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1 JK Tyre & Industries Limited BUY CMP: Rs Date: December 19 th, Key Ratios: Particulars FY09 (18 m) FY10E (12 m) FY11E (12 m) OPM (%) NPM (%) ROE (%) ROCE (%) P/BV(x) P/E(x) EV/EBDITA(x) Debt equity ratio Key Data: Sector Automobile Ancillary Face Value Rs wk. High/Low Rs /29.00 Volume (2 wk. Avg.) BSE Code V.S.R. Sastry Vice President Equity Research Desk vsrsastry@firstcallindiaequity.com Target price: Rs Market Cap. : Rs mn. SYNOPSIS We initiated the coverage of JK Tyre & Industries Ltd and set a target price of Rs JK Tyre & Industries Limited is the flagship company of Hari Shankar Singhania Group. It engages in the manufacture and distribution of tires, tubes, and flaps for the transportation industry primarily in India and Mexico. The company is looking to raise the share of exports to 50% from its Mexican subsidiary, Tornel, within a year. The company is planning to triple direct supply of truck and bus radial tyres to major companies like Tata Motors and Ashok Leyland in the coming two years. The company will invest 12 billion ($255.9 million) over the next 3-4 years in expanding its capacity, including setting up a Greenfield car radial plant in South India. The company concluded acquisition of 100% shareholding of Tornel in Mexico. The company s top line and bottom line is expected to grow at a CAGR of 14% and 47% over SY07 to FY11E. Share Holding Pattern: Dr. V.V.L.N. Sastry Ph.D. Chief Research Officer drsastry@firstcallindia.com Firstcall India Equity Advisors Pvt Ltd 1

2 Table of Content Content Page No. 1. Investment Highlights Company profile Company products Peer Group Comparison Key Concerns Financials Charts & Graph Outlook and Conclusion Industry Overview 17 Firstcall India Equity Advisors Pvt Ltd 2

3 Investment Highlights Result Updates (Q2FY10) (standalone): For the second quarter, the top line of the company increased 8%YoY and stood at Rs mn against Rs mn of the same period of the last year. The bottom line of the company for the quarter stood at Rs mn from Rs mn of the corresponding period of the previous year i.e., an increase of 284%YoY. EPS of the company for the quarter stood at Rs for equity share of Rs each. Firstcall India Equity Advisors Pvt Ltd 3

4 Expenditure for the quarter stood at Rs mn, which is around 9% lower than the corresponding period of the previous year. Raw material cost of the company for the quarter accounts for 57% of the sales of the company and stood at Rs mn from Rs mn of the corresponding period of the previous year i.e., a decrease of 27%YoY. Employee cost increased 35%YoY to Rs mn from Rs mn. and accounts for 8% of the revenue of the company for the quarter. OPM and NPM for the quarter stood at 15% and 6% respectively from -1% and -4% respectively of the same period of the last year. Firstcall India Equity Advisors Pvt Ltd 4

5 JK Tyre Launches Showroom in Kochi The company has launched a new showroom in Kochi. JK Tyre soars on plans to augment exports from Mexican arm The company is looking to raise the share of exports to 50% from its Mexican subsidiary, Tornel, within a year. As of now, only 25% of the arm s annual production is sold overseas. The company is also exploring opportunities to expand in the Central and Southern American markets. JK Tyre had taken over Tornel two years ago and as of now about 75% of Tornel's annual production of 66lakh units is sold in the Mexican domestic market. The company primarily is aiming at the Brazilian market as it believes that that country has been doing well amid the recent economic recession. JK Tyre & Industries is planning to triple direct supply of truck and bus radial tyres to OEMs The company is planning to triple direct supply of truck and bus radial tyres to major companies like Tata Motors and Ashok Leyland in the coming two years. The company s sales to original equipment manufacturers (OEMs) are only around 5% of its annual total production, while the rest goes to the after sales market. The company intends to increase this to 15% within the next 24 months. The company aims to take the opportunity to tap the market offered by OEMs with companies like Tata Motors and Ashok Leyland increasing the use of radials. Invest $255.9 Million on Expansion The company will invest 12 billion ($255.9 million) over the next 3-4 years in expanding its capacity, including setting up a Greenfield car radial plant in South India. The company currently produces 158lakh units of tyres globally of its three brands, JK Tyre, Vikrant and Tornel. The four Indian plants contribute 92lakh units, while the rest come from the three Mexican plants. By March 2010, the total capacity in India would be expanded up to 9.8 million units including addition of 500,000 units of car radials at the plant near Gwalior in the Indian state of Madhya Pradesh. As part of its expansion plans, the company would set up a Greenfield car radial plant. The proposed plant would be set up at an investment of about 4 billion and would have an initial production capacity of 2.5 million units per annum. Firstcall India Equity Advisors Pvt Ltd 5

6 JK Tyre, Ceat hike tyre prices by up to 4% JK Tyre and Ceat have hiked prices by 2 to 4% from October 1 due to a substantial escalation in the price of its key raw material, natural rubber, in the last five to six months. Natural rubber prices have risen about 50% to Rs 10,500/100 kg in the last six months, according to Rubber Board data. Rubber accounts for about half of the total raw material cost of tyre companies. JK Tyre has hiked the price of its heavy commercial vehicles tyres by 2%, of light vehicles by three to 4% and of other vehicles by 2-3%. The company attributed the price hike to the escalation in raw material prices of natural and synthetic rubber, carbon black and nylon cord which have been steadily increasing. JK tyres face disruption due to strike at Kankroli plant The operations at JK Tyre & Industries` plant at Kankroli, Rajasthan, have been disrupted due to the sit in strike by a section of workmen. Efforts are being made in order to resume the operations. JK Tyre targets sales turnover of Rs 40bn this year The company is projecting a sales turnover of Rs 40 billion in the current fiscal. The industry suffered the brunt as up to 60% of the raw material is from petroleumbased products. However, the sector seems to be recovering from April 2009 onwards. JK Tyre likely to set up radial unit in TN The company is thinking of getting into radial tyre companies, it plans to set up shops near Chennai. The New Delhi-based corporate group has held preliminary discussions with the Tamil Nadu (TN) government as part of evaluating possible locations to establish a car radial facility. It is learnt that the company is considering TN and Karnataka to house its Greenfield unit. It is believed that JK Tyre has been scouting for land in the Sriperumbadur belt so that it could be located close to the OEs in the bustling auto corridor. The project would entail an investment of Rs 16 billion in phases. Firstcall India Equity Advisors Pvt Ltd 6

7 Care assigns `A` & `PR1` ratings to JK Tyre Industries Credit rating agency, CARE assigned PR1 rating to the CP /STD (commercial paper / short-term debt) programme aggregating Rs 200 million (outside the working capital limits) of JK Tyre & Industries (JKTI). Also, CARE assigned PR1 rating to the short-term bank facilities of JKTI. This rating is applicable for facilities having tenure up to one year. JK Tyre completes acquisition of Tornel The company concluded acquisition of 100% shareholding of Tornel in Mexico. The cost of acquisition is Rs 2.70 billion. The money for the acquisition was raised through internal accurals and debt structured through a special purpose vehicle (SPV). Company Profile JK Tyre & Industries Limited engages in the manufacture and distribution of tires, tubes, and flaps for the transportation industry primarily in India and Mexico. The company offers tires for trucks, buses, light commercial vehicles, passenger vehicles, and farm vehicle tires. It also provides truck radials, car radials, and off the road tires. In addition, the company franchises retail stores under the JK Tyre Steel Wheels brand name. It exports its products to the United States, Europe, South America, and the Middle East. The company was formerly known as J.K. Industries Limited and changed its name to JK Tyre & Industries Limited in April 2007 in order to capture the brand JK Tyre and its value in the company s name. JK Tyre & Industries Limited was incorporated in 1951 and is headquartered in New Delhi, India. JKT manufacturing facilities State / Country Rajasthan Rajasthan Madhya Pradesh Karnataka Karnataka Mexico Mexico Mexico Location Jaykaygram Kankroli Banmore Mysore Plant I Mysore Plant II Azcapotzalco Tultitlan Hidalgo Firstcall India Equity Advisors Pvt Ltd 7

8 Subsidiaries: J. K. International Ltd. J, K. Asia Pacific Ltd. J. K. Asia Pacific (S) Pte. Ltd, (Subs, of J, K. Asia Pacific Ltd.) Lankros Holdings Ltd. (w.e.f, 10, ) Sarvi Holdings Switzerland AG. (Subs, of Lankros Holdings Ltd.) (w.e.f, ) Sunrise Hold Co, S.A. De C.V. (Subs, of Sarvi Holdings Switzerland AG.) (w.e.f. 10, ) Empresas Tornel, S.A. De C.V. (ETSA) (Subs, of Sunrise Hold Co. S.A. De C.V. )* Comercializadora America Universal, S.A. De C.V. (Subs, of ETSA)* Firstcall India Equity Advisors Pvt Ltd 8

9 Compahia Hulera Tacuba, S.A. De C.V. (Subs, of ETSA)* Compahia Hulera Tornel, S.A. De C.V. (Subs, of ETSA)* Compahia Inmobiliaria Norida, S.A, De C.V. (Subs, of ETSA)* General de Inmuebles Industrials, S.A. De C.V. (Subs, of ETSA)* Gintor Administracion, S.A. De C.V, (Subs, of ETSA)* Hules y Procesos Tornel, S.A. De C.V, (Subs, of ETSA)*(became subsidiary on ) Associates: JK Lakshmi Cement Ltd. Hari Shankar Singhania Elastomer and Tyre Research Institute Valiant Pacific LLC. Company products JK Tyre & Industries manufactures and supplies tyres and tubes, and steel-belted radial tyres. The Company manufactures Radial and Bias 4-wheeler tyres for trucks, buses passenger cars, LCVs, tractors etc. Product Range International Truck / Bus LCV Query Form Domestic Truck / LCV Firstcall India Equity Advisors Pvt Ltd 9

10 Passenger Cars Farm Steel Wheels The best in products and service to its valued customers With the objective of meeting customer needs company has established a nation wide chain of franchised retail outlets branded as JK Tyre Steel Wheels. JK Tyre Steel Wheels is a One Stop solution for complete Tyre Sales & Service requirements of the customer. There are over 100 such JK Tyre Steel Wheels spread across the length and breadth of the country and are last mile customer access touch points. JK Tyre Steel Wheels has redefined tyre retailing by providing a wide range of JK Tyre passenger car tyres & tyre care solutions in an ambient environment. These showrooms are equipped with high technology wheel servicing equipment providing value added services like Computerized Wheel Alignment, Wheel Balancing, Automated Tyre Changing, Tyre Rotation, air care all under one roof. Well trained personnel provide guidance on tyre care & maintenance. Dial-a-Tyre From the pioneer and leader in radials in India comes yet another innovation India's first and only unique -"Dial-a-Tyre Service", delivering tyres at the customer's doorstep. Firstcall India Equity Advisors Pvt Ltd 10

11 Peer Group Comparison Name of the company CMP(Rs.) (As on December 19 th,2009) Market Cap. (Rs. Mn.) EPS (Rs.) P/E (x) P/BV (x) Dividend (%) JK Tyre &Industries Ltd Apollo Tyres ltd MRF Goodyear India Balkrishna industries Key Concerns Adverse Govt. policies Economic slow down. Highly competition Firstcall India Equity Advisors Pvt Ltd 11

12 Financials Results Update 12 months ended Profit and Loss A/C (standalone): Value(Rs. in million) SY08 *FY09 FY10E FY11E Description 12m 18m 12m 12m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Net Profit Equity Capital Reserves Face Value (Rs) Total No. of Shares EPS (Rs) Firstcall India Equity Advisors Pvt Ltd 12

13 Quarterly ended Profit and Loss A/C (standalone): Value(Rs. in million) 31-Mar Jun Sep Dec-09E Description 3m 3m 3m 3m Net Sales Other Income Total Income Expenditure Operating Profit Interest Gross Profit Depreciation Profit before Tax Tax Net Profit Equity Capital Face Value (Rs) Total No. of Shares EPS (Rs) *NOTE: Change in Accounting Period Till September 2007, the company was following its Financial Year end from October to September. Going forward, the Company has changed it Financial Year end from April to March. The Financial Statement for March 2009, reflect the figure for 18 months. Firstcall India Equity Advisors Pvt Ltd 13

14 Charts Net sales & PAT P/E Ratio (x) Firstcall India Equity Advisors Pvt Ltd 14

15 P/BV (X) EV/EBITDA(X) Firstcall India Equity Advisors Pvt Ltd 15

16 1 Year Comparative Graph JK Tyre & Ind BSE SENSEX Outlook and Conclusion At the market price of Rs , the stock is trading at 3.13 x and 2.94 x for FY10E and FY11E respectively. On the basis of EV/EBDITA, the stock trades at 1.38 x for FY10E and 1.44 x for FY11E. Price to book value of the company is expected to be at 0.96 x for FY10E and 0.73 x for FY11E respectively. EPS of the company is expected to be at Rs and Rs for the earnings of FY10E and FY11E respectively. The company s top line and bottom line is expected to grow at a CAGR of 14% and 47% over SY07 to FY11E. The company is looking to raise the share of exports to 50% from its Mexican subsidiary, Tornel, within a year. Firstcall India Equity Advisors Pvt Ltd 16

17 The company is planning to triple direct supply of truck and bus radial tyres to major companies like Tata Motors and Ashok Leyland in the coming two years. The company will invest 12 billion ($255.9 million) over the next 3-4 years in expanding its capacity, including setting up a Greenfield car radial plant in South India. The company concluded acquisition of 100% shareholding of Tornel in Mexico. We recommend BUY with a target price of Rs for long term. Industry Overview The Indian auto component industry is one of India's sunrise industries with tremendous growth prospects. From a low-key supplier providing components to the domestic market alone, the industry has emerged as one of the key auto components centres in Asia and is today seen as a significant player in the global automotive supply chain. India is now a supplier of a range of high-value and critical automobile components to global auto makers such as General Motors, Toyota, Ford and Volkswagen, amongst others. As per an Automotive Component Manufacturers Association of India (ACMA) report, the turnover of the auto component industry was estimated at over US$ 18 billion in , an increase of 27.2 per cent since It is likely to touch US$ 40 billion, increasing India s share in the global auto component market from 1 per cent to 3 per cent by Aided by a 7 per cent growth in the original equipment manufacturers (OEM) segment and an 8.5 per cent rise in exports and after-market segment, it is expected that auto ancillary production would grow by 8.2 per cent in , according to a report by the Centre for Monitoring Indian Economy (CMIE). Investments in the auto component industry were estimated at US$ 7.2 billion in and are likely to touch US$ 20.9 billion by In Tamil Nadu alone, nearly US$ 1 billion have been invested by some of the major trye companies, such as Apollo Tyres, ATC Tires, MRF, Dunlop and TVS Srichakra. Exports of auto components grew at the rate of 35 per cent during and touched US$ 3.6 billion in It is estimated to reach around US$ 20 billion-us$ 22 billion by During April-January , exports grew by 27.3 per cent to US$ 2.12 million. A majority of Indian exports are sent to Europe and North America. Firstcall India Equity Advisors Pvt Ltd 17

18 India will be the next destination for the Automotive Testing Expo to be hosted by UKIP Media at Hyderabad next year. The expo will now be an annual event for the country and will showcase latest technologies, including simulation, for new automotives and components. Indian companies are also expanding their footprints abroad. For instance, TVS Logistics, a part of the TVS group, acquired one of the largest after market logistics companies in the UK. The company will undertake an investment in excess of US$ million in Multipart Holding in the next 18 months in order to expand its operations in the UK and rest of Europe. Further, Coimbatore-based Elgi Rubber Company has formed a fully owned subsidiary company in Texas, US under the name of Elgi Rubber Company LLC, investing upto US$ 5 million on the venture. Demand for tyres is derived from demand for automobiles. Therefore it is a derived demand product and its fortunes are very closely linked to those of the auto segment. Within the tyre industry the trucks and buses (T&B) segment accounts for more than 70% of sales. Though scooters and motorcycle tyre demand also plays a vital role, in value terms, CVs gain significance. Tyre varieties can be divided into two categories cross ply and radial. The domestic industry is dominated by cross-ply tyres, due to the poor conditions of roads in the country and overloading of CVs. This is also the reason why penetration of radial tyres in the CV segment is negligible and finds presence only in the passenger car segment. On the other hand, radial tyres dominate western markets. Radial tyres can be differentiated on the type of belt used fiberglass, steel and nylon. Worldwide, steel belted radials are more popular due to their performance advantage. Firstcall India Equity Advisors Pvt Ltd 18

19 There are three major consumer segments for tyres namely replacement segment, Original Equipment Manufacturers (OEMs) and exports. Though fortunes of the sector are closely tied with the automobile industry, replacement demand continues to remain the key growth driver. Replacement demand accounts for as high as 57% of industry volumes. However, the contribution from OEM and replacement segments varies across sub-segments in the auto sector. For instance, for the passenger car segment, demand is balanced from replacement and OEM categories i.e. 50:50. Another key transition that is taking place in the industry is the entry of multinationals like Good Year, Bridgestone and Michelin in the domestic market. MNC tyre makers have cornered a higher market share in India in the last three years due to their international relationships apart from superior technology. Since Honda, Hyundai and Toyota have an international sourcing agreement with Bridgestone; it is also the preferred supplier in India. Goodyear is believed to be the preferred supplier for Ford India. An extensive distribution network and strong brand recall are factors critical to tyre sales. Brand building is given a lot of importance by manufacturers, who allot 2-3% of sales to advertising. With the introduction of radial tyres, even technology has assumed significance. All foreign cars introduced in the country are on radial tyres. Raw materials constitute 60%-70% of production cost of tyres. Natural rubber and Nylon cord fabrics are the most critical raw materials as it accounts for 50% of total raw material cost. Since most of the raw materials are crude derivatives, a rise in prices has a negative impact on margins. Firstcall India Equity Advisors Pvt Ltd 19

20 The export market holds tremendous potential for domestic manufacturers. Tyre exports have grown at an annual compounded rate of 27% over the past 10 years. Indian tyres are exported to 56 countries, which are primarily developing countries. Destination India According to the Investment Commission of India, global automobile manufacturers see India as a manufacturing hub for auto components and are rapidly increasing the value of components they source from India due to: India's cost competitiveness in terms of labour and raw material. Its established manufacturing base. Makers of luxury cars are increasingly looking at making India a sourcing hub for components, besides using more local components in cars for the Indian market. BMW is likely to sign the first direct sourcing deal with local vendors by the end of this year. Skoda Auto India is looking at increasing localisation for its small car Fabia to over 50 per cent over the next two years. Mercedes Benz India expects growth in sourcing from India to continue at 10 per cent. Foreign Investments India enjoys a cost advantage with respect to casting and forging as manufacturing costs in India are 25 to 30 per cent lower than their western counterparts. Seeing the growing popularity of India in the automotive component sector, the Investment Commission has set a target of attracting foreign investment worth US$ 5 billion for the next seven years to increase India's share in the global auto components market from the existing 0.9 per cent to 2.5 per cent by Swiss auto clamps maker, Oeitker Group, has inaugurated the first phase of its manufacturing facility in India. It has invested US$ million in Phase I and hopes to start work on the second phase by the end of next year. The Tamil Nadu state cabinet recently gave clearance to the French tyre major, Michelin s proposal to set up a US$ million greenfiled project near Chennai, Tamil Nadu. A memorandum of understanding (MoU) has been signed by the US auto giant, Ford Motors, with the Tamil Nadu government to set up a unit with a capacity of 250,000 engines a year. Firstcall India Equity Advisors Pvt Ltd 20

21 German auto company, Volkswagen has commenced sourcing components from India for its Russian plant and is also looking at sourcing light systems, plastic-related items and metals for its European plants. Domestic Investments The market is so large and diverse that a large number of players can be absorbed to accommodate buyer needs. The sector not only has global players looking to invest and expand but leading domestic component companies are also pumping in huge sums into expanding operations. An auto park is coming up near Hyderabad with investments worth over US$ million from around 34 automotive ancillary units. This is in addition to a US$ million Greenfield project being set up by MLR Motors near the park. Moreover, Indian tyremakers are rolling out investment plans worth US$ 1.24 billion, due to the rising popularity of radial tyres in the commercial vehicles segment. Some other investments include: Apollo Tyres is to scale up investment at its upcoming radial tyre project at Oragadam in Tamil Nadu from US$ million to US$ million. Hero Motors will invest US$ million in association with Austrian firm BRP Powertrain for manufacturing automotive transmissions in India. Indian arm of Swedish automotive component maker SKF is investing US$ 30 million in a new ball bearings manufacturing plant at Haridwar. Policy Initiatives The government has taken many initiatives to promote foreign direct investment (FDI) in the industry. Automatic approval for foreign equity investment up to 100 per cent of manufacture of automobiles and components is permitted. The automobile industry has been delicensed. There are no restraints on import of components. The government has envisaged the Automotive Mission Plan 2016 to promote growth in the sector. It targets: Firstcall India Equity Advisors Pvt Ltd 21

22 Emerging as the global favourite in the area of design and manufacture of automobiles and auto components. Taking the output to US$ 145 billion, accounting for more than 10 per cent of the GDP. Offering additional employment to 25 million people by Looking Ahead With investments around US$ 15 billion slated for the sector over the next few years, the prospects for India's auto market are bright. Even though India's auto component industry has conventionally relied on exports for its profits, the domestic market itself is ripe with rapidly growing opportunities. Industry experts are hopeful that the country will be able to offset China and other Southeast Asian countries' traditional manufacturing advantage in the coming years, facilitating the industry's achievement of its targeted market value of US$ 40 billion by Disclaimer: This document prepared by our research analysts does not constitute an offer or solicitation for the purchase or sale of any financial instrument or as an official confirmation of any transaction. The information contained herein is from publicly available data or other sources believed to be reliable but we do not represent that it is accurate or complete and it should not be relied on as such. Firstcall India Equity Advisors Pvt. Ltd. or any of it s affiliates shall not be in any way responsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report. This document is provide for assistance only and is not intended to be and must not alone be taken as the basis for an investment decision. Firstcall India Equity Advisors Pvt Ltd 22

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