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Rationale and key rating drivers

Rationale and key rating drivers CARE Ratings Limited (CARE Ratings) has upgraded the long-term rating for bank facilities and instrument of JK Tyre and Industries Limited (JKTI) from CARE A+ to CARE AA- and reaffirmed the short-term ratings of CARE A1+. The outlook has also been revised from Positive to Stable. Revision in ratings considers the company’s improved operational and financial performance in FY24 (refers to April 1 to March 31) as characterised by increasing scale of operations, significant improvement in profitability margins, better improved net leverage and coverage indicators, and better working capital management. The improvement in the company’s credit risk profile is driven by increasing share of premium products in total sales mix and healthy capacity utilisation levels. In FY24, the consolidated revenue increased by compounded annual growth rate (CAGR) of over 15% from 2020 onwards.

On the operating profitability front, on consolidated level, the company has registered a significant improvement in the profit before interest, lease rentals, depreciation and taxation (PBILDT) margin in FY24 to 14% from 9% by improved operational efficiencies and reduced RM cost, product premiumisation, and optimisation of product mix. The upgrade in the ratings factors the improvement in the capital structure and net leverage which has triggered the positive rating sensitivity of net debt (including LC acceptances and dealer deposits)/PBILDT ratio less than 2.50x. However, it is expected to be moderate marginally in the near term with increase in raw material costs but over a medium to long term shall remain comfortable, and range bound as JKTI is focussing on increasing the premium portfolio which shall contribute more to the profitability going forward. JKTI raised equity through qualified institutional placement (QIP) in December 2023 which has also positively impacted the capital structure.

The debt levels are expected to peak in FY26 as the planned truck and bus radial (TBR), passenger car radial (PCR), and all steel light truck radial (ASLTR) capacity expansion is expected to be completed by FY26-end. Ratings also factor in JKTI’s established position in the domestic tyre industry characterised by strong market position in the TBR segment and growing presence in the passenger tyre segment, with presence across all the user segments, and its wide marketing and distribution network. However, ratings are constrained by volatility in raw material prices which may dent the operating margins in near term, 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 significantly impacting the margins, and increase in its net leverage position could lead to deterioration in the credit metrics and they remain as key monitorable.

Rating sensitivities: Factors likely to lead to rating actions

Positive factors

• Increasing its scale of operations and enhancing its market share and improvement in PBILDT margins over 15% on a sustained basis.

• Improving capital structure and net leverage such that net total debt (including acceptances and dealer deposits) to PBILDT is below 2x on a sustained basis.

Negative factors

• Declining profitability as marked by PBILDT margin below 10% on a sustained basis.

• Increasing debt (other than envisaged) due to capex or higher working capital requirement leading to deteriorating net total debt (including acceptances and dealer deposits) to PBILDT of over 3x on a sustained basis.

Analytical approach: Consolidated Consolidated; owing to strong operational and strategic linkages with its subsidiaries (Cavendish Industries Limited and JK Tornel S. A. De. CV). These entities are in the same line of business, sell under common brands, and have common management and control. Consolidated entities considered are mentioned in Annexure-6.

Outlook: Stable Stable outlook for JKTI reflects its likelihood to maintain its market position, healthy operating performance, and financial risk profile over the medium term.