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JK Tyre (JKI) reported a steady Q3; consol. margins sustained QoQ at 14.9% (vs. decline of ~100bps for peers). Commentary around growth is encouraging (expects to sustain 6-7% volume growth as seen in Q3, helped by timely expansion in high-margin SUV tyres); also, medium-term margin outlook remains healthy with an upward bias amid improving mix. We believe that the stock remains under-appreciated (refer Structural transformation underway; further-re-rating on the cards) despite superior all-round execution in growth, BS, and return ratios vs. peers in the past 5 years. Timely PCR expansion, innovative launches, improving brand equity, and distribution scale-up would further fortify the franchise. Our estimates are largely unchanged, we maintain BUY with an unchanged TP of Rs700 at 15x FY26E PER (top pick in autos).

EBITDA margin sustains sequentially

Consolidated revenues rose 2.1% YoY (down 5.4% QoQ) to Rs36.9bn; India revenues (incl. Cavendish) were higher 3% YoY (down 4.4% QoQ), while Mexico revenues rose 2.1% YoY (down 12.9% QoQ, impacted by lower working days in Dec). Consolidated EBITDA margin was down marginally by 20bps to 14.9%; India EBIT margin was stable at 13.2% (standalone margin down ~30bps, Cavendish margins up ~10bps); Mexico EBIT margin was lower by ~70bps to 4.9%. Overall, consolidated adjusted PAT stood at Rs2.3bn vs. Rs809mn/Rs2.5bn in Q3FY23/Q2FY24, respectively. JKI declared an interim dividend of Rs1/sh for FY24. Annualized pre-tax RoCE was at 19.7%; annualized RoE stands at 19.4%.

Earnings call KTAs

i) Domestic demand is steady; JKI sees 6-7% volume growth ahead on overall basis, backed by double-digit growth in replacement segment (for JKI, overall volumes grew 7% in Q3 – 11% growth in replacement, 6% growth in OEM, and 8% decline in exports). Management believes sluggishness in CVs is transient as CV replacement demand is still holding up well; the demand in Mexico operations (Tornel) is seen improving from current levels, with scope to increase current utilization levels of 81%. ii) Current utilizations are at ~85% (consol. level). iii) Ongoing capex of Rs8bn will be fully ramped up by Q1FY25 (seen supporting growth in revenues to Rs180-190bn); also, the previously announced Rs14bn capex (PCR, TBR, all steel radials) would be commercialized by Q3FY26 (~1.1- 1.2x asset turns possible here). iv) The Rs14bn capex is for high-margin segments (e.g., larger-sized tyres), which would help improve mix further and protect against RM volatility. v) JKI expects margins to remain within 13-15% band even in longer term, irrespective of RM volatility, if volume support continues; RM seen being stable in Q4 (vs. 2% increase in Q3); overall, the pricing environment is currently stable. vi) Net debt stands at Rs34.6bn vs. Rs46bn as of FY23; Company expects further decline in debt levels supported by healthy cash flows; Debt/Equity to remain within 0.5x-0.7x (0.75x today); Debt/EBITDA to stay in 1.5-1.8x range (1.7x today).

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