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Rationale and key rating drivers

The revision in the ratings for the bank facilities and instruments of JK Tyre and Industries Limited (JKTI) takes into account the improved operational and financial performances of the company in FY23 (refers to the period from April 1 to March 31) as characterised by increasing scale of operations, better working capital management and improved leverage and coverage indicators, which is expected to sustain going forward as well. During FY23, the consolidated revenue witnessed a growth of 23% resulting in compounded annual growth rate (CAGR) growth of 10% over past 6 years. On the operating profitability front, the company has registered a marginal improvement in the PBILDT margin in FY23 to 9.09% from 8.95%, but the margins improved substantially in Q1FY24 to 12.29% at a consolidated level. The moderation in prices of raw materials along with the company’s focus on increasing share of premium SKUs in the sales mix, increasing share in passenger car market, improving scale and capacity utilisation is likely to aid enhancement in the profitability of the company in FY24. The upgrade in the ratings factors the improvement in adjusted overall gearing (including LC acceptances and dealer deposits) which has triggered the positive rating sensitivity of overall gearing ratio less than 2.00x on a sustained basis. It also factors in the improved net leverage (net debt including LC acceptances and dealer deposits to PBILDT) position of JKTI in FY23 to 4.21x and is expected to improve further to below 3x by end of FY24. This shall be aided by sequential improvement in operating profitability, effective working capital management and lower capex intensity vis-à-vis earlier years. Furthermore, JKTI raised equity in FY23 which also positively impacted the capital structure. The debt levels are expected to peak in FY24 as the planned truck and bus radial (TBR) and passenger car radial (PCR) capacity expansion is completed by March 31, 2024, or early Q1FY25. The ratings also factor in its strong position in the domestic tyre industry characterised by established market position in the TBR segment, with presence across all the user segments and its wide marketing and distribution network. CARE ratings expects the robust passenger vehicle demand is expected to drive the volume growth in FY24 followed by commercial vehicles and 2/3- wheelers.

The ratings are, however, constrained by volatility in raw material prices, exposure to foreign currency fluctuation risks, and competitive nature of the industry. Any cost overruns in the announced capacity expansion plans by JKTI, delays in deriving the likely benefits and/or a sharp rise in the raw material prices, increase in import of Chinese tyres and slower-than-expected deleveraging could lead to deterioration in the credit metrics which remains a key monitorable.

Rating sensitivities: Factors likely to lead to rating actions

Positive factors

• The ability of the company to sustain or increase its scale of operations with PBILDT margins of 14% or more on a sustained basis.

• The ability to improve the capital structure and net leverage such that net total debt (including acceptances and dealer deposits) to PBILDT is below 2.5x on a sustained basis. 

Negative factors

• Decline in the profitability as marked by PBILDT margin below approximately 10% on a sustained basis.

• Any increase in debt (other than envisaged) due to capex or higher working capital requirement leading to deterioration in the net total debt (including acceptances and dealer deposits) to PBILDT of over 3.5x on a sustained basis.