IDEA RESEARCH. Company Update Wednesday, May 23, JK Tyre Switching to the High Lanes. Tracking Data. Major Shareholders.

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1 JK Tyre Switching to the High Lanes JK Tyre (JK) is a globally renowned, well established, manufacturer of tyres in India. It is the leader in radial tyres with the largest market share of ~32% in the domestic commercial vehicle (CV) segment. While the company s capacities grew, the Indian tyre industry went through a dull phase due to sluggish demand as well as rampant imports of cheaper Chinese radial tyres. High levels of debt combined with muted demand hurt the business of tyre companies. FY18 also witnessed the imposition of GST which disrupted demand and also made it virtually impossible for the tyre manufacturers to pass on the increase in raw material prices. Thus, FY18 was a year of aberration. However with a revival in the CV cycle and imposition of ADD on Chinese imports in September 2017, fortunes of the truck and bus radial tyre manufacturing companies have turned around. Buoyancy in demand will also help the company to pass on increase in raw material costs going forward. Over the next two years, we forecast consolidated profits to grow exponentially at 2-year CAGR of 233.6% to Rs 7.0bn in FY20 on back of relatively modest growth of 15.6% CAGR in consolidated revenues to Rs 110.5bn because of revival in CV segment, imposition of anti-dumping duty on Chinese tyre imports which will improve capacity utilisation and lead to better fixed cost absorption, employee cost rationalisation in Tornel and lower interest cost due to debt repayment of ~Rs3bn each in FY19E and FY20E and very low base of profit in FY18. We initiate coverage on JK Tyre with BUY rating and months price target of Rs 273 (Upside: 101%) based on target multiple of 7.0x EV/EBITDA on FY20E EBITDA of Rs 17.1bn. Currently, the stock is trading at attractive valuations of 3.2x FY20E EV/EBITDA (Ceat: 5.6x FY20E EV/EBITDA, Apollo tyres: 6.7x FY20E EV/EBITDA). We do believe that the company could trade at a possible premium to its peers given its superior growth rate and margin profile. Key financials (Y/e March) E 2020E Revenues (Rs m) 76,894 82,721 95,348 1,10,464 Growth (%) EBITDA (Rs m) 11,324 7,371 13,253 17,109 PAT (Rs m) 3, ,285 7,002 EPS (Rs) Growth (%) (16.9) (84.0) CEPS (Rs) Net DPS (Rs) Profitability & Valuation E 2020E EBITDA margin (%) RoE (%) RoCE (%) EV / sales (x) EV / EBITDA (x) PE (x) P / BV (x) Net dividend yield (%) Source: Company Data, PL Research Company Update Wednesday, May 23, 2018 Shailee Parekh shaileeparekh@plindia.com Charmi Mehta charmimehta@plindia.com Rating BUY Price Rs 135 Target Price Rs 273 Implied Upside 101% Sensex 34,345 Nifty 10,430 Bloomberg Code Reuters Code (Prices as on May 23, 2018) Tracking Data JKI IN JKIN.BO Market Cap (Rs bn) 30.8 Shares O/s (m) M Avg. Daily Value (Rs m) Major Shareholders Promoters 52.5% Domestic Inst. 0.9% Public & Others 46.6% Stock Performance (%) 1M 6M 12M Absolute (14.9) (6.8) (19.6) Relative (14.4) (8.6) (31.8) How we differ from Consensus EPS (Rs) PL Cons. % Diff. 2019E E May 23,

2 Investment Highlights JK Tyre to benefit from the revival in the CV cycle JK is the leader in Trucks & Bus Radial in India. It is primarily dependant on the CV segment as ~79% of its FY17 consolidated revenues came from this segment - ~67% of consolidated revenue from Medium/Heavy CV (MHCV) and ~12% from light weight truck (LCV) segment, thus making it a major beneficiary from the revival in the CV cycle. They were also amongst the pioneers in introducing Radial Tyres in India for the entire range of vehicles (Passenger Car, LCV, Bus, Truck and Tractors segment). Revenue mix by products FY17 Light truck 12.0% Truck 67.0% PCR 15.0% Farm 4.0% Others 2.0% Source: Company Presentation, PL Idea Research Over the past five years (FY13-18), consolidated revenues grew by 3.4% CAGR on the back of muted growth in CV segment which grew by 5.0% CAGR in the same period. We believe that the company s focus on CVs will continue on the back of revival in the Indian economy. Pick-up in Infra spend will trigger growth in freight movement. A good monsoon will lead to higher rural income, which in turn, will boost demand for LCVs. The Vehicle Scrap-page Policy should also aid demand growth for CVs. According to industry statistics, CV production is expected to grow in lower double digits (~10-12%) to 1.2mn units by FY20E. According to Society of Indian Automobile Manufacturers (SIAM), domestic truck and bus sales are expected to grow at 3 year CAGR of 9.5% to 0.4mn over FY18E-20E and over same period light commercial vehicle sales are expected to grow by 12.7% to 0.8mn. JK being a CV player with 32% domestic market share in the domestic market each in TBR and LCVs is likely to benefit the most out of this growth. Existing well-entrenched relationships with OEMs (26% of Truck & Bus Revenue) and the company s presence in after-market (54% of Revenue from replacement market) should May 23,

3 LCV (mn units) Truck & bus sales (mn) IDEA RESEARCH help it to post strong volume growth of 12.5% CAGR between FY18-FY20E to 24.5mn on the back growth in CV tyres led by demand from OEMs. Domestic truck and bus sales to grow at 9.5% CAGR CAGR FY % FY18E-20E - 9.5% FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Source: Company presentation, SIAM Light commercial vehicle sales to grow at 12.7% CAGR CAGR FY %% FY18E-21E % FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E FY21E Source: Company Data, PL Idea Research TBR market share as on Dec 2018 LCV market share as on Dec 2018 JK tyre 32% Others 23% MRF 14% Apollo 26% CEAT 5% Others 1% JK tyre 32% Apollo 27% MRF 27% CEAT 13% Source: Company Presentation Source: Company Presentation May 23,

4 Increase in replacement demand to augur well for tyre industry The domestic industry essentially caters to two segments (1) OEMs (2) Replacement market (Aftermarket). Consumption by OEMs is dependent on new automobile sales trend, while the replacement segment is linked to usage patterns and replacement cycles. Replacement demand dominates the tyre market contributing 68% of total demand (in unit terms), while the OEM market accounts for the balance 32% as of FY17. In the same year, replacements accounted for 56% of its revenues for FY17. The replacement segment enjoys better margins than the OEM segment; hence any increase in the share of replacement revenue will help JK to expand its margins. The major reason for high replacement share is due to the fact that the number of registered vehicles/annual sales remains at about 10x at close to 200mn registered vehicles (industry estimates) vis-à-vis ~24mn annual vehicle sales. Assuming an average life of 3-4 years for tyres, we envisage the contribution of replacement demand to increase further as a percentage of the total pie. Revenue mix by end market Replacement 56% OEM 28% Exports 16% Source: Company Data, PL Idea Research May 23,

5 FY10 FY11 FY12 FY13 FY14 FY15 FY16 FY17 FY18E FY19E FY20E FY21E IDEA RESEARCH Last decade saw pick up in radialisation Bias Tyres have been used in India for the past several decades. However, the Indian Tyre industry has been witnessing a trend in shift towards radial tyres from bias tyres. While radial tyres have already become a norm in PVs, the CV segment has been a laggard in adopting radial tyres mainly on account of poor road infrastructure, rampant over-loading and design limitations in vehicles produced which are not compatible for fitment of radial tyres. Additionally, lack of awareness in Aftermarket on Radial Tyres and 25-30% cheap Bias tyres has led to a slowdown in Radialisation. Currently in India, within the replacement market, ~66% of Truck tyres and ~23% of OEM run on cross-ply tyres due to their ability to carry higher loads, better adaptability to poor road condition and 20-25% cheaper in price. Globally, Bias Tyres have mostly been discarded by developed economies like USA and Europe. Radial Tyres are superior to Bias Tyres in like-to-like application situation but only underperform when the vehicle is over-loaded. Yet another benefit of truck radial is that even after the tyre wears out, there is some extra rubber provided below the tread, which can re-treaded, extending the life by 15-25% and providing 70-80% mileage. With increasing awareness about the benefits of radial tyres, the CV industry has been embracing it rapidly. Improving road conditions has helped accelerate the popularity of radial tyres. Radialisation in CVs has increased to ~45% (22% in FY13) and is to further double over the next five years. This rapidly changing preference has caused tyre manufacturers to set up new radial capacities to cater to the demand. The imposition of the anti-dumping duty (ADD) has provided the industry with the much needed support from the government. Truck and bus radialisation is gaining momentum 90% 75% 60% 45% 30% 15% 0% OEM Domestic* 80% 82% 72% 75% 68% 69% 61% 51% 67% 42% 34% 34% 53% 60% 25% 33% 44% 46% 48% 26% 17% 19% 22% 11% Source: Company Presentation, PL Idea Research *Domestic includes both OEM and Replacement segments May 23,

6 Average per month Chinese TBR imports( in 000's) IDEA RESEARCH ADD and higher Custom Duty provide relief from imports of TBR from China According to ATMA (a representative body of 11 large tyre companies in India), imports of truck and bus radial tyres (TBR) increased from 46,000 units a month in FY14 to ~107,000 units per month in FY17. These accounted for 40% of the replacement demand for truck and bus radials in India of which 92% (~40% in FY14) were Chinese tyres. The tyre majors invested ~Rs350bn during FY13-17 towards setting up TBR capacities. Rising TBR imports resulted in lower capacity utilisation levels. This came as a severe blow to the domestic tyre industry. ATMA then approached Directorate General of Anti-dumping and Allied Duties (DGAD) for anti-dumping duty on TBR imports in India as the per unit import price from China was even less than the cost of raw materials that go into making of these tyres. Finally, the Central Board Excise and customs re-imposed anti-dumping duty of US$ a ton on new Chinese TBR for a period of five years effective from September 18, This has provided the much needed relief to the domestic players and is helping them grow volumes. Subsequently, Chinese imports fell by 40% to 63,000 a month in FY18. Sharp fall in Chinese TBR imports FY15 FY16 FY17 FY18 Source: Company Data, PL Idea Research In the Union Budget 2019, the basic customs duty on imported truck and bus radial tyres was hiked to 15% from the earlier 10% levels. It will further reduce the price differential between domestic and imported CV radials, boosting domestic demand for radial tyres. May 23,

7 Diversifying product mix through the acquisition of Cavendish During the start of FY17, JK Tyre completed the acquisition of Cavendish Industries for an enterprise value of ~Rs21.7bn funded through equity (Rs7bn) and debt (Rs14.7bn) which included three manufacturing facilities of the Birla group company, Kesoram Industries. The plants are located in Laksar (Uttarakhand), manufacturing wide range of tyres, tubes and flaps with an installed tyre capacity of 10mn p.a. This helped JK Tyre diversify its product portfolio by gaining access to the 2 and 3-wheeler segments. JK Tyre has had a history of successfully turning around underperforming acquisitions (Vikrant in Mysuru and Tornel in Mexico) in short period of time and Cavendish was no exception to this. The plants turned profitable through moderation of conversion costs (by ~40%), right-sizing the workforce (offered VRS which brought down the employee strength from 7,500 employees to 4,800 employees), 60% reduction in wastes and value engineering. The company has planned to expand TBR capacities by 0.5mn tyres pa in Cavendish at the cost of Rs2.3bn which is expected to go on stream in 4 parts 125,000 tyres per quarter for the next 4 quarters. Currently, Cavendish is operating at ~90% utilisation levels. During FY18, Cavendish reported revenues of Rs15.7bn and EBIT of Rs1.5bn. Going forward; we expect revenues to grow at CAGR of 16.7% to Rs21.4bn and EBIT at CAGR of 53.1% to Rs3.4bn in FY20E. Cavendish s Financial Overview (Rs m) Particulars FY17 FY18 FY19E FY20E CAGR FY18-20E (%) Revenues* 11,713 15,684 17,800 21, EBIT* 2,140 1,457 2,314 3, EBITM (%) Source: Company Data, PL Idea Research * Numbers for Cavendish are derived by subtracting standalone numbers from total consolidated numbers Cost restructuring in Tornel Tornel was JK Tyre s first international acquisition in which they acquired 100% of equity at Rs 2.7bn. It has three facilities and manufactures wide range of bias and radial tyres (truck, CV, farm and industrial tyres in bias category and LCV tyres in radial category) with a total capacity of 7.9mn tyres pa as on FY18. During FY18, the management decided to right-size the staff at the subsidiary. The employees working with the subsidiary were given VRS amounting tous$35mn. This resulted in a one-time hit to the bottom-line in Q3FY18. Post VRS, 40% of the staff was hired back at 60% of their original salary, 40% was new recruitments and the balance 20% of the work was outsourced. This is expected to moderate employee costs which will help to expand EBITDA margins from 8.8% in FY18 to 12.0% in FY20E.Over next two May 23,

8 years; we expect Tornel s revenue to grow at 2-year CAGR of 17.6% to Rs 14.7bn and EBIT to grow at 2-year CAGR of 37.4% to Rs 1.8bn in FY20E. Tornel s Financial Overview (Rs m) Particulars FY17 FY18 FY19E FY20E CAGR FY18-20E (%) Revenues 12,146 10,646 12,800 14, EBIT ,344 1, EBITM (%) Source: Company Data, PL Idea Research May 23,

9 Key Risks Fluctuation in Rubber prices Raw material cost forms the largest cost in tyre manufacturing accounting for 65-70% of the total cost. The main raw materials used to manufacture tyres are natural rubber, poly butadiene rubber (PBR), styrene butadiene rubber (SBR) and nylon tyre cord fabric. Rubber including (natural and synthetic), nylon tyre cord fabric (NTC) and carbon black account for a major portion~60-65% of the overall raw material cost. Hence any change in the prices of these materials impact the overall industry s profitability. 70% of cost involved in making a tyre is raw material, out of which, ~38% cost is of natural rubber. Prices of NR are dependent on rubber tapping which requires a suitable climate. Floods in Thailand (Major NR producer) led to major disruption in production leading to scarcity of supply and rampant price increase. This led to increase in COGS for all the industry players. Further higher duty on NR imported from nations has also impacted the profitability of companies. We have projected price of NR to remain stable in the coming years; however, any major fluctuations may impact our earnings estimates. Rubber prices RSS4 index Source: Bloomberg, PL Idea Research May 23,

10 Natural rubber largest component of raw matrial costs Others 15% Natural Rubber 38% Other crude derivatives 29% Synthetic Rubber 18% Source: Company Data, PL Idea Research Shortage of Carbon black Carbon black accounts for ~11% of the total raw material cost for a tyre company. Recently, there has been a crunch in domestic availability of carbon black. As per ATMA, the demand-supply gap for carbon black in the domestic market is at 20% currently v/s 14% in FY17. The carbon black prices has gone up by 16% in Dec 2017 to US$520 per ton v/s US$450 per ton in Oct ATMA made representation to the government to allow domestic tyre makers duty-free import of carbon black to the extent of the existing gap between demand and supply in order to enable them to continue with their planned production. Keeping all this in mind, prices of carbon black are expected to stay around new high prices, which can, in turn, affect margins of the company. Tyre demand pegged to economic growth Demand for tyres is linked to growth in the automobile industry, which in turn, is linked to economic growth. Any slowdown in economic growth in the coming years will impact the demand for tyres adversely. Volatility in currency rates Any volatility in PESO/INR rate may impact Mexican subsidiary revenues and thus, the margins. Forward currency contracts, interest rate swaps and option contracts are used to hedge foreign currency risks. May 23,

11 Revenue (Rs bn) IDEA RESEARCH Financial Overview Tepid top-line with robust bottom-line growth Over the past five years (FY13-18), JK grew consolidated revenues by 3.4% CAGR to Rs82.7bn, EBITDA by 3.6% to Rs7.4bn but de-growth in profits by 20.4% to Rs629mn. During FY18, the consolidated profits were lower mainly due to a sudden spike in both domestic and global natural rubber prices and higher than normal stocking by automakers during Feb Mar 2017 period. After muted growth from FY13-18, we forecast consolidated revenues to grow by 15.6% CAGR to Rs110.5bn, EBITDA by 52.4% to Rs17.1bn and consolidated profits by 233.6% CAGR to Rs7.0bn Over FY18-20E. The domestic rubber prices are now stabilising around Rs /kg, while global rubber prices trade at a discount at Rs117/kg. Assuming rubber prices to be range-bound, the management expects EBITDA margins to improve to 15.5% by FY20E from abnormal low of 8.9% in FY18. Geographical revenue break-up Cavendidsh Mexico Jk Tyre FY14 FY15 FY16 FY17 FY18 FY19E FY20E Source: Company Data, PL Idea Research May 23,

12 Tyres sold (mn units) IDEA RESEARCH Improving operational efficiency on back of rising volumes Due to rise in Chinese imports and muted growth in CVs, the capacity utilisations remained at low levels. We expect demand to increase over the next two to three years because of imposition of ADD on Chinese tyre imports, increase in customs duty, revival in CV cycle along with demand for radialisation. Going forward, we expect tyre sales to grow at 12.5% CAGR over FY18-20E to 24.5mn. We believe, rising utilisation levels are likely to reduce operating costs as a % of sales from 17.7% in FY18 to 16.5% in FY20E. Manufacturing capacity (mn units) Category Jk Tyre Cavendish Tornel Total Truck Bias Truck Radial Passenger Line Radial /3 Wheler Others Total Tons per day (TPD) 1, ,709 Source: Company Data, PL Idea Research Volumes increasing on back of higher demand 30.0 Others** 2/3 Wheeler Passenger Line Radial Truck Radial Truck Bias FY15 FY16 FY17 FY18* FY19 FY Source: Company Data, PL Idea Research *FY18 volume figures are assumed based on 9MFY18 volumes and overall volume growth of 11% in FY18 ** Others include off highway tyres Repayment of debt The total debt as on FY18 is Rs 65.2bn resulting in DER of 2.8x. During FY17, the total debt increased from Rs 26.6bn in FY16 to Rs 63.4bn mainly on account of acquisition of Cavendish. However as the expansion phase is almost coming to an end, the company May 23,

13 plans to repay long term debt worth Rs 6bn over the next 2 years. This will bring down the DER to 1.8x by FY20E. Rising return ratios As profits were hurt in FY18, the return ratios were subdued RoCE at 5.3% and RoE at 2.7% which were 12.9% and 16.6% in FY17. We expect RoCE to be 16.2% and RoE to be 22.7% in FY20E as the company deleverages its balance sheet. Optimising costs in Tornel to aid margin expansion During FY18, the management decided to right-size the staff in their Mexican subsidiary, Tornel. The employees working with the subsidiary were given VRS amounting to US$35mn. As a result of this, Tornel profits took a hit in Q3FY18. Of these, the company hired back 40% of the staff at 60% of their original salary, 40% were new recruitments and balance work was outsourced. This led to moderation in employee costs which will help to expand EBITDA margins by 400bps to 600bps, going ahead. What transpired in FY18? Q1FY18 Result Overview (Rs m) Y/e March Q1 18 Q1 17 YoY gr. (%) Net Revenue 18,066 17, Raw Material Cost 12,195 8, Gross Profit 5,871 9, % of revenue Employee Cost 2,209 2, % of revenue Other Expense 3,673 3, % of revenue Total Expenditure 18,077 14, EBITDA (11) 3, Margin (%) Source: Company Data, Idea Research Revenues grew marginally by 1.5% YoY to Rs 18.1bn due to lower offtake by OEMs. Off take was impacted due to high levels of imports of Chinese radial tyres which affected volume off take as well as prices of Indian TBR, implementation of GST led to destocking of inventories which impacted replacement demand and industry switch from BS-III to BS-IV emission norms, impacted Truck OEM sales as production cuts were taken by all CV manufacturers. It was the first quarter since the past 12 quarters where the company May 23,

14 turned red at the EBITDA level itself as raw material cost had shot up sharply by 30% YoY and the company had not been able to pass it on. Gross margins fell 18.4 percentage points to 32.5% which was the lowest in the last twelve quarters. Q2FY18 Result Overview (Rs m) Y/e March Q2 18 Q2 17 YoY gr. (%) Net Revenue 20,583 19, Raw Material Cost 13,127 9, Gross Profit 7,456 9, % of revenue Employee Cost 1,949 2,218 (12.2) % of revenue Other Expense 3,548 3, % of revenue Total Expenditure 18,624 15, EBITDA 1,959 3,863 (49.3) Margin (%) Source: Company Data, Idea Research Consolidated revenues grew 7.3% YoY to Rs 20.6bn. Raw material prices continued to stay high (up 21% YoY) mainly due to rubber prices which were higher by 15% YoY. Although sequentially gross margins improved but YoY it was down by 11.8 percentage points to 36.2%. ADD on import of Chinese Radial tyres was finally announced at the end of this quarter on September 18, 2017 which provided the much needed relief to the TBR industry. Q3FY18 Result Overview (Rs m) Y/e March Q3 18 Q3 17 YoY gr. (%) Net Revenue 21,232 18, Raw Material Cost 13,590 10, Gross Profit 7,642 8, % of revenue Employee Cost 1,868 2,095 (10.8) % of revenue Other Expense 3,647 3, % of revenue Total Expenditure 19,103 15, EBITDA 2,129 2,654 (19.8) Margin (%) Source: Company Data, Idea Research May 23,

15 Post imposition of the ADD, JK benefited most as it is the market leader in the TBR segment. Offtake improved due to pick up in OEM sales and the replacement market in the TBR and PCR segments also showed growth. Consequently, revenues grew 15.5% YoY Rs 21.2bn. Inspite of major labour restructuring (VRS offered to all the employees which costs USD 35m) that was successfully completed in Tornel, EBITDA margins improved to 10.0%, from 9.5% in the previous quarter. Q4FY18 Result Overview (Rs m) Y/e March Q4 18 Q4 17 YoY gr. (%) Net Revenue 22,840 21, Raw Material Cost 13,586 14, Gross Profit 9,254 7, % of revenue Employee Cost 2,155 1, % of revenue Other Expense 3,805 3, % of revenue Total Expenditure 19,547 19, EBITDA 3,293 2, Margin (%) Source: Company Data, Idea Research Gross margins improved significantly during the quarter by nearly 700 bps due to reduction in discounts and softening of rubber prices. However, higher employee costs and other expenses as a percentage of sales lead to EBITDA margins improving by just 520 bps to 14.4%. For FY19E, we have assumed a slight dip (50 bps to 40.0%) in gross margins just in case raw material prices of rubber or carbon black move up as oil prices have been rising and the company takes time to pass on the increase. We have assumed slightly higher employee cost due to commissioning of new capacities but lower other expenses due to operating leverage. May 23,

16 Valuations Profits to grow nearly 7x faster than peers Over the last five years, consolidated revenues grew by 3.4% but consolidated profits de-grew by 20.4% due to muted growth in CV segment, bad monsoon and cheaper imports. With favourable tailwinds such as revival in the CV segment in the coming years, higher demand from replacement segment and imposition of ADD on Chinese tyre imports, tyre companies are expected to do well. During FY18, the rubber prices were volatile and led to margin erosion in H1FY18. With softening of rubber prices, the worse now seems to be over for the company and gross margins are expected to sustain at Q4FY18 exit levels at 40.0% (34.5% in H1FY18 and 36.5% in FY18). Over the next two years, we expect consolidated revenue to grow by 15.6%, while consolidated profits to grow ~11x in FY20E to Rs 110.5bn and Rs 6.9bn respectively. The complete benefit of employee restructuring carried out in Mexican subsidiary will be visible starting FY19E. Thus, the EBITDAM margins are expected to expand by ~658bps to 15.5% in FY20E on the back of higher gross margins, lower employee costs and operating leverage. Further, as capex cycle is almost over, deleveraging of balance sheet is likely to boost cash-flows and return ratios. When compared to its peers such as Ceat and Apollo tyres, (based on Bloomberg consensus estimates,) JK Tyre is likely to grow its revenues at the same rate as its peers, but profits will grow 7x faster. is likely to have highest RoE among its peers, ~22.7% in FY20e v/s 12.1% for Apollo and 15.6% for Ceat. We initiate coverage on stock with a BUY recommendation and a months price target of Rs 273 (Upside : 101%) based on target multiple of 7.0x EV/EBITDA on FY20E EBITDA of Rs17.1bn. Currently, the stock is trading at attractive valuations of 3.2x FY20E EV/EBITDA (Ceat: 5.6x FY20E EV/EBITDA, Apollo tyres: 6.7x FY20E EV/EBITDA). We do believe that the company could trade at a possible premium to its peers, given its superior growth rate and margin profile. Comparative Valuation Table Name Price (Rs) Mcap (Rs bn) PER (x) EV/EBITDA (x) RoE (%) Revenues (Rs bn) EPS (Rs.) 19E 20E 19E 20E 20E 19E 20E 19E 18E EPS CAGR % 18-20E Jk Tyre Apollo CEAT Source: Company Data, Bloomberg Consensus Estimates May 23,

17 FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E EBITDAM (%) IDEA RESEARCH v/s Apollo We have compared the two major tyre manufacturers in the CV segment. JK is the leader in the CV segment with a 32% market share and Apollo with 28%. Although Ceat is also present in this segment, it has a very small market share of only ~5%. For JK tyre, CVs (truck & bus and LCV) account for ~80% of its revenues while for Apollo tyres it is ~47% of its revenues. While PV is 15% of revenues for JK tyre while 39% for Apollo tyres. Thus, when Chinese players dumped TBR tyres in India JK tyre was affected more than Apollo tyres. (Apollo tyres could sustain margins as PV demand was not affected in the same period). According to industry statistics, CV production is expected to grow in lower double digits (~10-12%) to 1.2mn units. CV tyre have high margin compared to any tyres. As JK tyre is primarily a CV focused company, EBITDA margins of JK tyre (FY20E: 15.5%) are expected to be higher than Apollo tyres (FY20E: 13.8%) going forward. JK Tyre Revenue mix by product FY17 Farm 4% LCV 12% PV 15% Others 2% Truck and bus 67% Apollo Tyre Revenue mix by product FY17 LCV 6% Others 14% PV 39% Truck 41% Source: Company Presentation EBITDA margins trajectory JK Tyre Source: Company Presentation Apollo Tyres Source: Company Data, PL Idea Research, Bloomberg Consensus Estimates for Apollo tyres May 23,

18 RoE (%) IDEA RESEARCH As JK tyre is highly levered company than Apollo tyres, financial leverage comes into play and has helped JK tyres to have better return ratios than its peers. JK return ratios to going forward JK Tyre Apollo Tyres FY13 FY14 FY15 FY16 FY17 FY18 FY19E FY20E Source: Company Data, PL Idea Research, Bloomberg Consensus Estimates for Apollo Tyres May 23,

19 Company and Management Background JK Tyre & Industries (JK Tyre), the flagship company of the JK Group, is headed by Dr Raghupanti Singhania. It is one of India s leading tyre manufacturers and placed amongst the 25 largest tyre companies in the world. It started manufacturing tyres in 1976 with a capacity of 0.5mn tyres, which has grown to ~32mn tyres pa through organic and inorganic route. It has 12 manufacturing locations - India (9) & Mexico (3). It has vast distribution and service network with over 4,000 dealers in India. It is present in over 105 countries. The company s product profile spans the entire range including passenger cars, utility vehicles, light trucks, truck & bus, agriculture & off-the road tyres. During FY17, truck & bus segment contributed 67% to the total revenue followed by passenger car (15%), light truck (12%), farm (4%), OTR & others (2%). It commands leadership position in TBR tyres and LCVs with a market share of 31% in both segments. The company acquired Cavendish Industries in FY17; it helped JK Tyre to foray into the two-wheeler segment. Corporate Structure Source: Company Presentation, PL Idea Research Brand Portfolio Source: Company Presentation, PL Idea Research May 23,

20 Industry Overview The Indian tyre industry comprises of a large number of global and Indian autocompanies, of which, top 10 companies account for about 80% of the market share. The domestic tyre industry can be classified on the basis of its design, markets and vehicle category, which have been evolved over the years. Domestic Tyre Industry Classification A. On the basis of use: Commercial Personal Off the road Motorcycles Tractors Passengar cars LCVs Scooters B. On the basis of markets: OEM Replacement Exports C. On the basis of design: Cross-ply Radial Source: Care Report, PL Idea Research Replacement demand dominates the tyre market contributing 56% of total size, while the OEM market share is 44% as of Indian tyre market is driven largely by two May 23,

21 Lakh units IDEA RESEARCH & three wheeler tyres (53%), followed by passenger cars (28%) and commercial vehicle segments (16%). Tractor segment accounted for only 3% of the tyre sales in End market revenue FY17 Segmental revenue breakup - FY17 Replac ement 68% OEM 32% LCV 9% 2/3 W 13% PV 15% Others 9% Truck and bus 54% Source: Company Presentation Source: Company Presentation Outlook for the domestic tyre industry over the near-to-medium term is stable supported by favorable tyre demand, both domestic and exports, and likely improvement in realization. ICRA research expects revenue growth for the industry at ~12-13% (CAGR) during FY Tyre demand is directly proportional to the automobiles demand. Any demand swings in the automobile segment will have a direct and equal impact on the demands of tyres. Indian tyre production data 2,000 1,800 1,600 1,400 1,200 1, ,192 1,254 1,228 1,289 1,461 1,520 1,273 FY11 FY12 FY13 FY14 FY15 FY16 FY17 (apr -dec) 1,805 FY18 Source: ATMA, PL Idea Research May 23,

22 Income Statement (Rs m) Y/e March E 2020E Net Revenue 76,894 82,721 95,348 1,10,464 Raw Material Expenses 43,431 52,497 57,209 65,174 Gross Profit 33,463 30,224 38,139 45,290 Employee Cost 8,543 8,181 8,963 9,949 Other Expenses 13,596 14,673 15,923 18,232 EBITDA 11,324 7,371 13,253 17,109 Depr. & Amortization 2,913 2,995 3,272 3,329 Net Interest 4,404 4,655 5,120 5,048 Other Income 654 1,461 1,534 1,718 Profit before Tax 5,352 1,068 6,396 10,450 Total Tax 1, ,111 3,449 Profit after Tax 3, ,285 7,002 Ex-Od items / Min. Int. (57) Adj. PAT 3, ,285 7,002 Avg. Shares O/S (m) EPS (Rs.) Cash Flow Abstract (Rs m) Y/e March E 2020E C/F from Operations 4,810 10,978 5,627 8,425 C/F from Investing (24,862) (7,238) (1,342) (2,585) C/F from Financing 21,611 (5,385) (3,086) (3,139) Inc. / Dec. in Cash 1,559 (1,646) 1,199 2,701 Opening Cash 1,394 2,953 1,307 2,506 Closing Cash 2,953 1,307 2,506 5,207 FCFF (20,052) 3,739 4,285 5,840 Key Financial Metrics Y/e March E 2020E Growth Revenue (%) EBITDA (%) 1.4 (34.9) PAT (%) (16.9) (83.4) EPS (%) (16.9) (84.0) Profitability EBITDA Margin (%) PAT Margin (%) RoCE (%) RoE (%) Balance Sheet Net Debt : Equity Net Wrkng Cap. (days) Valuation PER (x) P / B (x) EV / EBITDA (x) EV / Sales (x) Earnings Quality Eff. Tax Rate Other Inc / PBT Eff. Depr. Rate (%) Source: Company Data, PL Research. Balance Sheet Abstract (Rs m) Y/e March E 2020E Shareholder's Funds 23,218 23,420 27,440 34,176 Total Debt 39,428 35,196 32,196 29,196 Other Liabilities 2,639 2,016 2,218 2,439 Total Liabilities 65,284 60,631 61,853 65,811 Net Fixed Assets 61,200 64,509 62,047 60,668 Goodwill Investments 732 1,282 1,475 1,769 Net Current Assets 1,913 (6,973) (3,844) 764 Cash & Equivalents 2,953 1,307 2,506 5,208 Other Current Assets 37,625 36,437 41,684 47,987 Current Liabilities 38,666 44,717 48,035 52,432 Other Assets 1,441 1,812 2,175 2,610 Total Assets 65,284 60,631 61,853 65,811 Quarterly Financials (Rs m) Y/e March Q1FY18 Q2FY18 Q3FY18 Q4FY18 Net Revenue 18,066 20,583 21,232 22,840 EBITDA (11) 1,959 2,129 3,293 % of revenue Depr. & Amortization Net Interest 1,168 1,187 1,150 1,150 Other Income ,131 Profit before Tax (1,788) ,501 Total Tax (609) Profit after Tax (1,179) ,598 Adj. PAT (1,179) ,589 Source: Company Data, PL Research. May 23,

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