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JK Tyre & Industries 3QFY2013 performance highlights and results update

Contributed by Angel Broking

JK Tyre & Industries (JKI) reported an in-line result for 3QFY2013 at the standalone level as EBITDA margins continued to improve, led by declining natural rubber prices. Further, the Mexican subsidiary, Tornel, too reported a sharp improvement in its performance and posted a net profit of Rs.45cr during April-December 2012 as against a loss of Rs.48cr in FY2012. We retain our positive outlook on JKI as we believe that the performance will improve further in the coming quarters due to declining raw-material prices. However, slowdown in OEM demand remains a concern. We maintain our Buy rating on the stock.

Profitability continues to improve in standalone and Tornel operations: For 3QFY2013, JKI posted a 7.4% yoy (3.1% qoq) decline in its standalone top-line to Rs.1,281cr, largely due to the slowdown in OEM demand. The demand from OEMs continues to remain weak on account of the sharp slowdown being witnessed in the medium and heavy commercial vehicle (MHCV) and passenger car segments. Consequently, JKI’s total volumes posted a decline of 7.3% yoy (1.3% qoq) to 61,212MT. The net average realization remained flat on a yoy basis; however, it declined 1.7% sequentially. The EBITDA margin improved 393bp yoy (103bp qoq) to 9.2%, primarily on account of 14.5% yoy (4% qoq) decline in natural rubber prices. Hence the raw-material cost as a percentage of sales witnessed a sharp decline of 652bp yoy (62bp qoq) to 70.7%. As a result, the operating profit surged 62.1% yoy (9.3% qoq) to Rs.118cr. JKI incurred an exceptional expense of Rs.11cr due to the unfavorable currency movement. Adjusted for the same, the net profit recorded an 87.7% yoy (26.4% qoq) growth to Rs.32cr.

Outlook and valuation: We expect JKI to report continuous improvement in its operating performance, led by availability of additional capacity from the Chennai plant and declining raw-material prices. Consequently, we estimate JKI to post an EPS of Rs.41.3 in FY2014. At Rs.108, the stock is trading at an attractive valuation of 2.6x FY2014 earnings. We retain our Buy rating on the stock with a target price of Rs.165.