JK Tyre and Industries - Q1FY2014 Result Update - Angel Broking

JK Tyre & Industries' (JKI) reported strong standalone results for 1QFY2014 led by a sharp improvement in gross margin (up 612bp yoy to 32.8%) driven by softening of natural rubber prices (down 12.6% yoy). The consolidated bottom-line too registered an impressive performance as Tornel operations continue to witness sharp improvement following receding cost pressures and thrust on exports. We retain our positive outlook on JKI as we believe that the company will continue to benefit from stable raw-material prices. However, slowdown in OEM demand remains a concern. We maintain our Buy rating on the stock.

Improvement in standalone and Tornel operations continues: JKI's top-line posted a muted growth of 4% yoy to Rs. 1,484cr due to slowdown in OEM demand. Nevertheless, EBITDA margins witnessed a substantial improvement of 325bp yoy (221bp qoq) to 12.1% as natural rubber prices declined 12.6% yoy leading to a 612bp yoy (280bp qoq) reduction in raw-material cost a percentage of sales. Employee and other expenditure as a percentage of sales however, grew by 140bp and 150bp yoy respectively, restricting further expansion in margins. Aided by strong operating performance, the operating profit and adjusted net profit posted a robust growth of 42.3% yoy (31.5% qoq) and 52.6% yoy (96.5% qoq) to Rs. 179cr and Rs. 68cr respectively. The depreciation (up 42.7% yoy) and finance expenses (up 30.2% yoy) continue to remain at elevated levels due to the commissioning of the Chennai plant. The company's Mexican subsidiary, Tornel, too posted an impressive performance during the quarter. While the top-line grew marginally by 2.3% yoy to Rs. 400cr; EBIT posted a substantial growth of 114.8% yoy to Rs. 59cr with EBIT margins increasing by ~800bp yoy aided by decline in input costs.

Outlook and valuation: We retain our positive outlook on JKI as we believe that the company will continue to benefit from the availability of additional capacity from the Chennai plant and stable raw-material prices. At Rs. 92, the stock is trading at an attractive valuation of 1.5x FY2015 earnings. We retain our Buy rating on the stock with a target price of Rs. 152.

Source : Equity Bulls

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