. Consolidated EBITDA declined ~28% YoY to Rs4.2bn with EBITDA margin at 11.6 %, down by 211bps QoQ owing to sharp rise in RM cost. EBIT margin declined by 209bps/250bps/60bps QoQ in standalone (8.2%), Cavendish (14.1%), and Mexico (5.3%). Consolidated PAT stood at Rs1.5bn.

Earnings Call KTAs

1) The management expects demand to improve in H2 driven by the festive season, increased government infrastructure spends, normalizing construction and mining activities, and on-going premiumization trend; replacement demand is also seen improving in H2. 2) At Tornel (Mexico), RM costs rose 11% QoQ, partially offset by a 9% price hike. Mexico has imposed 32% anti-dumping duty on Chinese PCR and light-truck tires, effective Nov-24; this is seen boosting domestic demand prospects for the company. Additionally, the Mexican Peso's weakening against the USD is seen supporting exports in coming quarters, though currency weakness in other Latin American markets have affected export competitiveness in those regions. 3) The company has been partly addressing the impact of rising RM costs (up 6-7% QoQ in Q2) through pricing, mix optimization, and operational efficiency, with ~3-3.5% cumulative price hikes till Q2. 4) Company has taken further price hike in TBR in end-Oct and is assessing further price hikes (if needed) going forward, keeping an eye on the recent RM correction. It expects improved demand outlook in CVs and PVs to aid ability of the market to absorb price increases. 5) The Rs14bn expansion in TBR, PCR, and all-steel light truck radials is on track; the company expects these brownfield capacity additions to achieve ~1.2x asset turns; these will start getting commissioned in H2FY26E with ramp-up over the following 2-3 quarters. 6) Company expects Cavendish amalgamation to offer benefits in the form of better economies of scale, some cost reduction due to reduction in capacity, as well as tax benefits from carried-forward losses at Cavendish. Completion of pending approvals is expected in the next 10-12 months. 7) Capacity utilization stands at 85% overall and 90% in radial; radial utilization is seen rising to over 95% going forward. 8) JKI targets Rs15bn net debt reduction over the next 2 years. 8) Existing mid-high teen return ratios in Q2 are seen improving going ahead.

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