Recommendation from an Auto Ancillaries - Tyres & Rubber Products Sector

This column gives you scrip chosen by the research team during the fortnight that is fundamentally strong and expected to give good capital appreciation over a time period of 1 year.

JK TYRE AND INDUSTRIES: SPINNING WITH PROFITABLE POTENTIAL

HERE IS WHY
✓   Demand for tyres on the rise
✓   Production of electric vehicles to trigger further growth
✓   Increasing global market share

I ndia has become the fastest-growing major economy in the world. This fast growth, coupled with rising incomes, a boost in infrastructure spending and increased manufacturing incentives, has accelerated tremendous growth in automobile industry. Its impact will be on automotive parts, which has vast room for growth, within which the tyre industry will command a premium position. The India tyre market is projected to grow at a CAGR of 6.6 per cent between 2024 and 2032 and reach a volume of around 339.37 million units by 2032. Considering all these factors, our choice recommendation is JK Tyre and Industries Limited (JKIL).

JKIL is the flagship company of the JK Group. It is one of the leading tyre manufacturers in India and among the top 25 manufacturers in the world with a wide range of products catering to diverse business segments that includes truck and bus, LCV (light commercial vehicles), passenger cars, MUV (multiutility vehicles) and tractors. In Q4FY24, on a consolidated basis, its revenue rose by 1.82 per cent YoY to ₹3,698.45 crore compared to ₹3,632.47 crore from the previous year’s same quarter. On a sequential basis, its revenue increased by 0.29 per cent.

The PBIDT excluding other income increased by 27.90 per cent to ₹481.16 crore YoY as compared to ₹376.20 crore from the previous year’s same quarter, while sequentially decreasing by 12.54 per cent. The net profit stood at ₹174.90 crore compared to ₹112.52 crore, a YoY increase of 55.44 per cent, while sequentially decreasing by 22.95 per cent from ₹226.99 crore. Going ahead, the company expects 8-10 per cent revenue growth in FY25 against 6 per cent growth for the tyre industry. The Indian tyre manufacturers are witnessing an increase in capacity utilisation driven primarily by the replacement demand. The replacement sector constitutes about two-thirds of the tyre demand. Secondly, by 2030, the Indian government has pledged to have 30 per cent of new car sales in the country to be electric. Due to this the Indian automobile industry is expected to continue its growth trajectory. For FY24, 61 per cent of the revenue of company came from replacement while 23 per cent from OEMs and the rest 16 per cent from exports.

To revolutionise the Indian tyre business, it bought a start-up that has been developing smart tyres. This company was the first in India to introduce a tyre pressure monitoring system (TPMS) based on sensor technology. The company has innovated self-healing puncture protection tyres and green tyres for better fuel efficiency. In India, it has introduced a whole line of EV-specific smart radial tyres for all classes of trucks, buses, LCVs and passenger automobiles.

The company has a strategy to strengthen its market position across segments, increase global presence, and derive benefits from acquisitions and churn out a premium product portfolio. On the valuation front, the shares of the company are trading at a PE of 13.7 times which is lower than the industry PE of 23.9 times and its three-year median PE of 15.2 times. The company has a three-year average return on equity (ROE) of 13.2 per cent and a return on capital employed (ROCE) of 13.2 per cent. Considering the sector’s growth potential and the increasing demand for tyres, we recommend BUY