Mumbai
based Equinomics Research like JK Tyre
and firmly believe that this stock can give a minimum return of 24 % from the current
level.
However,
if the FIIs, who hold just 2.8 % stake in the company, decide to increase their
penetration in the stock, then the same could result in improvement in its
valuation and hence, the stock can give a return of as high as 52 % from the
current market price of Rs.290.
Equinomics
Research convictions in the stock
emanate from following rational:
The
natural rubber prices have fallen from as high as Rs. 240 per kg 4 years ago to
Rs.145 per kg (for RSS4 Grade which is primarily used in tyre making) now. It
has fallen by 11 % from the year (2014) beginning price of Rs.163 per kg which is highly positive for
all tyre companies including JK Tyre.
The
cost of natural rubber accounts for about 40 % sales. This crash in rubber
prices has helped JK Tyre to improve EBITDA margins to double digits 11 % in
FY2014. The global rubber prices are expected to remain suppressed at least for
another 2 to 3 quarters due to slowdown in the auto sales in many parts of the
world.
Going
forward, on back of lower rubber prices, JKTIL is expected to maintain double
digit margins leading to higher profitability;
JK
Tyre’s Mexican subsidiary mitigates the geographical concentration risks the capacity utilization for Tornel increased
to ~90% from 65%. Further the company is planning to spend Rs.140 crore in
Mexican subsidiary to further improve the capacity;
To
combat the sluggish market conditions, JKT undertook several strategic actions
by renewing its thrust in the replacement market as also adding new OEMs. It
widened its network of customer touch points which enabled it to deliver better
service to its customers.
Aggressive
efforts resulted in export recording a 23 % increase during the year FY2014;
Also,
we might see a fall in net debt levels going forward strengthening the balance
sheet -the Net Debt / Equity ratio is expected to fall from 2.1 % currently (it
was 2.6 % in FY13);
Economic
revival on back initiative taken by new government to revive capex cycle augurs
well for JKT. Also strong volume growth in the domestic and export markets to
result in higher earnings going ahead.
This
coupled with lower rubber prices will help JKT to maintain double digit margins;
Consolidated
Annual Financial Performance for FY2014 points to very impressive performance
partly due to severe fall in natural rubber prices. While its consolidated revenue (including the
revenue of JK Tornel) increased by 9 % to Rs. 8,279 crore, its operating profit
rose yoy by 41 % to Rs.890 crore and net profit increased by 29 % to Rs.263
crore over the previous year. JK Tyre reported a consolidated EPS of Rs. 64 in
FY2014 and this should be noted that it attained this EPS level after making an
exceptional loss of Rs. 59.52 crore in FY2014;
The
stock trades at mere 4.5x FY2014 Consolidated EPS of Rs.64/. At CMP, the stock
trades at a PE of 3.7x its FY2016E EPS of Rs.80
(conservative estimate). CEAT, which has lower sales volume as compared
to JKT, enjoys a PE multiple of 6.7x on FY2014 EPS.
Equinomics
Research recommend investors to
accumulate (with one year investment perspective) the stock at current price of
Rs.290/ with a target price of Rs.360, assuming 4.5x valuation on one-year
forward EPS.
However,
if the FIIs increase their penetration in the stock, then our expected price
target for the stock can move up to Rs.440 assuming 5.5x FY2016E EPS of Rs.80.
Hence, Equinomics Research suggest our
investors to accumulate the stock at current price of Rs.290. .
Disclosure:
I, G.Chokkalingam, invested in JK Tyre (more than 30 days ago) and hence,
suggest all investors to consider this fact before investing in this stock;
 |
| G.Chokkalingam |
G.Chokkalingam
Founder
& Managing Director
Equinomics
Research & Advisory Pvt Ltd
18-
3/A, Ekta CHS, Shiv Dham Complex
(Opp
to Oberoi Mall)
Filmcity
Road, Malad (East)
Mumbai
- 400 097
chokka.g@equinomics.in
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