JK Tyre and Industries - 1QFY2013 Result Update - Angel Broking

JK Tyre and Industries (JKI) registered strong results for 1QFY2013 driven by a significant improvement in operating margins. The top-line growth, however, remained muted as volumes declined by ~3% yoy led by weak OEM and replacement demand. We retain our positive view on JKI and believe that the company will report strong performance going ahead as natural rubber prices have stabilized. However, slowdown in demand remains a concern as the replacement demand has not picked up as anticipated. We maintain our Buy rating on the stock.

Strong operating performance led by margin expansion: For 1QFY2013, JKI registered a muted 2.4% yoy growth (5.3% qoq decline) in net sales to Rs.1,443cr as the demand for tyres in the replacement segment remained sluggish. Also, the demand from the OEMs remained muted as the medium and heavy commercial vehicle (MHCV) segment witnessed a decline of 12% yoy. As a result, the volumes witnessed a decline of ~3% yoy during the quarter. The operating performance registered a significant improvement with the EBITDA margin expanding by 430bp yoy to 8.7%. The same was driven mainly by an improvement in rawmaterial costs (down 430bp yoy) as natural rubber prices witnessed a decline of 15.6% yoy during the quarter. On a sequential basis, the margins improved 100bp as raw-material expenses declined 150bp. As a result, the net profit came in at Rs.25cr as against a profit of Rs.1cr in 1QFY2012.

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 stable raw-material prices. Consequently, we estimate JKI to post an EPS of Rs.38.5 in FY2014E. At Rs.92, the stock is trading at an attractive valuation of 2.4x FY2014E earnings. We retain our Buy rating on the stock with a price target of Rs.135.

Source : Equity Bulls

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