The road transport and automobile industry are critical for the Indian economy. However, on the Indian terrain, there are only few that last long. Due to diversity of the weather, temperature, and geographic variations, the challenges posed by road network are many. Pacing with major part of the economy on its back is the Indian tyre industry. Like the challenges posed by the country’s terrain, the sector has recently fought hard against unprecedented challenges posed by the pandemic and global uncertainties and have navigated through rocky roads and pits, sand and rain-washed slopes to script a strong recovery. In fact, rating agency ICRA estimates a 13 to 15% volume demand growth in FY2022.
JK Tyre – An Unmatched Growth Story
Taking a lead in the growth story is the front-running tyre manufacturer, JK Tyre with its 5.75 lakh MT annual capacity. The company is serving various automotive segments from its state of the art manufacturing plans in India and Mexico plants, and it dominates the truck/bus radial space in the country. With approximately 700 brand shops of steel wheels, express wheels, farm express and truck wheels, they have over a network of over 6000 dealers and are the largest exporter of on-highway tyres to USA.
Positive Financials and Strong Operations
Amidst global uncertainties due to the pandemic or beyond, JK Tyre recorded the highest ever quarterly sales in Q3FY22. It surpassed Rs. 3,000 crore mark for the first time, registering a 11% growth, in a situation where the overall industry grew at ~2-3% during the same period. The cost expense saw a decline of 12% in 9MFY22 to Rs. 318 crore on year-on-year basis.
Recording the highest ever exports of Rs. 484 crore for Q3FY22, JK Tyre has taken the total export to Rs. 1,414 crore during the period. The Company has also been focusing strongly on capacity utilisation. Both the parent company and its subsidiary Cavendish Industries have recorded a capacity utilization of ~89% and ~82% for Q3FY22, respectively. It has been experiencing capacity utilisation at ~90% amid improvement in demand prospects.
Driving Peerless Performance with Sustainable Impact
With regards to competition assessment, while the gross margin of Tyre manufacturers on sequential basis declined by 250-300 bps, JK Tyre gross margin declined 20 bps on account of costing efficiencies. The Company is trading at a price to book of 0.97x which is at a significant discount to its peers. With a 12.76% Return on Equity, which is higher than its peers Apollo tyres (3.27%) and MRF (9.96%), In FY21, JK Tyre TTM P/E ratio is approximately 7.37 times while the sector P/E is at approximately 20.56 times, which shows that it is undervalued.
JK Tyre leveraged “Green tyre" technology, which increases fuel efficiency thereby conserving natural resources. It has Eco-range of tyres for cars, buses and two wheelers with ultra-low rolling resistance. It has the unique distinction to be amongst the top 3 companies in the lowest energy consumption category. It also is the first company in the country to launch “Tyre Pressure Monitoring System (TPMS)” based on sensor technology.
Future Scope
As per changing dynamics in global geopolitics and economics, one of the key growth drivers for the Indian tyre industry would be the recently levied antidumping duty on China products in USA and other developed markets. This policy change in the International market will give a boost to the Indian tyre industry. While the company will benefit from such external factors, JK Tyre is also making a conscious effort to deleverage its balance sheet. It remains committed to reduce its long-term borrowing by 45%, which is approximately Rs. 1,400 crore in coming three years.
With regards to the expansion plans that are specific to the company, JK Tyre is planning a CAPEX of approximately Rs. 540 crore in next 12 to 18 months. Approximately Rs. 200 crore from this CAPEX fund will be utilized for debottlenecking the capacity in PCR segment (Passenger Car Radial), around Rs. 240 crore for expansion in TBR space (truck/bus radial) and approximately Rs. 100 crore for maintenance capex.
Thus, JK Tyre aims to realize incremental revenue potential of approximately Rs. 900-1,000 crore. The expansion of such scale will help the company enhance its capacity by 3.42 lakhs tyres/ annum in TBR segment, taking to total capacity to 4 million (Overall Capacity stood at around 32 million). Post CAPEX, at 100% capacity utilisation, JK Tyre can reach to about Rs. 15,000 crore in terms of revenues.
JK Tyre has positioned itself not only as the unmatched player in the tyre industry, but also as a mega initiative driver towards sustainability. Its robust fundamentals, clear vision, and strong expansion plans will ensure the company dominates the sector and outperforms all competition over the next decade.
Dr Samir Kapur
Management Consultant, Author and Visiting Faculty to Management Institutes.
www.thesamirkapur.com
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