JK Tyres and Industries (JKIND) : Rock Bottom Margins, Upside Potential Strong

ICICI Securities Limited
Result Update
May 27, 2011
Rating matrix
Rating : Buy JK Tyres and Industries (JKIND)
Target : | 118
Target Period : 12-15 months | 95
Potential Upside : 24%
WHAT’S CHANGED…
Key Financials PRICE TARGET....................................................................................................Unchanged
(| Crore) FY10 FY11E FY12E FY13E EPS (FY12E)......................................................................... Changed from | 20.7 to | 17.6
Net Sales 3677.7 4831.3 5432.7 6592.3
EPS (FY13E)..........................................................................................Introduced at | 29.8
EBITDA 405.6 276.9 354.6 475.8
Net Profit 163.5 55.1 72.3 122.5 RATING....................................................................................... Changed from Hold to Buy
EPS (|) 39.8 13.4 17.6 29.8
Rock bottom margins, upside potential strong…
Valuation summary JK Tyres and Industries (JKTIL) reported its Q4FY11 results that were
FY10 FY11E FY12E FY13E above our estimates with topline coming in at | 1339.1 crore (I-direct
PE (x) 2.4 7.1 5.4 3.2 estimate: | 1251.6 crore). It grew 28.3% YoY and 14.0% QoQ due to
Target PE (x) 3.0 8.8 6.7 4.0 strong growth in the TBR and PV segment with strong year-end buying in
EV to EBITDA (x) 2.9 5.6 5.2 4.0 Q4FY11. The EBITDA margin as expected continued to remain under
Price to book (x) 0.6 0.5 0.5 0.4 pressure at 5.0% (I-direct estimate 4.6%), a 260 bps YoY decline on
RoNW (%) 25.9 7.7 9.4 14.3 higher rubber prices (average cost of ~|235/kg). However, lower than
RoCE (%) 20.0 9.9 10.5 13.2 anticipated other expenses helped lent cushion to EBITDA margins. The
decline in other expenses was mainly due to lower selling expenses in the
Stock data TBR segment. The bottomline came in at | 12.5 crore (I-direct estimate:|
Mcap |390.7crore 7.8 crore) mainly due to lower tax rates.
Debt (FY10) |860.2crore
Cash (FY10) |63.3crore Highlights of the quarter
EV |1250.9crore JKTIL is the market leader in the radial truck and bus segment (TBR). In
52 week H/L 204 / 77.4
line with that its capacity at Vikrant has been commissioned from May
Equity cap |41.1crore
2011. Radial demand continues to be on the upswing with TBR segment
Face value |10
MF Holding
radial penetration reaching ~18%. The Chennai facility is also running on
7.3%
schedule and would start production from October 2011. The company
FII Holding 7.8%
has undertaken a pricing action in April-May 2011 of ~7-8% to mitigate
some costs pressures. JKTIL has capex plans of | 1130 crore in FY12E of
Price movement which ~| 300 crore has been spent till now. The ever rising input prices
7,000 450 for tyre companies remain a serious concern on margins. Rubber prices
6,000 400 (RSS-4), which had begun a surge in prices since Q1FY11, have continued
350 to remain at life-time high at~ | 220-230/kg with average prices up ~55%
5,000
300
4,000
YoY. JKTIL has expressed interest in de-risking its business from the cost
250
200 side and in view is looking at setting up rubber plantations in the future.
3,000
2,000
150 Valuation
100
1,000 50 With moderate growth (~8-10%) in TBR segment and higher growth in
0 0 PV segment (12-15%), the revenue outlook remains positive. However, in
Jun-10 Sep-10 Dec-10 Feb-11 May-11 the near term, sticky rubber prices remain the primary concern and a
Price (R.H.S) Nifty (L.H.S) decline in it could provide upsides. At the CMP of | 95, the stock is
trading at 5.4x FY12E EPS and 3.2x FY13E EPS. We value the stock at 4.0x
FY13E EPS of | 29.8 to arrive at a target price of | 118. Our target price
Analyst’s name
implies 24% upside. We have changed our rating from HOLD to BUY.
Karan Mittal Exhibit 1: Financial performance
karan.mittal@icicisecurities.com (| Crore) Q4FY11 Q4FY11E Q4FY10 Q3FY11 YoYchg(%) QoQchg(%)
Nishant Vass Net Sales 1339.1 1251.6 1043.6 1174.4 28.3 14.0
nishant.vass@icicisecurities.com EBITDA 67.3 57.3 79.2 61.9 -15.0 8.77
EBITDA Margin (%) 5.0 4.6 7.6 5.3 (260) bps (30) bps
Depreciation 23.1 22.0 22.3 22.9 3.8 1.0
Interest 29.1 24.0 22.3 22.9 30.5 27.0
Reported PAT 12.5 7.8 27.0 9.1 -53.8 36.3
EPS (|) 3.0 1.9 6.6 2.2 -53.8 36.3
Source: Company press release, ICICIdirect.com Research
ICICIdirect.com | Equity Research

Exhibit 2: Sales performance

FY11 witnessed strong domestic automobile growth of ~28%, 1500
which reflected in strong net sales growth. However, in FY12 we
remain moderately optimistic over growth with slowing down
1346.3
domestic OEM growth
1178.5
1178.5
1178.5
1000
1047.6
(|crore)
941.4
900.7
874.5
874.5
854.2
802.0
782.2
500
Q4FY08
Q5FY09
Q6FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Source: Company, ICICIdirect.com Research
Raw material costs have seen an increase of 260 bps YoY Exhibit 3: Net raw material expense trend
mainly due to ~57% higher rubber prices YoY. Rubber prices
80 77.0 77.0 76.1
continued to rise unabated with lifetime high prices at ~| 220- 75.0
230/kg, which did not seem to witness strong declines 75 71.8 71.8 71.8
69.9
68.5
70
64.9
62.9
(%)
65
59.9
60
55
50
Q4FY08
Q5FY09
Q6FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11
Exhibit 4: EBITDA margin trend

The rise in input prices has led to a decline in EBITDA margins as 16
14 14.5
end-product prices have been increased in a similar fashion
Even though the topline has improved correspondingly YoY, the 12 11.8 12.1
margins on the EBITDA front have declined 10
8 8.4
7.6
(%)
6
5.3 5.3 5.3 5.0
4
2
1.2
0 -0.6 -0.6
-2
Q4FY08
Q5FY09
Q6FY09
Q4FY09
Q1FY10
Q2FY10
Q3FY10
Q4FY10
Q1FY11
Q2FY11
Q3FY11
Q4FY11

Page 2
Exhibit 5: Raw material and EBITDA margin trend

74 12.0
73.0 11.0 73.1
72 72.4 10.0
9.1 71.4
70 8.0
7.2
6.5
68 6.0 6.0
(%)
(%)
5.8
66.3 66.6
66 4.0
64 2.0
62 0.0
FY12E
FY13E
FY07
FY09
FY10
FY11
Exhibit 6: Monthly rubber prices trend (|/Kg)

Natural rubber (RSS-4) prices have broken the ceiling and
have risen more than two times since March 2009
leading to serious price concerns. JKTIL has increased 250
prices by 7-8% in April-May 2011 in order to mitigate
rising cost pressures 200
(|/Kg)
150
100
50
Sep-09
Sep-10
Jan-09
Mar-09
Jul-09
May-09
Nov-09
Jan-10
Mar-10
Jul-10
May-10
Nov-10
Jan-11
Mar-11
May-11

Page 3
Valuation
With moderate growth (~8-10%) in the TBR segment and higher growth
in the PV segment (12-15%), the revenue outlook remains positive. JKTIL
is undertaking strong capex activities for expansion of radial tyre
capacities across TBR and PV segment, which has created a debt
overhang on the stock. However, with higher revenue and operating
leverage coming through newer capacities, we expect this concern to
decline, going forward. However, in the near term, sticky rubber prices
remain the primary concern and a decline in it would provide upside
potential for the stock. At the CMP of | 95, the stock is trading at 5.4x
FY12E EPS and 3.2x FY13E EPS. We have valued the stock at 4.0x FY13E
EPS of | 29.8 to arrive at a target price of | 118. Our target price implies a
24% upside. We have changed our rating on JKTIL from HOLD to BUY.
Exhibit 7: Revised financials

FY12E FY13E
(| crore) Old New Introduced % Chg
Net sales 5,596.4 5,432.7 6,592.3 (2.9)
EBITDA 467.7 354.6 475.8 (24.2)
EBITDA (%) 8.4 6.5 7.2 (190) bps
Net profit 161.1 72.3 29.8 (55.1)
EPS (|) 39.2 17.6 29.8 (55.1)
Exhibit 8: Valuation table

Sales Growth EPS Growth PE EV/EBITDA RoNW RoCE
(| cr) (%) (|) (%) (x) (x) (%) (%)
FY10 3677.7 31.6 39.8 83.7 2.4 2.9 25.9 20.0
FY11E 4831.3 31.4 13.4 -66.3 7.1 5.6 7.7 9.9
FY12E 5432.7 12.4 17.6 31.3 5.4 5.2 9.4 10.5
FY13E 6592.3 21.3 29.8 69.4 3.2 4.0 14.3 13.2

Page 4
ICICIdirect.com coverage universe (Auto ancillaries)

Apollo Tyres Sales (| cr) EPS (|) PE(x) EV/E (x) RoNW (%) RoCE (%)
Idirect Code APOTYR CMP(|) 67 FY10 5036.6 8.4 4.3 5.6 27.0 32.0
Target(|) 64 FY11E 5490.5 3.6 10.1 10.2 10.9 12.0
Mcap (|cr) 3277.9 % Upside -4.5 FY12E 6347.8 3.3 11.0 9.1 8.5 10.1
FY13E 7296.3 5.6 6.5 6.9 13.0 12.9
Automotive Axle
Idirect Code AUTAXL CMP(|) 403 SY09 267.2 3.6 113.2 20.4 3.1 6.3
Target(|) 477 SY10 669.7 29.2 13.8 7.9 23.3 27.0
Mcap (|cr) 609.8 % Upside 18.4 SY11E 965.3 39.3 10.3 6.1 26.0 30.1
SY12E 1113.3 50.3 8.0 4.9 26.9 32.9
Balkrishna Industries
Idirect Code BALIND CMP(|) 147 FY10 1387.0 21.6 6.8 9.6 36.6 32.4
Target(|) 166 FY11E 2002.9 19.2 7.6 5.5 24.9 22.6
Mcap (|cr) 1421.8 % Upside 12.9 FY12E 2422.1 23.3 6.3 6.9 24.0 20.2
FY13E 2800.2 25.5 5.8 6.1 21.3 16.8
Bharat Forge
Idirect Code BHAFOR CMP(|) 312 FY10 3327.6 -2.9 NA 22.4 NA NA
Target(|) 373 FY11E 5088.0 12.1 25.3 11.5 15.3 14.7
FY13E 6724.7 23.5 13.0 7.1 18.3 25.8
JK Tyres
Idirect Code JKIND CMP(|) 95 FY10 3677.7 39.8 2.4 2.9 25.9 20.0
Target(|) 118 FY11E 4831.3 13.4 7.1 5.6 7.7 9.9
FY13E 6592.3 29.8 3.2 4.0 14.3 13.2
Subros
Idirect Code SUBROS CMP(|) 30 FY10 906.5 4.6 7.4 3.8 14.2 18.7
Target(|) 35 FY11E 1091.0 4.7 7.2 4.9 12.9 12.4
FY13E 1,512.2 6.9 4.9 3.3 15.3 15.7
Motherson Sumi
Idirect Code MOTSUM CMP(|) 226 FY09 2595.6 5.0 66.2 34.1 26.7 9.0
Target(|) 200 FY10E 6702.2 6.5 25.3 12.8 24.9 18.3
Mcap (|cr) 6529.955 % Upside -11.7 FY11E 8176.6 9.1 20.2 8.2 25.6 28.0
FY12E 9813.0 11.0 16.7 6.0 26.5 32.1
Exide Industries
Idirect Code EXIIND CMP(|) 161.2 FY10 3794.0 6.3 25.5 14.4 31.0 41.7
Target(|) 169.2 FY11E 4575.6 7.8 20.6 14.1 26.9 32.4
FY13E 6495.8 10.6 15.1 9.1 24.2 32.7

Page 5
Exhibit 9: Recommendation history

250 TP:178,Buy
TP:179, Buy
TP:118, Buy
200
150
100
TP:186, Buy
50
0
Jun-10 Jul-10 Sep-10 Oct-10 Dec-10 Jan-11 Mar-11 Apr-11 May-11
Price (R.H.S)

Page 6
ICICIdirect.com Universe price movement vis-à-vis BSE Auto index
Exhibit 10: OEM comparison with BSE Auto

The chart compares the movement of OEM stocks in the 200
ICICIdirect.com Universe with the BSE Auto index, thereby 190
180
reflecting the degree of mimicking of the index 170
160
150
Since August 2010, Bajaj Auto, Tata Motors and M&M 140
130
have outperformed while Maruti Suzuki, Escorts, Hero 120 BSE Auto
Honda have underperformed in comparison to the index by 110
100
being divergent on the upside and downside, respectively 90
80
70
60 Escorts
50
40
Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11
BSE Auto Bajaj Maruti Tata Motors
M&M Escorts Hero Honda
Exhibit 11: Ancillaries comparison with BSE Auto
The chart compares the movement of auto ancillary stocks

in the ICICIdirect.com universe with the BSE Auto index 175
155
The volatile nature of smaller ancillary companies is
135
reflected. These have met with numerous fluctuations with
the exception of larger market capitalisation companies like 115 BSE Auto
Bharat Forge and Exide Industries, which mimic the index
95
greatly. The tyre companies post November 2010 have
Auto Axl
grossly underperformed due to the intense rubber price 75 Subros
Bharat Forge
overhang
55 JK Tyres
35
Sep-10 Oct-10 Nov-10 Dec-10 Jan-11 Feb-11 Mar-11 Apr-11 May-11
BSE Auto Auto Axl Bharat Forge
Balkrishna JK Tyres Apollo Tyres
Subros Motherson Sumi Exide Inds

Page 7
RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Hold and Sell. The performance horizon is two years unless specified and the notional
target price is defined as the analysts' valuation for a stock.
Strong Buy: >15%/20% for large caps / midcaps, respectively;

Buy: Between 10% and 15%/20% for large caps / midcaps, respectively;
Hold: Up to +/-10%;
Sell: -10% or more;
Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com
ICICIdirect.com Research Desk,

ICICI Securities Limited,
7th Floor, Akruti Centre Point,
MIDC Main Road, Marol Naka,
Andheri (East)
Mumbai – 400 093
research@icicidirect.com
ANALYST CERTIFICATION
We /I, Karan Mittal MBA Nishant Vass MBA(FINANCE) research analysts, authors and the names subscribed to this report, hereby certify that all of the views expressed in this research report accurately
reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the specific
recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.
Disclosures:
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underwriter of securities and participate in virtually all securities trading markets in India. We and our affiliates have investment banking and other business relationship with a significant percentage of
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generally prohibits its analysts, persons reporting to analysts and their dependent family members from maintaining a financial interest in the securities or derivatives of any companies that the analysts
cover.
The information and opinions in this report have been prepared by ICICI Securities and are subject to change without any notice. The report and information contained herein is strictly confidential and
meant solely for the selected recipient and may not be altered in any way, transmitted to, copied or distributed, in part or in whole, to any other person or to the media or reproduced in any form, without
prior written consent of ICICI Securities. While we would endeavour to update the information herein on reasonable basis, ICICI Securities, its subsidiaries and associated companies, their directors and
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ICICIdirect.com | Equity Research

Exhibit 2: Sales performance

Exhibit 4: EBITDA margin trend

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

Exhibit 5: Raw material and EBITDA margin trend

Exhibit 6: Monthly rubber prices trend (|/Kg)

ICICIdirect.com | Equity Research

Exhibit 7: Revised financials

Exhibit 8: Valuation table

ICICIdirect.com | Equity Research

ICICIdirect.com coverage universe (Auto ancillaries)

ICICIdirect.com | Equity Research

Exhibit 9: Recommendation history

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

ICICIdirect.com Universe price movement vis-à-vis BSE Auto index

Exhibit 10: OEM comparison with BSE Auto

Source: Company, ICICIdirect.com Research

Exhibit 11: Ancillaries comparison with BSE Auto

The chart compares the movement of auto ancillary stocks

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

Strong Buy: >15%/20% for large caps / midcaps, respectively;

Pankaj Pandey Head – Research pankaj.pandey@icicisecurities.com

ICICIdirect.com Research Desk,

ICICIdirect.com | Equity Research

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