Result Update

May 28, 2010

Rating matrix
Rating : Buy JK Tyre and Industries (JKIND)
Target : Rs 211
Target Period : 12 months Rs 179
Potential Upside : 18%
WHAT’S CHANGED…
Key financials
PRICE TARGET ............................................................. Changed from Rs 340 to Rs 110
(Rs crore) FY09 FY10 FY11E FY12E
Net Sales 4,934.1 3,678.0 4,338.8 4,834.9 EPS (FY09E) ................................................................ Changed from Rs 30.40 to Rs 35
EBITDA 282.1 405.9 512.5 608.2 EPS (FY10E) ........................................................... Changed from Rs 44.70 to Rs 31.50
Net Profit 19.0 163.8 179.4 216.6
RATING.......................................................................................................... Unchanged
Valuation summary High rubber prices eating into bottomline…
FY09 FY10 FY11E FY12E
PE (x) 38.7 4.5 4.1 3.4 JK Tyres and Industries Ltd (JKIND) reported its Q4FY10 results that
Target PE (x) 45.5 5.3 4.8 4.0 exceeded our standalone topline estimates. It grew ~19.8% QoQ and
EV to EBITDA (x) 6.5 5.1 4.7 4.2 ~30.6% YoY to Rs 1,047.6 crore due to the robust volume sales from
Price to book (x) 1.3 1.0 0.8 0.7 original equipment manufacturers (OEMs) and replacement market.
RoNW (%) 3.5 25.2 22.1 21.6 EBITDA margin took a severe hit to 7.6% as against Q3FY10 on account
RoCE (%) 12.5 17.9 16.5 16.7 of higher rubber prices though falling oil prices have cushioned the
Stock data impact to some extent. JKIND reported a profit of Rs 27 crore against a
Mcap Rs 736.8crore loss of Rs 32.4 crore in Q4FY09 but was down 26.1% QoQ. For FY10, it
Debt (FY09) Rs 1,101.8 crore reported net sales of Rs 3,691.6 crore while the net profit jumped to Rs
Cash (FY09) Rs 42 crore 163.5 crore from Rs 19.1 crore in FY09. A strict comparison is not
EV Rs 1,838.6 crore possible as the corresponding period is of 18 months. With the Tornel
52 week H/L Rs 235.7/52.8 acquisition, its consolidated sales were at Rs 4,584.7 crore while the
Equity cap Rs 41.1 crore bottomline was at Rs 219.7 crore.
Face value Rs 10
MF Holding 12.1%
With strong demand coming from OEMs and the replacement market, we
FII Holding 9.7%
see strong growth prospects for the company. The company has
Price movement (Stock vs. Nifty) aggressive expansion plans and is increasing its capacities in every
6,000 225 segment to leverage upon the opportunity emerging from incremental
5,500 demand. The only concern on bottomline growth is of rising rubber
5,000 175 prices. JKIND has been passing on the rise in rubber prices immediately
4,500 in the replacement market and with a lag affect to OEMs. The softening of
4,000 125 rubber price would necessitate a re-rating of the stock. We are revising
3,500 our net sales estimates by 5.1% upward to Rs 4,338.8 crore. However,
3,000 75 with pressure on EBITDA margins, we are reducing our net profit
2,500 estimates by 13.4% for FY11. We are introducing our FY12 financial
2,000 25 estimates to Rs 4,834.9 crore and net profit to Rs 216.6 crore.
Jun-09 Aug-09 Nov-09 Feb-10 May-10

JK Tyre NIFTY
Valuation
Strong volume growth and incremental capacities would cheer falling
Analyst’s name growth. However, rubber prices are a cause of concern to bottomline
Supriya Madye (Khedkar) expansion. We are upgrading our target price to Rs 211, valuing the stock
supriya.madye@icicisecurities.com on 4x FY12E EPS (conservative multiple on account of rubber price risks).
Nishant Vass Exhibit 1: Key financials
nishant.vass@icicisecurities.com (Rs Crore) Q4FY10 Q4FY09 Q3FY10 YoYchg QoQchg FY10
Net Sales 1043.6 870.8 798.7 19.9 30.7 3677.7
EBITDA Margin (%) 7.6 -0.6 12.1 11.4
Depreciation 22.3 18.8 22.3 18.4 0.0 86.0
Interest 18.7 26.0 20.8 -28.2 -10.3 88.7
Other Income 0.1 0.7 0.1 -92.4 -28.6 0.8
Reported PAT 27.0 -32.4 36.5 -183.3 -26.1 163.5
EPS (Rs) 6.6 -7.9 8.9 -183.3 -26.1 39.8
Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

 JK Tyre and Industries (JKIND)

Key highlights
Exhibit 2: Sales performance (Rs crore)
Boosted by the domestic automobile market recovery the
1200
topline has improved in comparison to the previous downturn 1047.6
year while Q4FY10 sales have touched an all-time high 1000 941.4
874.5 874.5 900.7
830.0 849.1 854.2
782.2 802.0
800 688.0 722.9

(Rs crores)
600

400

200

Q4FY07

Q1FY08

Q2FY08

Q3FY08

Q4FY08

Q5FY09

Q6FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10
Source: Company, ICICIdirect.com Research

The raw material cost has increased around 860 bps in the
Exhibit 3: Raw material expense trend (% sales)
last three quarters, leading to declining bottomline
90
80
70
77.0 75.0 77.0
60 68.7 68.1 69.9 68.5
62.4 65.0 64.9 62.9
50 59.9
40
30
20
10
0
Q4FY07

Q1FY08

Q2FY08

Q3FY08

Q4FY08

Q5FY09

Q6FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10
Raw material/sales(%)

Source: Company, ICICIdirect.com Research

Exhibit 4: EBITDA margin trend (%)

The rise in raw material prices especially natural rubber prices to

16
the tune of ~70% has led to the decline in the EBITDA margin
14
even though the topline has improved correspondingly
14.5
12
10 11.8 12.1
11.0
8 10.3
8.8 8.4
6 8.1 7.6
4
2
0 -0.6 -0.6
1.2
-2
Q4FY07

Q1FY08

Q2FY08

Q3FY08

Q4FY08

Q5FY09

Q6FY09

Q4FY09

Q1FY10

Q2FY10

Q3FY10

Q4FY10

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

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JK Tyre and Industries (JKIND)

Sky rocketing rubber prices cause concern

Rubber prices have zoomed to ~Rs165/kg, a ~100% increase on a YoY
basis, with average accounted rubber cost for FY10 at Rs110/kg and Rs
145/kg for Q4FY10. The company has raised prices by 6.7% in FY10.
However, the margins would be pressurised on any further hardening of
rubber prices.

Exhibit 5: Rubber price trend (Rs/kg)

Natural rubber (RSS-4) prices have broken the ceiling and
have risen more than two times since March 2009 leading 170 164.2
to serious price concerns. JKIND has increased prices by
150 148.8
6.7% for FY10 and plans to have another 4% hike in June
2010 130 137.0
136.0
134.3
110
109.0 113.0
90 99.1 98.2 102.5106.5
94.9 98.1
70
70.3 69.0 75.8
64.9
50
12/8/08 2/8/09 4/8/09 6/8/09 8/8/09 10/8/09 12/8/09 2/8/10 4/8/10
Rubber prices (Rs/Kg)

Source: Company, ICICIdirect.com Research

Capacity and capital expenditure outlook

JKIND has already completed a Rs 315 crore capital expenditure in FY10

for the truck radial segment (TBR) leading to capacity increase to 8 lakh
units, going forward, for FY11 and FY12. JKIND plans to incur additional
capex of Rs 930 crore of which ~Rs 700 crore is in FY11 while the
remaining Rs 230 crore is in FY12 along with the normal maintenance
capex of ~Rs 30 crore every year.

The company plans to invest Rs 154 crore in the existing plant expansion
at Mysore. The remaining Rs 776 crore out of the Rs 930 crore in the
greenfield plant is coming up at Chennai (Tamil Nadu) whose capacity
would be around 29 lakh units. Out of the total additional capacity coming
up 25 lakh units would be passenger vehicles radials (PVR) leading to total
PVR capacity touching 70 lakh units in FY11. The remaining 4 lakh units
would be in the TBR segment, thereby taking the capacity to 12 lakh units.

Exhibit 6: Capacity outlook

Lakh nos. FY09 FY10 FY11E FY12E
Truck bias 25.2 25.2 25.2 25.2
Truck radials 4.7 8.0 12.0 12.0
PV bias 11.0 11.0 11.0 11.0
PV radials 45.2 45.2 70.0 70.0
Specility tyres 0.3 0.3 0.3 0.3
OTR 0.1 0.1 0.2 0.4
Total 86.5 89.8 118.7 118.9
Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

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JK Tyre and Industries (JKIND)

Rising debt a concern

The company has a standalone debt of Rs 860 crore in FY10 on its books.
This was reduced from Rs 1,100 crore in FY09, resulting into lower
finance costs. The consolidated debt of Rs 1,158 crore FY10 decreased
from Rs1,382 crore. The company maintains a cash balance of Rs 50
crore. Going forward, the incremental capex would be funded by
borrowings increasing leverage as well as finance costs. The company
currently has a cost of borrowing at around 10.5%.

Revision of financial estimates

Considering the strong growth coming up from rising automobile sales,
we are revising our net sales estimates by 5.1% upward to Rs 4,338.8
crore. However, with pressure on the EBITDA margin, we are reducing
our net profit estimates by 13.4% for FY11. We are introducing our FY12
financial estimates to Rs 4,834.9 crore and net profit to Rs 216.6 crore.
Exhibit 7: Revised financial estimates
(Rs crore) FY11Eold FY11E % chg FY12E
Net sales 4,127.0 4,338.8 5.1 4,834.9
EBITDA 522.2 512.5 -1.9 608.2
EBITDA margins (%) 12.7 11.0 12.6
Net profit 207.3 179.4 -13.4 216.6
EPS (Rs) 50.5 43.7 -13.5 52.8

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

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 JK Tyre and Industries (JKIND)

Exhibit 8: ICICIdirect.com Research coverage universe

Tata Motors Sales (Rs cr) EPS (Rs) PE(x) EV/E (x)* RoNW (%) RoCE (%)
Idirect Code TELCO CMP 709 FY09 25,354.1 19.5 36.4 49.7 10.0 7.1
Target 847 FY10E 32,851.1 59.3 12.0 15.4 22.1 12.8
Mcap (Rs cr) 36459.0 % Upside 19.4 FY11E 35,965.9 58.0 12.2 13.1 16.6 11.7

Maruti Suzuki Sales (Rs cr) EPS (Rs) PE(x) EV/E (x)* RoNW (%) RoCE (%)
Idirect Code MARUTI CMP 1199 FY09 20,775.6 40.3 29.8 17.1 13.3 18.5
Target 1614 FY10E 31,684.5 84.0 14.3 8.3 23.1 33.3
Mcap (Rs cr) 34658.3 % Upside 34.6 FY11E 34,957.7 94.0 12.8 7.6 21.0 28.9
FY12E 37,714.7 101.8 11.8 6.9 18.8 26.4

M&M Sales (Rs cr) EPS (Rs) PE(x) EV/E (x)* RoNW (%) RoCE (%)
Idirect Code MAHMAH CMP 516 FY09 13,093.7 30.0 17.2 29.5 17.4 9.9
Target 608 FY10E 18,487.5 33.9 15.9 12.2 31.3 24.8
Mcap (Rs cr) 28818.7 % Upside 17.9 FY11E 21,561.3 34.4 15.0 11.2 24.5 25.2
FY12E 24,428.7 38.7 13.3 10.1 22.3 25.2

Bajaj Auto Sales (Rs cr) EPS (Rs) PE(x) EV/E (x)* RoNW (%) RoCE (%)
Idirect Code BAAUTO CMP 2,078 FY09 8,696.2 44.0 47.3 28.9 38.9 36.8
Target 2,300 FY10E 11,920.5 117.8 18.2 12.1 74.0 68.5
Mcap (Rs cr) 30070.3 % Upside 10.7 FY11E 13,545.1 121.3 17.1 11.9 50.6 54.9

Escorts Sales (Rs cr) EPS (Rs) PE(x) EV/E (x)* RoNW (%) RoCE (%)
Idirect Code ESCORT CMP 172 FY08 1,998.0 1.3 131.4 23.1 -1.6 7.0
Target 193 FY09 2,162.8 9.9 17.4 10.6 8.5 10.6
Mcap (Rs cr) 1621.8 % Upside 12.4 FY10E 2,598.3 13.3 12.9 8.4 8.7 11.9
FY11E 3,039.6 16.1 10.7 6.8 9.6 13.1

Automotive Axle Sales (Rs cr) EPS (Rs) PE(x) EV/E (x)* RoNW (%) RoCE (%)
Idirect Code AUTAXL CMP 348 FY08 751.9 36.9 9.4 5.0 37.7 40.4
Target 525 FY09 267.2 3.6 97.7 17.1 3.1 6.3
Mcap (Rs cr) 526.2 % Upside 51.0 FY10E 536.3 24.5 14.2 7.4 19.6 24.5

Balkrishna Industries Sales(Rs cr) EPS (Rs) PE(x) EV/E (x)* RoNW (%) RoCE (%)
Idirect Code BALIND CMP 539 FY09 1,175.4 32.7 16.5 7.2 14.5 13.5
Target 662 FY10E 1,299.2 100.7 5.3 6.7 36.0 26.8
Mcap (Rs cr) 1041.0 % Upside 23.0 FY11E 1,497.2 110.4 4.9 4.0 30.7 28.8

Bharat Forge Sales(Rs cr) EPS (Rs) PE(x) EV/E (x)* RoNW (%) RoCE (%)
Idirect Code BHAFOR CMP 259 FY09 4,774.0 1.1 226.7 15.3 3.6 9.6
Target 254 FY10E 5,004.0 4.3 60.9 12.4 6.2 17.0
Mcap (Rs cr) 5762.4 % Upside -1.9 FY11E 5,416.7 9.8 26.4 9.7 19.6 23.5

JK Tyres Sales (Rs cr) EPS (Rs) PE(x) EV/E (x)* RoNW (%) RoCE (%)
Idirect Code JKIND CMP 179 FY08 4,934.1 4.6 38.7 6.5 3.5 12.5
Target 211 FY09 3,678.0 39.9 4.5 5.1 25.2 17.9
Mcap (Rs cr) 736.8 % Upside 17.6 FY10E 4,338.8 43.7 4.1 4.7 22.1 16.5

Subros Sales (Rs cr) EPS (Rs) PE(x) EV/E (x)* RoNW (%) RoCE (%)
Idirect Code SUBROS CMP 43 FY09 694.4 2.2 19.5 6.2 7.6 12.2
Target 61 FY10E 875.6 3.9 11.0 4.2 12.1 16.5
FY11E 931.0 5.6 7.6 3.0 15.5 20.9
Mcap (Rs cr) 258.0 % Upside 41.2 FY12E 1,081.7 6.7 6.4 2.6 16.2 22.6
Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

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JK Tyre and Industries (JKIND)

ICICIdirect.com Universe price movement vis-à-vis BSE Auto index

Exhibit 9: OEM comparison with BSE Auto

The chart compares the movement of OEM stocks in the 440
430
420
ICICIdirect.com Universe with BSE Auto index, thereby 410
400
390
reflecting the degree of mimicking of the index 380
370
360
350
340
Since mid February 2010, Bajaj Auto, Tata Motors and 330
320
310
300
Escorts have outperformed and Maruti Suzuki 290
280
270
260
underperformed in comparison to the index by being 250
240
230
divergent on the upside and down side, respectively 220
210
200
190
180
170
160
150
140
130
Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10

BSE Auto Bajaj Maruti Tata Motors M&M Escorts

Source: Company, ICICIdirect.com Research

Exhibit 10: Ancillaries comparison with BSE Auto

The chart compares the movement of Auto ancillary stocks

in ICICIdirect.com Universe with BSE Auto index 455

405
The volatile nature of smaller ancillary companies is
reflected, which have met with numerous fluctuations with 355
the exception of larger market capitalisation companies like 305
Bharat Forge and Subros, which mimic the index greatly
255

205

155
Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10 May-10
BSE Auto Auto Axl Bharat Forge Balkrishna
JK Tyres Apollo Tyres Subros

Source: Company, ICICIdirect.com Research

ICICIdirect.com | Equity Research

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 JK Tyre and Industries (JKIND)

RATING RATIONALE
ICICIdirect.com endeavours to provide objective opinions and recommendations. ICICIdirect.com assigns
ratings to its stocks according to their notional target price vs. current market price and then categorises them
as Strong Buy, Buy, Add, Reduce and Sell. The performance horizon is two years unless specified and the
notional target price is defined as the analysts' valuation for a stock.

Strong Buy: 20% or more;

Buy: Between 10% and 20%;
Add: Up to 10%;
Reduce: Up to -10%
Sell: -10% or more;

pankaj.pandey@icicisecurities.com
Pankaj Pandey Head – Research

ICICIdirect.com Research Desk,

ICICI Securities Limited,
7th Floor, Akruti Centre Point,
MIDC Main Road, Marol Naka,
Andheri (East)
Mumbai – 400 093

research@icicidirect.com

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report accurately reflect our personal views about any and all of the subject issuer(s) or securities. We also certify that no part of our compensation was, is, or will be directly or indirectly related to the
specific recommendation(s) or view(s) in this report. Analysts aren't registered as research analysts by FINRA and might not be an associated person of the ICICI Securities Inc.

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