 "New acquisition sets the wheel in motion for JK Tyre")
The JK Tyre paradox is like yesteryears Pakistani spinner Abdul Qadir's googly which one perceives to be a leg break.
I am not privy to its numbers for 2015-16 (at the time of writing at least), but it would be reasonable to assume that the company will report a consolidated Ebidta in excess of Rs 1,000 crore for 2015-16 (Rs 868 crore for the first three quarters, consolidated). Strangely, the company is priced at a discounting less than half its industry peers. Why?
So let me play Devil's Advocate.
One, JK Tyre has probably bitten off more than it can chew with Birla Tyres' Haridwar plant acquisition, affecting its ability to service debt.
Two, the tyres industry in India will fight a losing battle with low-priced Chinese imports.
Three, domestic tyre companies will be up against the Michelins of the world setting up manufacturing facilities in India.
Now let me invite Angel's Advocate.
One, the latest acquisition will complete the JK Tyre portfolio (through two and three-wheeler tyres where the company was never present) and also enhance TBR (truck/bus radial tyres) and passenger car capacities. The plant is a showpiece and losing, but then JK Tyre is a transformation specialist who turned the acquisition (and losing) Vikrant Tyres plant around and did the same with a once-losing Tornel plant (Mexico). If JK Tyre can leverage its best practices from the other plants, moderate costs and generate procurement efficiencies, this Haridwar play may be another great story to tell.
Two, JK Tyre is doing some freaked-out stuff within the sector; its Fleet Management Solution is focusing on delivering a lower cost per km travelled solution for large fleets even as most players are still focused on product sale; it's over-the-counter product sale through experiential Truck Wheels and Steel Wheels outlets form 30 per cent of revenues.
Three, even as Chinese dumping increased (and cannot be wished away), the company strengthened its supply chain management (SCM), doubled product introduction and strengthened its technology sheen. The result, the grapevine indicates, is that the company not only plugged SCM leaks and saved money, but in the process reported its lowest inventory in March even as monthly sales were its highest ever.
Four, I like the look of the company's interest outflow - from Rs 64 crore in the first quarter of the last financial year to Rs 59 crore in the third - at a time when one would have presumed that increased Chinese dumping would have compelled JK Tyre to provide longer credit to dealers and stretched its financials.
Five, the company is India's largest in the truck-bus radial space, just the space to be in when the world is radialising faster than ever.
So there you are. Around Rs 200 crore in depreciation, post-tax discounting of less than five based on FY16 results and the possibility of reporting Rs 10,000 crore in 2016-17 revenues. Assuming that an increase in rubber costs knocks 300 basis points off margins, there could still be Rs 1,500 crore in Ebidta against today's market cap of Rs 1,800 crore.
Unless I am getting something terribly wrong and barking up the wrong gum tree.
The author is a stock market writer, tracking corporate earnings and investor psychology to gauge where markets are not headed
