JK Tyre: Set To Outperform

JK Tyre Industries announced a robust set of numbers post market hours on May 27. The company’s quarterly and annual performance has been impressive. Even in a subdued environment, it has managed to boost profitability by improving various operating parameters. With a positive outlook in the current year, the performance is only expected to get better.

In Q4FY13, the revenues of JK Tyre came in at Rs 1382.83 crore, declining by 7.19% as compared to that in Q4FY12. The fall came with the current operating environment in the automobile industry, which has been rather subdued. Weak consumer demand has resulted in drastically lower sales to OEMs (Original Equipment Manufacturers), and thus lower revenues.

Of late, rubber prices are stabilising at a lower level. In Q4FY13, the average price of RSS-3 and RSS-4 grade rubber saw a decline of 15% from that in Q4FY12. Considering that rubber constitutes around 50% of the total raw material cost, this decline comes as a major profitability booster. During the quarter, JK Tyre’s ‘cost of materials consumed’ dropped by 20.24% as compared to Q4FY12. As a percentage of net sales, this came in at 55.42%, which is significantly lower than the figure of 64.49% seen in Q4FY12. In Q4FY13, the company saw an increase of 12.68% in its EBIT to Rs 103.41 crore.

On the other hand, its net profit declined by 60.97% to Rs 33.70 crore. However, it must be noted that the higher profit seen in Q4FY12 was mainly on account of a boost in profitability resulting out of higher ‘Exceptional Items’. With this factored in, the company’s profitability in Q4FY12 would come in at a mere Rs 5.18 crore, which is way lower than that seen in Q4FY13.

JK Tyre’s performance on a consolidated basis for FY13 has also been impressive, as it reported 2.98% growth in revenues over FY12. Although the revenues from India declined by 0.89%, its performance in Mexico (which contributes to a little under 30% of total revenues) through its subsidiary Tornel was very strong. The revenues from this segment grew by 20.58% on a yearly basis, boosting its overall performance.

In addition to the financial results, the company also said that it is planning to invest Rs 800 crore to double the capacity at its Chennai plant over the next two years. Furthermore, it will also invest approximately USD 25 million in Tornel to increase capacity by 25% in the next 12 months. Apart from these, JK Tyre would carry out investments to the tune of Rs 125 crore at its two facilities in Mysore and Kankroli.

With easing of pressure on interest rates and inflation, the outlook for the automobile industry is gradually improving. Consumer demand is expected to pick up soon in the industry and the tyre industry can only benefit from it. Moreover, the softening of raw material prices has been contributing to the profitability of tyre companies.

In this background, JK Tyre is set to grow with continued investment and capacity augmentation. It is trying to gear up for the potential increase in volumes and also to catch up on the increasing trend of radicalisation in the industry. Hence, we remain bullish on the long-term prospects of JK Tyre.