ET INTELLIGENCE GROUP 19/NOV/2014: JK Tyre & Industries is likely to see multiple positive triggers for the earnings growth in coming years led by an improved product mix and augmented capacity. This will lend credence to investors regarding the company\'s ability to generate sufficient cash flows to service its debt burden and boost the company\'s stock price to bridge its valuation gap with peers. JK Tyre is the market leader in the domestic truck and bus radial (TBR) tyres market with a 34 per cent share. This enables the company to take the advantage of the shift in consumers\' preference to radial technology over nylon tyres or cross-ply tyres. It will also benefit from a gradual revival in truck sales during the past few months. JK Tyre has shown a stronger volume growth from CV makers compared with the industry growth in H1 of current fiscal. The company reported volume growth of 47 per cent in the segment against 40 per cent growth for the industry. A growing preference to radial tyres will also boost operating profitability in the long term, considering the premium pricing of these tyres. \"Our margins are expected to increase as radialisation picks up in the domestic market. TBR tyre penetration is at 29-30 per cent in India and is likely to increase to 65-70 per cent in the next three years. The key driver for our margins is the enriched product mix,\" said Arun Bajoria, president & director, JK Tyre. The Delhi-based company posted an operating profit margin of 12.3 per cent on a consolidated basis in the September 2014 quarter.
This means volume growth will not be a problem unlike other players which have expanded their nylon tyre capacities. Second, 30-40 per cent of the fresh loan of Rs 1,030 crore, to be raised in the next three years, will be in foreign currency. Since the foreign loan will be at a relatively lower interest rate, it will bring the overall cost of borrowings down. Theoretically, CV tyre volume growth moves in tandem with GDP growth while passenger car volume growth is 1.5 times of the GDP growth. It has a debt of Rs 2,297 crore on consolidated basis at the end of the September 2014 quarter. The company expects its standalone debt to be in the range of Rs 1,600-1,700 crore by 2016. Its Mexican unit (known as JK Tornel), which it acquired in 2008, has shown a higher growth in the radial tyre segment. It is expanding passenger car production capacity by 50 per cent at its Mexican unit and turning the facility of cross-ply tyres into industrial tyres. Although the Mexican unit is supplying tyres primarily to Nissan city cabs run at New York, it is in the process of receiving orders from other global automakers.
Bajoria believes that debt-servicing will not be a problem due to two reasons. First, products manufactured at the new facility will have a healthy and sustainable demand. The stock trades at a 50 per cent discount to local peers, mainly due to fears of a leveraged balance sheet. But, an increasing revenue contribution from the high-margin TBR segment, clubbed with its disciplined pricing policy, is likely to relieve the debt overhang on the stock. JK Tyre Matrix Operation Fig in crores Except margin Q2FY - 2014 Q1FY - 2015 Q2FY - 2015 YoY Growth (%) EBITDA Margin (%) 11.65 10.28 12.4 - 1275 - 1107 2505.77 - 2297.94 -8.29 Source - BSE