JK Tyre: Positives of margin expansion priced-in, debt repayment key1 min read . Updated: 26 Oct 2020, 11:06 AM IST
- The company reduced its working capital by around Rs500 crore during the quarter, which led to positive cash conversions
- Increased focus on debt repayment should help the company bridge its valuation gap with peers, analysts said
The JK Tyre and Industries Ltd stock took a breather on Monday, after a sharp rally last week. Following its September quarter earnings, the stock rose more than 20% in the past few trading sessions.
There were two key highlights in the company’s results. Strong expansion in operating margins and management commentary focused on debt-reduction.
JK Tyre’s operating margins expanded by around 190 basis points on a year-on-year basis to 15.6% in the September quarter. One basis point is one hundredth of a percentage point. Soft prices of raw materials were expected to work in favour of tyre companies. However, analysts say, this is the highest Ebitda margin the company has seen in the last four year and much higher than estimates of around 9-9.5%. Ebitda is short for earnings before interest, tax, depreciation and amortization.
In a post earnings conference call, the management said margin expansion is happening on the back of higher sales volume through network expansion and optimization of fixed cost. The company reduced its working capital by around Rs500 crore during the quarter, which led to positive cash conversions. The management is confident of sustaining operating margins around these levels.
Further, the company has no major capital expenditure (capex) planned for this year, apart from the normal maintenance capex. It aims to reduce its total debt to nearly 40-45% in next three years to take net debt/Ebitda ratio to below 3 times, the management said. The company’s elevated debt has been a key concern for investors in this stock. Domestic brokerage house ICICI Securities Ltd sees the company’s net debt declining to Rs4,158 crore by fiscal year 2023.
According to other analysts, after the stock’s recent runaway rally, positives such as commentary on margin expansion and debt repayment are priced-in. But given its stretched balance sheet, actually reducing the debt will be a long-drawn process. Meanwhile, on the valuation front, the JK Tyre stock is trading at a one-year forward price-to-earnings ratio of around 10 times. The stock is trading at a discount to peers Ceat Ltd and Apollo Tyres Ltd, which are trading at 15 and 16 times, respectively. Increased focus on debt repayment should help the company bridge its valuation gap with peers, analysts said.