JK Tyre (JKI) has delivered a subdued performance in 3QFY22, with EBITDA margin coming in at 8.9%, vs. our estimate of 10.2%, primarily impacted by higher commodity cost. Lower margin performance in India as well Mexico business impacted profitability. Its consolidated revenue grew by 11% YoY and 3% QoQ to Rs30.8bn (4% below our estimate of Rs31.9bn), while EBITDA fell 45% YoY and 7% QoQ to Rs2.7bn as against our estimate of Rs3.2bn due to higher RM cost.
However, EBIT margin of India business contracted 967bps YoY and 75bps QoQ to 5.6%, while for Mexico business it declined by 178bps YoY and 106bps QoQ to 6.7%. Adjusted PAT, excluding exceptional items, declined by 73% YoY and 19% QoQ to Rs526mn, vs. our estimate of Rs818mn. Looking ahead, the management has guided for near-term margin pressure for India business, while its Mexico operation would see a better traction and healthy margins. We expect JKI to gain market shares and an improving brand equity would help in pricing power.
All these would result into margin expansion going into FY23. In view of the likely revival in replacement demand, controlled debt level, margin expansion in India as well as Mexico operations and attractive valuation, we maintain our BUY rating on the stock, and maintain our Target Price at Rs191.
New Products, Premiumization, Improving Brand and Network to Aid Revenue
JKI has recently increased focus on new product launches with better quality, performance and premiumization. Contribution of high-margin premium products is steadily rising for both the operations. Brand equity of the company has also improved in the last 2-3 years, helping in pricing power. Moreover, it has been expanding its network with the recent addition of ~750 new touch points in 9MFY22 and plans to take the total network to 6,000+ by FY22-end.
We believe that the new products, better quality and network expansion would support market share gain in the replacement segment, going ahead. Moreover, its rising exports from India as well as Mexico to major markets would provide a decent platform for the next leg of growth. Its exports grew by 46% YoY in 3QFY22.
The company’s strategy to expand capacity by 10-15% through de-bottlenecking over the near term would keep its capex lower, hence the lower debt over the next 1-2 years. We expect a limited margin expansion due to cost pressure and estimate it to record 10.2% EBITDA margin in FY24E. However, with better asset utilization, we expect its RoE to improve from 9.6% to 13.4% over FY22E-FY24E.