JK Tyre 3QFY2011 Performance Highlights and Results Update
JK Tyre reported a mixed set of results for 3QFY2011, with strong top-line growth following higher offtake in OEM volumes; however, the bottom line was down significantly due to contraction in EBITDA margin. The company’s EBITDA margin declined substantially due to the sharp increase in rubber prices. However, the stock is available at attractive valuations due to the recent correction in the stock price. We recommend Buy on the stock.
Margin pressures overshadow strong top-line growth: JK Tyre reported turnover of Rs.1,179cr (Rs.802cr) for 3QFY2011, an increase of 46.9% yoy. Top-line growth was aided by volume growth of ~27% in tonnage terms and ~17% growth in net sales realisation. The company posted a 36% yoy and 11.5% qoq decline in operating profit to Rs.61.9cr (Rs.96.8cr) for 3QFY2011 due to contraction in operating margin. The company’s operating margin dipped substantially by 681bp yoy and 89bp qoq, primarily due to the unprecedented and unabated spurt in rubber prices, leading to a significant 901bp yoy increase in raw-material cost at 71.3% (62.3%) of sales in 3QFY2011. As a result, net profit came in at Rs.9.1cr (Rs.36.5cr), registering a decline of 74.9% yoy and 54.7% qoq.
Margin pressures overshadow strong top-line growth: JK Tyre reported turnover of Rs.1,179cr (Rs.802cr) for 3QFY2011, an increase of 46.9% yoy. Top-line growth was aided by volume growth of ~27% in tonnage terms and ~17% growth in net sales realisation. The company posted a 36% yoy and 11.5% qoq decline in operating profit to Rs.61.9cr (Rs.96.8cr) for 3QFY2011 due to contraction in operating margin. The company’s operating margin dipped substantially by 681bp yoy and 89bp qoq, primarily due to the unprecedented and unabated spurt in rubber prices, leading to a significant 901bp yoy increase in raw-material cost at 71.3% (62.3%) of sales in 3QFY2011. As a result, net profit came in at Rs.9.1cr (Rs.36.5cr), registering a decline of 74.9% yoy and 54.7% qoq.
Outlook and valuation: We estimate JK Tyre to post an EPS of Rs.22.1 for FY2011E and Rs.34.5 for FY2012E. At Rs.118, the stock is available at attractive valuations of 5.3x and 3.4x FY2011E and FY2012E earnings, respectively. Due to the recent correction in the stock price, we recommend Buy on the stock with a Target Price of Rs.166, valuing the company at 4.8x (40% discount to market leader Apollo Tyres’ multiple of 8x) FY2012E earnings. At our target price, JK Tyre will trade at 0.6x and 4.2x FY2012E P/B and EV/EBITDA, respectively.
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