JK Tyre & Industries Ltd.

Transcription

1 Apr16 May16 Jun16 Jul16 Aug16 Sep16 Oct16 Nov16 Dec16 Jan17 Feb17 Mar17 Apr17. Volume No.. I Issue No. 118 JK Tyre & Industries Ltd. April 28 th, 2017 BSE Code: NSE Code: JKTYRE Reuters Code: JKIN.NS Bloomberg Code: JKI:IN Radialisation trend catching up fast JK Tyre & Industries Ltd (JK Tyre) has been in the business of manufacturing and selling tyres since its inception in Further, JK Tyre derives 86%/14% of its revenues from Indian/Mexican markets. It commands a dominant market share of 28% in truck tyre segment. Investment Rationale Rising CV radialisation levels & recovery in replacement demand bode well: JK Tyre is well poised to benefit from the radialisation story in India. JK Tyre is the largest player with 28% market share in truck tyre segment. The radialisation levels have increased from 6% in FY09 to 44% in FY16. Further, radialisation trend (given the fuel & efficiency benefits) in truck & bus segment is expected to rise at a rapid pace and is likely to reach around 77% by FY21E. JK Tyre s share of radial tyres revenue has increased from 46% in FY14 to 58% in FY16. With the completion of expansion project at its Chennai plant, the TBR/PCR capacity has increased to 2.3mn/10mn tyres per annum. Further, CIL acquisition would expand its presence in truck radials segment with an incremental capacity of 1.2mn tyres per annum. Moreover, JK Tyre is well positioned to reap the benefit from shorter life (avg useful life of ~1 year) of M&HCV segment tyres on the back of expectation of robust demand from replacement market (77% to sales) as truck OEM sales saw a recovery in FY15/16 (~20% p.a.). Thus, we expect India business (contributed 86% to the consolidated revenues in FY16) to witness a CAGR of 10% over FY1719E largely driven by rising radialisation levels coupled with volume growth through capacity expansion & acquisition of CIL. Foray into twowheeler segment has completed the portfolio: With the acquisition of CIL, JK Tyre has forayed into the fastgrowing 2/3 wheeler category (6.3mn tyres per annum). The entry into the 2Ws space not only helps JK Tyre in becoming a fullrange tyre maker but also allows the company in penetrating rural markets. JK Tyre has launched premium two and threewheeler tyres under the brand Blaze. Notably, the product has been received well in the market. Currently, 2W tyres contribute nearly 5% to the total revenues & the company is targeting to double the contribution over the next two years. Turnaround of Cavendish acquisition to drive growth ahead: Within one year of acquisition, JK tyre has managed to turnaround CIL. CIL turned PBT positive in Q4FY17 led by employee rationalisation & reduction in conversion costs. While TBR capacity for JK Tyre (excluding CIL) is being fully utilised, the utilisation level of TBR capacity at CIL has improved to 7080% since acquisition. More importantly, CIL acquisition has enhanced the domestic capacity by 55% to 1,770 tonnes per day. JK tyre got an access to three factories located at Laksar (Haridwar) where the company would enjoy tax benefits up to Leverage ratio set to decline from FY18E onwards as no capex plans on the anvil: As domestic capacity has increased by 55% with the acquisition of CIL, JK Tyre has no major capex lined up in the medium term. The debt/equity ratio is estimated to rise from 1.7x in FY16 to 2.1x in FY17 as the company has funded major part of CIL s acquisition through debt. However, the strong free cash flow generation to the tune of Rs1951cr over FY1719E would help in improving the leverage ratio from the current level of 2.1x to 1.2x in FY2019. Valuations: Given JK Tyre s dominant position in TBR segment coupled with robust brand equity, we expect revenue to grow at a CAGR of ~10% over FY1719E. However, PAT is expected to grow at a CAGR of ~19% on account of low base effect. We initiate JK Tyre with a BUY rating with a TP of Rs183 at 6.5x FY19E EPS. Market Data Rating BUY CMP (Rs.) 166 Target (Rs.) 183 Potential Upside 10% Duration Long Term Face Value (Rs.) 2 52 week H/L (Rs.) 167/79 Adj. all time High (Rs.) 167 Decline from 52WH (%) 0.7 Rise from 52WL (%) Beta 1.1 Mkt. Cap (Rs.Cr) 3,757 Fiscal Year Ended Y/E FY16 FY17E FY18E FY19E Revenue (Rs.Cr) 6,953 7,490 8,132 9,038 Adj. profit (Rs.Cr) Adj. EPS (Rs.) P/E (x) P/BV (x) ROE (%) One year Price Chart JKTYRE Sensex (Rebased) Shareholding Pattern Mar17 Dec16 Chg. Promoters (%) Public (%)

2 JK Tyres: Business overview JK Tyre & Industries Ltd (JK Tyre) is one of the leading tyre manufacturers in the country. The company derives 86% & 14% of its revenues from India and Mexico markets respectively. It commands leadership position in the Indian truck and bus radial tyre segment, with a market share of 28%. The product profile spans the entire range including passenger cars, utility vehicles, light trucks, truck & bus, agriculture & offthe road tyres. With the acquisition of CIL, ATL forayed into twowheeler segment. Its key brands include JK Tyre, Vikrant and Tornel. JK Tyre has 12 manufacturing locations spread across India (9) & Mexico (3). It has a total production capacity of 2,110 tonne per day. Consolidated revenue break up by geography (%) Mexico, 14% India, 86% A welldiversified product portfolio The company s diverse product portfolio spans across the entire range including truck & bus, passenger cars, light trucks, agriculture & offthe road tyres. With the latest acquisition of Cavendish Industries, JK Tyre has forayed into two & threewheeler space. It is the largest player in the truck tyre segment with 28% market share. Notably, truck & bus segment contributes the maximum 67% to the total revenue followed by passenger car (15%), light truck (12%), farm (4%) and OTR & others (2%) segments. Comprehensive product portfolio Revenue breakdown by product Light Truck, 12% Farm, 4% OTR & others, 2% PCR, 15% Truck, 67%

3 Many first to its credit JK Tyre has a firstmover advantage in introducing cutting edge technology. It was the first player in India to launch radial technology for entire range (passenger car, LCV, bus, truck and tractors). Further, it was also the first company to launch VRated ecofriendly tyres with high performance. Impressive customer base & extensive distribution network JK Tyre has global presence in 100 countries spread across six continents. The company generates 35% of its revenue from OEMs, 56% from replacement market and 9% from exports. It has consistently added new customers and supplies to most of the OEMs in truck, passenger car, truck, tractor & OTR categories. The company has 143 JK Tyre selling points which service the growing needs of about 4,000 dealers (1,000 exclusive) across India. Further, the company markets products through 23 JK Tyre Truck Wheels (fully equipped tyre service centre). Moreover, it has about 200 one stop retail & tyre care outlets called JK Tyre Steel Wheels which generate significant portion of PCR sales. Diversified customer base New products launched over the years FY FY15 63 FY14 65 FY13 62 FY12 40 Consolidated revenue break up by market (%) Exports, 9% OEMs, 35% Replacement, 56% Rising radialisation levels to help in sustaining the leadership position JK Tyre is well poised to benefit from the radialisation story in India. JK Tyre is the largest player with 28% market share in truck tyre segment. The radialisation levels have increased from 6% in FY09 to 44% in FY16. Further, radialisation in truck & bus segment is expected to

4 increase at a rapid pace and is likely to touch around 77% by FY21E. JK Tyre s share of radial tyres revenue has increased from 46% in FY14 to 58% in FY16. Notably, radial tyres enjoy better margins when compared to margins of bias tyres. JK Tyre commands leadership position in TBR space Others/Imports, 25% JK Tyre, 28% Birla, 5% Ceat, 5% MRF, 13% Apollo Tyre, 24% Radialisation trend on the rise 100% 50% 0% 67% 72% 77% 60% 53% 44% 33% 11% 17% 19% 22% 26% FY10 FY11 FY12 FY13 FY20E FY21E Truck tyre demand to revive JK Tyre is India s largest player with 28% market share in truck tyre segment. Importantly, during the past five fiscals (FY1116), demand for truck tyre has been almost flat when compared to longterm average of 67%. However, going forward, we expect truck tyre demand to revive & register a CAGR of ~6% over FY1619E on account of four factors: (1) shift towards large trucks, (2) government focus on infrastructure development, (3) stricter vehicle scrappage policy & (4) shift to stricter emission norms will drive the fleet demand. India Truck tyre demand to witness a CAGR of 6% during FY1619E E E E E E Cavendish Acquisition The next growth engine In 2015, JK Tyre acquired Cavendish Industries Ltd (CIL), a unit of Kesoram Industries, for Rs2,195cr. Notably, since May, 2016, JK Tyre has started to consolidate the financials of CIL (acquisition impact) onto the overall financials of the company. The deal has added a capacity to produce 10mn tyres a year and hence the total manufacturing capacity in India will increase to 27mn units a year. More importantly, this acquisition has provided JK tyre an entry point into the fastgrowing 2/3 wheeler category. Interestingly, CIL has a capacity of 6.3mn tyres per annum in this category. The foray into the 2Ws space not only helps JK Tyre in becoming a fullrange tyre maker but also allows the company in penetrating rural markets. JK Tyre has launched premium two and threewheeler tyres under the brand Blaze. Notably, the product has been received well in the market. Currently, 2W tyres contribute nearly 5% to the total

5 Rs. Crores 1,733 1,285 1,102 1,179 1,274 1,401 Rs. Crores 5,951 6,125 5,881 6,346 6,897 7,680 revenues & the company is targeting to double the contribution over the next two years. Further, this acquisition would expand its presence in truck radials segment with an incremental capacity of 1.2mn tyres. Turnaround of Cavendish to aid growth Within one year of acquisition, JK tyre has managed to turnaround CIL. CIL turned PBT positive in Q4FY17 led by employee rationalisation & reduction in conversion costs. Notably, the utilisation levels of CIL s units manufacturing truck radials have gone up to 7080% since acquisition. JK tyre got an access to three factories located at Laksar (Haridwar) where the company would enjoy tax benefits up to Chinese imports on the downtrend Imports of the Chinese tyres have been severely hurt by the demonetisation drive. Further, the government is mulling to impose antidumping duty on imported Chinese truck radial tyres. This can further improve both volumes and realisations for Indian TBR players. 10,000 India revenue to grow at 10% CAGR over FY1719E 20.0% 5, % Mexican operations to witness an improving trend Mexico business contributed 14% to the total consolidated revenues in FY16. It has over 85% market share in Light Commercial Vehicles (LCVs) bias, 88% market share in truck bias and 8% market share in passenger line radials. It also supplies farm and industrial tyres. It has 3 manufacturing plants in Mexico & the total capacity is around 8.3mn tyres p.a. in PCR, truck bias and other tyres segments. Over the last 8 years, the capacity utilisation levels have increased from 40% to 70%. In FY16, JK Tyre has increased capacity in PCR segment by 1.5mn tyres. We expect the Mexican operations to register revenue CAGR of over 9% during FY1719E aided by enhanced capacity. 2.9% 4.0% 7.9% 8.7% Revenue Growth YoY (%) 2,000 1,000 Mexico revenue to grow at 9% CAGR over FY1719E 10.3% 25.9% 14.2% 11.4% 10.0% 10.0% Enhanced capacity to aid JK Tyre s overall revenue growth We expect India business (contributed 86% to the consolidated revenues in FY16) to witness a CAGR of 10% over FY1719E largely driven by rising radialisation levels coupled with volume growth through capacity expansion & acquisition of CIL. Further, truck tyre demand is expected to pickup owing to robust replacement demand. Notably, truck & bus segment contributes the maximum 67% to the total revenue. While we expect M&HCV segment to grow at ~8% CAGR 0.0% 20.0% 7.0% 8.0% 10.0% 10.0% 0.0% Revenue Growth YoY (%) 10.0% 20.0% 30.0%

6 Rs. Crores Rs. Crores ,142 1,297 1,343 1,493 Rs. Crores 7,652 7,384 6,953 7,490 8,132 9,038 over FY1619E, we expect truck tyre demand to revive & register a CAGR of ~6% over FY16 19E. 10,000 5,000 Overall revenue to grow at 10% CAGR during FY1719E 10.1% 7.7% 8.6% 3.5% 5.8% Revenue Growth YoY (%) EBITDA margin to remain tepid While the radialisation levels is expected to inch up to 67% in FY19E, higher natural rubber prices would arrest any gains in margins. Interestingly, JK Tyre has been undertaking regular price hikes (increased prices by ~3% in the last 34 months) to offset the higher raw material costs. Thus, we expect EBITDA margins to hover around 16.5% levels in FY18E & FY19E. 2,000 1,500 1, EBITDA to grow at 7% CAGR over FY1719E % 11.1% 10.0% % 10.0% EBITDA EBITDA Margin (%) c PAT to grow at 19% CAGR over FY1719E In FY16, Adj. PAT stood at Rs512cr, reporting a growth of ~36% CAGR over FY1316. PAT margin improved by 230bps to 7.4% YoY in FY16. We expect Adj. PAT to grow at a relatively moderate CAGR of ~19% over FY1719E led by higher depreciation & interest costs. 1,000 PAT to grow at 19% CAGR over FY1719E Adj PAT Adj PAT Margin (%) Return ratios trend ROE (%) ROCE (%)

7 Key Risks: Any sharp increase in natural rubber prices could negatively impact the margins. High competition from China in the TBR segment. Weak demand in the M&HCV segment.

8 Profit & Loss Account (Consolidated) Y/E (Rs. Cr) FY16 FY17E FY18E FY19E Total operating Income 6,953 7,490 8,132 9,038 Raw Profit Material & Loss cost Account (Consolidated) 3,869 4,089 4,489 4,989 Employee cost ,103 Other operating expenses 1,162 1,190 1,308 1,454 EBITDA 1,142 1,297 1,343 1,493 Depreciation EBIT 945 1,004 1,038 1,179 Interest cost Other Income Profit before tax Tax Profit after tax Minority Interests P/L from Associates Adjusted PAT E/o income / (Expense) (48) (57) Reported PAT Balance Sheet (Consolidated) Y/E (Rs. Cr) FY16 FY17E FY18E FY19E Paid up capital Reserves and Surplus 1,703 2,083 2,512 3,063 Net worth 1,748 2,128 2,558 3,108 Minority interest Total Debt 2,910 4,810 4,310 3,810 Other noncurrent liabilities Total Liabilities 5,043 7,474 7,409 7,466 Total fixed assets 3,753 5,516 5,561 5,497 Capital WIP Goodwill Investments Net Current assets 1,185 1,708 1,748 1,919 Deferred tax assets (net) Other noncurrent assets (436) (436) (436) (436) Total Assets 5,043 7,474 7,409 7,466 Cash Flow Statement (Consolidated) Y/E (Rs. Cr) FY16 FY17E FY18E FY19E Pretax profit Depreciation Chg. in Working Capital (66) (390) 60 (96) Others Tax paid (160) (179) (202) (255) Cash flow from operating activities ,205 1,146 Capital expenditure (559) (2,200) (200) (200) Chg. in investments 3 Other investing cashflow Cash flow from investing activities (506) (2,174) (170) (166) Equity raised/(repaid) 0 Debt raised/(repaid) 1,900 (500) (500) Dividend paid (41) (68) (75) (87) Other financing activities (381) (401) (359) (318) Cash flow from financing activities (422) 1,431 (935) (905) Net chg in cash (25) Key Ratios (Consolidated) Y/E FY16 FY17E FY18E FY19E Growth (%) Net Sales (6.1) EBITDA Net profit 35.8 (12.4) Margin (%) EBITDA EBIT NPM Return Ratios (%) RoE RoCE Per share data (Rs.) EPS DPS Valuation(x) P/E EV/EBITDA EV/Net Sales P/B Turnover Ratios (x) Net sales/ GFA Sales/ Total assets

9 Rating Criteria Large Cap. Return Mid/Small Cap. Return Buy More than equal to 10% Buy More than equal to 15% Hold Upside or downside is less than 10% Accumulate* Upside between 10% & 15% Reduce Less than equal to 10% Hold Between 0% & 10% * To satisfy regulatory requirements, we attribute Accumulate as Buy and Reduce as Sell. * JKTYRE.is a midcap company. Disclaimer: Reduce/sell Less than 0% The SEBI registration number is INH The analyst for this report certifies that all the views expressed in this report accurately reflect his / her personal views about the subject company or companies, and its / their securities. No part of his / her compensation was / is / will be, directly / indirectly related to specific recommendations or views expressed in this report. This material is for the personal information of the authorized recipient, and no action is solicited on the basis of this. It is not to be construed as an offer to sell, or the solicitation of an offer to buy any security, in any jurisdiction, where such an offer or solicitation would be illegal. We have reviewed the report, and in so far as it includes current or historical information, it is believed to be reliable, though its accuracy or completeness cannot be guaranteed. Neither Wealth India Financial Services Pvt. Ltd., nor any person connected with it, accepts any liability arising from the use of this document. The recipients of this material should rely on their own investigations and take their own professional advice. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance. We and our affiliates, officers, directors, and employees worldwide: 1. Do not have any financial interest in the subject company / companies in this report; 2. Do not have any actual / beneficial ownership of one per cent or more in the company / companies mentioned in this document, or in its securities at the end of the month immediately preceding the date of publication of the research report, or the date of public appearance; 3. Do not have any other material conflict of interest at the time of publication of the research report, or at the time of public appearance; 4. Have not received any compensation from the subject company / companies in the past 12 months; 5. Have not managed or comanaged the public offering of securities for the subject company / companies in the past 12 months; 6. Have not received any compensation for investment banking, or merchant banking, or brokerage services from the subject company / companies in the past 12 months; 7. Have not served as an officer, director, or employee of the subject company; 8. Have not been engaged in market making activity for the subject company; This document is not for public distribution. It has been furnished to you solely for your information, and must not be reproduced or redistributed to any other person. Contact Us: Funds India Uttam Building, Third Floor No. 38 & 39 Whites Road Royapettah Chennai T: contact@fundsindia.com

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