Rubber Defines The Path For JK Tyre

JK Tyre announced their Q1 FY13 results yesterday, posting tremendous growth in the margins. The stock price of JK Tyre has been trading higher in the range of 4 and 5 per cent since the results have been announced. 

The tyre industry had been under tremendous pressure over rising rubber prices during FY11 and FY12. Rubber prices had proliferated resulting in the profit of tyre companies being hurt massively. In FY11 and FY12, the operating profit of JK Tyre saw a YoY decline of 30.72 per cent and 16.32 per cent respectively. The net profit for the same period had decline by 62.49 per cent and 82.06 per cent. Rubber accounts for a little above 50 per cent of the raw material input for tyre companies. Moreover, most of the inputs being petro products, prices were seen rocketing with oil prices. During FY11, the topline of the company though had seen a robust growth of 30.49 per cent due to the strong growth seen in the automobile industry. 

Since the beginning of FY13 though, the above trend has been reversing. The automobile sector has been slowing down, affecting the topline of JK Tyre. For Q1 FY13, the company announced a modest growth in the topline with sales increasing by 2.14 per cent to Rs.1,443.26 crore from Rs.1,413.08 crore in Q1 FY12. The operating profit and the net profit for Q1 FY13 have spiked immensely displaying phenomenal growth in the financials and margins. The operating profit increased from Rs.64.52 crore in Q1 FY12 to Rs.125.87 crore in Q1 FY13, almost doubling while the net profit increased from Rs.0.96 crore in Q1 FY12 to Rs.24.71 crore in Q1 FY13. Rubber prices for RSS-3, RSS-4, RSS-5, the grades most commonly used in automobile tyres and radials, have dropped in the range of 22.79 per cent and 27.46 per cent in each of May and June 2012.

There is extreme dependency of the financials of JK Tyre on the prices of raw materials, considering material costs forming most of the costs and the high volatility seen in input costs. Looking beyond the raw material blues, JK Tyre has been performing in a very promising manner. Radialisation has been rapidly changing the trends in the tyre industry lately, though this change was rather tardy since the introduction of radials in India. Radialisation has crossed the 98 per cent mark in the passenger car segment and is at 15 per cent for Medium and Heavy Commercial Vehicles (M&HCV) and 18 per cent for Light Commercial Vehicles (LCV). The pace of growth in commercial vehicle radialisation and in the sales of LCVs provides the company with huge potential of growth. The company is well capturing this momentum with 27 per cent of their existing production of Truck and Bus tyres comprises of radials.

The company has also been making heavy capital expenditures to ramp up production. In FY12, the company expanded the production of truck and bus tyres to 10 lakh per annum in the Mysore plant. In the new Chennai plant too, which has a capacity of 2 lakh Truck and Bus tyres per annum, there are plans of capacity addition to make it 4 lakh per annum. Along with capacity increases, the company has also been launching new products in this segment to make the most of the opportunity and to strengthen its position as a market leader in the segment.

Having looked at the performance, industry and its correlation with other factors, and the easing of raw material prices, we have a positive outlook for the company’s performance. At the same time, the YTD returns of JK Tyre are 53.54 per cent, which makes the capital appreciation high enough to pose a downside risk. Moreover, the trailing PE of JK Tyre stands at 12.12x which is a tad higher than the industry PE.  Thus, we would recommend caution while investing coupled with a close watch on rubber prices.