Equinomics Research Recommendation JK Tyre

Mumbai based Equinomics Research  like JK Tyre and firmly believe that this stock can give a minimum return of 24 % from the current level.

However, if the FIIs, who hold just 2.8 % stake in the company, decide to increase their penetration in the stock, then the same could result in improvement in its valuation and hence, the stock can give a return of as high as 52 % from the current market price of Rs.290. 

Equinomics Research  convictions in the stock emanate from following rational:

The natural rubber prices have fallen from as high as Rs. 240 per kg 4 years ago to Rs.145 per kg (for RSS4 Grade which is primarily used in tyre making) now. It has fallen by 11 % from the year (2014) beginning price of  Rs.163 per kg which is highly positive for all tyre companies including JK Tyre.

The cost of natural rubber accounts for about 40 % sales. This crash in rubber prices has helped JK Tyre to improve EBITDA margins to double digits 11 % in FY2014. The global rubber prices are expected to remain suppressed at least for another 2 to 3 quarters due to slowdown in the auto sales in many parts of the world. 

Going forward, on back of lower rubber prices, JKTIL is expected to maintain double digit margins leading to higher profitability;

JK Tyre’s Mexican subsidiary mitigates the geographical concentration risks  the capacity utilization for Tornel increased to ~90% from 65%. Further the company is planning to spend Rs.140 crore in Mexican subsidiary to further improve the capacity;

To combat the sluggish market conditions, JKT undertook several strategic actions by renewing its thrust in the replacement market as also adding new OEMs. It widened its network of customer touch points which enabled it to deliver better service to its customers.

Aggressive efforts resulted in export recording a 23 % increase during the year FY2014;

Also, we might see a fall in net debt levels going forward strengthening the balance sheet -the Net Debt / Equity ratio is expected to fall from 2.1 % currently (it was 2.6 % in FY13);

Economic revival on back initiative taken by new government to revive capex cycle augurs well for JKT. Also strong volume growth in the domestic and export markets to result in higher earnings going ahead.

This coupled with lower rubber prices will help JKT to maintain double digit margins;

Consolidated Annual Financial Performance for FY2014 points to very impressive performance partly due to severe fall in natural rubber prices.  While its consolidated revenue (including the revenue of JK Tornel) increased by 9 % to Rs. 8,279 crore, its operating profit rose yoy by 41 % to Rs.890 crore and net profit increased by 29 % to Rs.263 crore over the previous year. JK Tyre reported a consolidated EPS of Rs. 64 in FY2014 and this should be noted that it attained this EPS level after making an exceptional loss of Rs. 59.52 crore in FY2014;

The stock trades at mere 4.5x FY2014 Consolidated EPS of Rs.64/. At CMP, the stock trades at a PE of 3.7x its FY2016E EPS of Rs.80  (conservative estimate). CEAT, which has lower sales volume as compared to JKT, enjoys a PE multiple of 6.7x on FY2014 EPS.

Equinomics Research recommend  investors to accumulate (with one year investment perspective) the stock at current price of Rs.290/ with a target price of Rs.360, assuming 4.5x valuation on one-year forward EPS.

However, if the FIIs increase their penetration in the stock, then our expected price target for the stock can move up to Rs.440 assuming 5.5x FY2016E EPS of Rs.80.

 Hence, Equinomics Research suggest our investors to accumulate the stock at current price of Rs.290. .

Disclosure: I, G.Chokkalingam, invested in JK Tyre (more than 30 days ago) and hence, suggest all investors to consider this fact before investing in this stock;

 

G.Chokkalingam

G.Chokkalingam

Founder & Managing Director

Equinomics Research & Advisory Pvt Ltd

18- 3/A, Ekta CHS, Shiv Dham Complex

(Opp to Oberoi Mall)

Filmcity Road, Malad (East)

Mumbai - 400 097

 chokka.g@equinomics.in

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