22032016115700JK Tyre Intiating Coverage
22032016115700JK Tyre Intiating Coverage
22032016115700JK Tyre Intiating Coverage
BUY
Target Price `153
CMP `84
61.7
22.6
0.25
133/77
1.8
2.0
Shareholding Pattern
Shareholders
Promoters
DIIs
FIIs
Public
Total
%
52.3
1.7
10.5
35.5
100.0
110
100
90
80
70
JK Tyres
4-Jan-16
25-Jan-16
2-Nov-15
14-Dec-15
12-Oct-15
23-Nov-15
21-Sep-15
31-Aug-15
10-Aug-15
8-Jun-15
20-Jul-15
29-Jun-15
6-Apr-15
27-Apr-15
18-May-15
2-Feb-15
16-Mar-15
23-Feb-15
60
Sensex
PAT
329.66
439.22
496.41
579.13
EPS
(`)
14.54
19.36
21.89
25.53
EPS
Growth (%)
-33.4
27.1
13.4
35.3
RONW
(%)
18%
18%
20%
20%
ROCE
(%)
18%
20%
20%
21%
P/E
(x)
7.3
4.3
3.8
3.3
EV/EBITDA
(x)
5.6
4.0
3.7
2.7
nd
Tuesday, 22
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
March, 2016
STOCK POINTER
Index Details
Company Background
JK Tyre & Industries (JK Tyre), incorporated in 1974 is engaged in the manufacture
of automotive tyres (passenger car, commercial, farm and off-the-road), tubes and
flaps. It enjoys a leadership position in the domestic radial tyres segment, with a
market share of 31% (as on FY15). It has 9 manufacturing plants -- 6 in India and 3
in Mexico (after acquisition of Tornel in 2008). It has a wide distribution network with
143 selling points and 4000+ dealers across India.
Indian Operation
Mexican Operation
Revenue
- Rs 6784 Crore
Revenue Share - 84%
Net Profit
-Rs 253 Crore
Revenue
- Rs 1258 Crore
Revenue Share - 16%
Net Profit
-Rs 71 Crore
Commercial - 84%
Passengers -14 %
Customer Wise
Revenue
Replacement - 58%
OEMs
- 23%
Exports
-19%
Others - 2%
-2-
Tuesday, 22
nd
March, 2016
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Kakroli, Rajasthan
(3 plants)
Banmore, Madhya
Pradesh
Chennai,
Tamil Nadu
Mysore,
Karnataka
-3-
Tuesday, 22
nd
March, 2016
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40%
30%
7000
6000
20%
5000
10%
4000
3000
0%
2000
-10%
1000
0
-20%
FY10
FY11
FY12
FY13
Revenue
FY14
FY15
FY16E
FY17E
FY18E
JK Tyres EBITDA and PAT have grown at a 5 year CAGR of 11% and 8% to Rs
948 crore and 324 crore respectively in FY15. During the period FY10-FY15, the
EBITDA margin has averaged at 9-10%, while the PAT margin has averaged at
~3-4%. With the softening of crude oil prices, its key input, the EBITDA margin
touched 16.8% in 9MFY16, a jump of 460 bps YoY. Going forward, we expect
crude oil prices to settle at $40/barrel and have factored in EBITDA margins of
15%-15.5% over our forecast period of FY16-18.
-4-
Tuesday, 22
nd
March, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Profitability trend
1,400
1,200
in Rs crore
RM as a % of revenues reduced from
76% to 64% in FY14;strong demand
and stable crude prices helped
recovery in EBITDA margin from 5% in
FY12 to 12% in FY14
RM as a % of revenues
increased from 62% to 71%
in FY11; as crude prices
could not be entirely passed
on, EBITDA margin fell from
13% to 6% in FY11
18%
16%
14%
1,000
12%
800
10%
600
8%
6%
400
4%
200
2%
FY10
FY11
FY12
FY13
FY14
FY15
FY16E
FY17E
FY18E
(200)
0%
-2%
EBITDA
PAT
JK Tyre currently has a capacity of ~20.6 mn units per annum, of which 6.6 mn
units are based in its Mexican subsidiary Tornel (acquired in 2008).
The capacity of JK Tyres Indian operations has grown at a 3 year CAGR of 11%.
The average capacity utilization is around 100% in the Truck/Bus radials (TBR)
category and around 85-90% in the Passenger Car Radials (PCR) category. Going
forward, the company plans to enhance its Indian capacity (Chennai plant) by 2.6
mn at a total cost of Rs 1,430 crore, which is expected to be commissioned by
FY17. With existing capacities operating at optimum utilization levels, coupled with
improvement in demand, we believe the expansion will yield higher volumes with a
minimal lag, post commissioning. This is likely to offset the impact of lower
realizations on account of the partial pass-through of reduced crude oil prices and
lead to an overall revenue CAGR of 3.4% over FY16-FY18.
-5-
Tuesday, 22
nd
March, 2016
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Tyres in lakhs
80%
78%
140
76%
120
74%
100
72%
80
70%
60
68%
66%
40
64%
20
62%
60%
2011-12
2012-13
Annual Capacity
2013-14
Effective Capacity
2014-15
There have been no expansions in the Mexican subsidiary, Tornel, since its
acquisition. The Tornel plant is operating at a utilization of 60%-70% in the PCR
category. The company is planning to increase the capacity in Tornel by 1.65 mn
units going forward. However, since the expansion is only in the planning phase,
we have not considered the same into our projections.
Acquisition of Cavendish Industries gets CCI nod
In September 2015, JK Tyre and its wholly owned subsidiary, JK Asia Pacific
Singapore, entered into an agreement with Kesoram Industries to acquire a 100%
stake in Cavendish Industries (CIL) (a 99% subsidiary of Kesoram) for Rs 2,200
crore. In February 2016, the deal received the CCI nod. CIL, with a capacity of ~5
mn tyres, manufactures a range of tyres, tubes and flaps at its plant located in
Haridwaar. The acquisition will be funded by a combination of debt and equity by
JK Tyre and its group companies; JK Tyre is to have the largest shareholding with
an investment of Rs 450 crore. The acquisition will:
i) help the company expand its presence in the TBR market
ii) provide an entry point into the fast growing two and three wheeler tyre market
iii) and help earn marketing and distribution margins
-6-
Tuesday, 22
nd
March, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
JK Tyres EBITDA margin has increased from 9% in FY13 to 12.8% in FY15 with a
higher proportion of revenues stemming from value-added radial tyres. The
management expects radialisation penetration to increase to 65% in the coming
years. With the higher radialisation coupled with softening of rubber prices (crude
oil derivative), we expect EBITDA margins to expand to 15.2% by FY18 from FY 15
levels.
EBITDA and EBITDA margin trend
Rs cr
1400
18.0%
1200
16.0%
14.0%
1000
12.0%
800
10.0%
600
8.0%
6.0%
400
4.0%
200
2.0%
0.0%
FY12
FY13
FY14
EBITDA
FY15
FY16E
FY17E
FY18E
-7-
Tuesday, 22
nd
March, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
. radial tyre market is growing at the rate of 5%-6% annually due to high
In India, the
demand from OEMs. Demand from OEMs stands at 70% in the TBR segment and 30% in
the aftermarket segment. According to a study conducted by Continental, the Indian truck
tyre replacement market has a volume of approximately 14 million units per year, out of
which almost 4 million units are radial tyres, whereas the other 10 million are bias tyres.
-8-
Tuesday, 22
nd
March, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Penalty on overloading
Radial tyres are not preferred for unscrupulous practice of over-loading of
trucks. The government has imposed stringent penalties on over-loading
10 times the toll rates and immediate off-loading of the excess luggage.
Adequate penalties on over loading will ensure higher penetration.
-9-
Tuesday, 22
nd
March, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
-10%
200,000
-20%
-30%
Total Sales
2019-20
400,000
2018-19
0%
2017-18
600,000
2016-17
10%
2015-16
800,000
2014-15
20%
2013-14
1,000,000
2012-13
30%
2011-12
1,200,000
2010-11
40%
2009-10
1,400,000
Growth (RHS)
- 10 -
Tuesday, 22
nd
March, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
160
Rubber INR/100kg
300
140
292
120
250
239
100
200
191
185
80
126
150
109
100
95
60
96
40
50
20
-
We believe that the sharp slump in crude oil prices are over-done and a rebound is
likely, given the output caps being put in place. However, the three digit prices of oil are
a distant reality given the weak global economy. Prices could rebound to the $40/barrel
range and accordingly, margins would dip too. We have factored in EBITDA margins in
the range of 15-15.5% over our forecast period.
- 11 -
Tuesday, 22
nd
March, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Mar-16
Nov-15
Jul-15
Mar-15
Nov-14
Jul-14
Mar-14
Nov-13
Jul-13
Mar-13
Nov-12
Jul-12
Mar-12
Nov-11
Jul-11
Mar-11
Nov-10
Jul-10
Mar-10
Nov-09
Jul-09
Mar-09
Nov-08
Mar-08
International Price
Jul-08
Jan-16
Oct-15
Jul-15
Apr-15
Jan-15
Oct-14
Jul-14
Apr-14
Jan-14
Oct-13
Jul-13
Apr-13
Jan-13
Oct-12
Jul-12
Apr-12
Jan-12
Oct-11
Jul-11
Apr-11
Jan-11
Oct-10
Jul-10
Apr-10
Jan-10
Domestic Price
Key Risks
Volatile crude prices
Crude prices may have already bottomed out and there is the possibility that the low
cost environment may become a thing of the past. Global oil supplies are likely to be
maintained at January levels. This deal has the support of 15 OPEC and non-OPEC
members (the notable exclusion being Iran), which together account for 73% of
international output. The deal is to be finalized in a meeting scheduled in April 2016.
Controlled supply could lead to a bounce back in crude oil to around $40/barrel and
result in a rise in raw material costs, given that 45% of raw material costs are linked to
crude.
Curbs on rubber imports to inflate costs marginally
To protect the domestic rubber plantations the import of cheap natural rubber from
China has been banned from Jan 21, 2016 to March 31, 2016. Further continuation of
this ban could lead to higher raw material costs.
- 12 -
Tuesday, 22
nd
March, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Financial Performance
In Q3FY16, the revenue of JK Tyres reported a de-growth of 12% YoY to Rs
1,617 crore on account of a sharp fall in realizations in-line with the fall in crude
prices. Further, volumes were hit on account of Chinese dumping of tyres.
However raw material prices were only partially passed on, the EBITDA shot
up by 20% YoY to 268 crore (Rs 254 crore in Q3FY15). Despite higher
depreciation and taxation, the PAT jumped 21% YoY to111 crore.
Q3FY16
Net Sales
1617.1
Growth (%)
-12.0
Total expenditure
Q3FY15
1837.8
FY201503
FY201403
7383.7
7651.8
-3.5
1349.6
1584.2
6453.0
6780.5
267.5
253.6
930.8
871.3
Margin (%)
16.5
13.8
15.5
15.1
Depreciation
50.6
40.0
157.8
179.5
217.0
213.6
773.0
691.8
3.6
4.5
16.9
18.3
220.6
218.1
789.9
710.2
Margin (%)
13.6
11.9
10.7
9.3
Finance Cost
59.7
61.2
257.4
276.2
EBITDA
Extraordinary Items
-10.5
-30.0
-46.9
-59.5
PBT
150.4
126.8
485.6
374.4
Margin (%)
Provision for Tax
Profit after Tax
9.3
6.9
6.6
4.9
45.1
36.2
161.7
118.8
105.3
90.6
323.9
255.6
Margin (%)
6.5
4.9
4.4
3.3
Share of Associates
5.3
1.2
5.8
7.4
110.6
91.8
329.7
263.0
- 13 -
Tuesday, 22
nd
March, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Financial Outlook:
We expect JK Tyres revenues to grow at a 3 years CAGR of 3.4% to Rs 8,156
crore by FY18, driven by an expansion of the existing capacity in radialisation,
which will help boost volumes. The acquisition of CIL, which has not been
factored in, is an upside trigger to our estimates. The EBITDA is expected to
grow at a CAGR of 9.5% by FY 18 to Rs 1,223 crore from Rs 931 crore in
FY15. At the PAT level, the company is expected to grow at a CAGR of 21% by
FY 18 to clock a PAT of Rs 579 crore.
Consolidated Revenue, Gross & PAT margins
9,000
Rs in Cr
18
30%
16
8,000
14
7,000
20%
12
6,000
10
10%
5,000
8
0%
FY12
FY13
Net Sales
FY14
FY15
FY16E
Operating Margin
FY17E
PAT Margin
Debt/Equity(x)
Tuesday, 22
nd
March, 2016
FY 18 E
FY 7E
FY 16 E
Mar-15
Mar-14
Mar-13
Mar-12
Mar-11
Mar-10
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FY18E
FY17E
FY16E
Mar-15
Mar-14
Mar-13
No. of Days
Mar-12
Mar-11
Inventory Days
Mar-10
Mar-09
No. of days
- 14 -
ROCE
FY18E
80.00
70.00
60.00
50.00
40.00
30.00
20.00
10.00
-
FY18E
FY11
FY17E
ROE
(2)
FY10
FY16E
Mar-15
1,000
Mar-14
-10%
Mar-13
2,000
Mar-12
3,000
Mar-11
Mar-10
4,000
Valuation
We initiate coverage on JK Tyre as a BUY with a price objective of Rs 153, representing a
potential upside of 82% from the CMP of Rs 84 over a period of 18 months. We have used
the PE multiple approach to value JK Tyre and assigned a multiple of 6x on FY18 EPS of Rs
25.53 to arrive at the target price. We are upbeat on the prospect of the company due to the
following aspects:
Mar-14
CMP
2X
Sep-14
4X
Mar-15
6X
Sep-15
8X
10X
200
3000
2500
150
2000
100
1500
50
1000
500
0
Sep-10
Sep-11
CMP
Sep-12
0.5X
Sep-13
1X
1.5X
Sep-14
2X
Sep-15
2.5X
0
Sep-10
EV
Sep-11
3.5X
Sep-12
Sep-13
6X
8.5X
Sep-14
11X
nd
March, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Sep-15
13.5X
6.00
4.00
2.00
CEAT PE
JK Tyre PE
CEAT median PE
Mar-16
Jan-16
Nov-15
Sep-15
Jul-15
May-15
Mar-15
Jan-15
Nov-14
Sep-14
Jul-14
May-14
Mar-14
Jan-14
Nov-13
Sep-13
Jul-13
May-13
Mar-13
Jan-13
JK Tyre Median PE
Historically, JK Tyre has traded at a median PE multiple of 4.3x, at a discount of ~30% to Ceats median PE multiple.
However, this discount has widened to more than 100% currently, with JK Tyre trading at 4.2x, while Ceat is trading at
9.3x. Ceat enjoys a premium multiple over JK Tyre considering:
i) Substantially less geared The FY15 DE of Ceat was 0.48x v/s JK Tyres 2.12x, and
ii) Better RoCe Ceats FY15 RoCE was 26.4% v/s JK Tyres 18.1%
However, with a higher sales and margin profile and a comparable RoE, we believe the steep discount to JK Tyres
multiple is unwarranted. Our assigned multiple of 6x is at a discount of 20% to Ceats FY18 multiple.
- 16 -
Tuesday, 22
nd
March, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
Peer Comparison
Y/E March
JK Tyre
EBITDA
Margin
(%)
PAT
Margin
(%)
ROE(%)
P/E
P/BV
EV/
EBITDA
Sales
EBITDA
PAT
2015
7,383.7
930.8
329.7
12.6%
4.5%
17.6%
7.3
1.7
5.6
2016E
6,947.6
1,081.2
439.2
15.6%
6.3%
18.2%
4.4
1.0
4.1
2017E
7,554.8
1,135.4
496.4
15.0%
6.6%
19.7%
3.9
0.8
3.7
2018E
8,155.7
1,222.5
579.1
15.0%
7.1%
20.4%
3.4
0.7
2.8
Apollo
2015
12,725.7
1,930.0
977.6
15.2%
7.7%
20.3%
7.7
1.5
3.6
2016E
11,944.0
1,990.0
1,085.7
16.7%
9.1%
19.0%
7.0
1.2
3.6
2017E
12,980.2
2,078.3
1,104.7
16.0%
8.5%
16.2%
6.8
1.1
3.5
2018E
14,672.5
2,320.5
1,179.4
15.8%
8.0%
15.4%
6.4
0.9
3.1
2015
5,754.8
797.0
317.2
13.8%
5.5%
23.4%
11.5
2.2
4.9
2016E
5,867.0
834.7
414.6
14.2%
7.1%
22.0%
8.5
1.7
4.7
2017E
6,567.8
890.3
465.9
13.6%
7.1%
19.8%
7.9
1.5
4.4
2018E
7,263.0
965.8
520.7
13.3%
7.2%
18.7%
7.5
1.3
4.1
CEAT
1,881.5
294.7
103.8
15.7%
5.5%
43.3%
16.5
6.2
5.5
2016E
2,115.3
286.2
190.0
13.5%
9.0%
44.6%
10.3
4.2
6.0
2017E
2,350.8
315.2
207.0
13.4%
8.8%
36.1%
9.4
3.1
5.4
2018E
NA
NA
NA
NA
NA
NA
NA
NA
NA
13,525.5
2,008.0
1,563.7
14.8%
11.6%
29.5%
8.6
2.2
5.6
2016E
20,452.2
4,361.1
2,331.9
21.3%
11.4%
32.4%
6.5
1.9
3.6
2017E
15,519.2
2,944.2
1,529.1
19.0%
9.9%
20.3%
8.8
1.6
5.5
2018E
17,612.0
2,976.4
1,558.6
16.9%
8.8%
17.4%
8.7
1.4
5.7
- 17 -
Tuesday, 22
nd
March, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
FY15
FY16E
FY17E
Net Sales
7383.7
6947.6
7554.8
-3.5
-5.9
8.7
6453.0
5866.4
6419.5
% Chg.
-4.8
-9.1
9.4
EBDITA
% Chg.
Total Expenditure
FY18E
FY15
FY16E
FY17E
FY18E
14.5
19.4
21.9
25.5
21.2
26.4
29.3
32.4
1.1
1.1
1.2
1.2
61.8
82.3
105.4
132.1
0.7
930.8
1081.2
1135.4
EBDITA Margin %
12.6
15.6
15.0
2.1
1.5
1.1
Other Income
16.9
16.8
17.3
0.9
0.9
1.0
1.0
PBDIT
947.6
1097.9
1152.6
26%
27%
23%
22%
Depreciation
157.8
171.9
175.1
18%
20%
20%
21%
Interest
257.4
247.8
231.9
0.0
0.0
0.0
0.0
Exceptional items
-46.9
-39.9
0.0
PBT
485.6
638.3
745.7
870.4 P/E
Tax Provisions
161.7
210.9
257.3
300.3 P/BV
Reported PAT
323.9
427.4
488.4
570.1 EV/Sales
Minority Interest
PAT
EV/EBIDTA
7.3
4.3
1.7
3.8
1.0
0.7
0.8
0.6
0.6
3.3
0.6
0.4
5.6
4.0
3.7
2.7
323.9
427.4
488.4
4.4
6.2
6.5
44.2
45.0
44.2
44.0
Share of Associate
5.8
11.8
8.0
67.5
71.9
70.6
70.7
329.7
439.2
496.4
53.3
51.5
50.0
51.6
45.4
45.4
45.4
1355.7
1820.9
2344.3
0.0
0.0
0.0
1503.6
1646.0
1474.0
319.8
298.8
272.1
638.3
745.7
870.4
171.9
175.1
163.7
147.4
-50.6
34.6
48.9
141.4
90.5
-117.8
-30.7
734.2
935.4
851.9
1150.8
-80.0
410.7
411.0
426.0
-799.6
-308.7
-1.0
Total Liabilities
3635.1
4222.0
4561.7
-0.3
10.0
-435.7
18.6
Gross Block
4827.8
5566.8
5667.8
-799.9
-298.6
-436.7
-61.4
2126.5
2298.4
2473.5
0.0
0.0
0.0
0.0
Net Block
2701.3
3268.4
3194.3
252.9
-223.0
-172.8
-505.0
830.3
400.0
300.0
-267.2
-273.8
-258.9
-234.1
216.1
228.0
691.0
-7.2
-496.7
-431.7
-739.1
-299.1
138.7
176.4
-72.9
140.0
-16.5
350.4
186.5
187.0
200.0
235.6
162.8
302.9
286.3
3635.2
4222.0
4561.7
162.8
302.9
286.3
636.7
- 18 -
485.6
157.8
Tuesday, 22
nd
March, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.
- 19 -
Tuesday, 22
nd
March, 2016
This document is for private circulation, and must be read in conjunction with the disclaimer on the last page.