JK Tyre & Industries Limited analyst Q&A

Thank you very much. We will now begin the question and answer session. The first question is from the line of Nirav Seksaria from Living Root Analytics. Please go ahead.

Yes, sir so could you shed some light on the margin like what could we expect the margin for the next 6 months or so like at what crude level are we comfortable to maintain the current margin level?

Right now, our margin s have reached at 15.3% levels with the operating profitability doubled to 597 Crores over corresponding quarter. We are expecting some increase in the raw material prices by 3 to 4% owing to rise in crude oil prices.

But during Q2 the crude prices were relatively less so at what crude levels going forward we can maintain the 15% margin?

So basically, we have been seeing volatility in the crude prices recently. We believe between 85 to 95 range of the crude level should not impact us much.

So, sir if the crude is within that level we can reach the December 2020 EBITDA margin level of 18%?

18% are you saying?

Yes like is it possible to reach the 18% level which was achieved in December 2020?

See we have been working all the way , right from the increase in efficiencies, improvement in the tyre premiumization and also launching innovative products in the recent past. We are trying to improve upon th e margins on a sustainable basis , subject raw material prices remain in a range. I would not like to say that what kind of margins we can get in the next few quarters , but yes we are very optimistic that we will be able to get much better compared to what has been the history actually.

As Mr. Aggarwal is saying that we will put every best effort to sustain the margins.

87% as we said

Yes, overall the 87% utilization.

What about the JK Tornel and on the standalone basis too?

About 85% in JK Tornel and standalone is 95%.

Thank you sir.

Thank you. Next question is from the line of Aditya Rathi from Aequitas Investments . Please go ahead.

Thank you for the opportunity and first of all congratulation on a very good set of number . Sir my first question was again related to margin so in the opening remark you mentioned that margin increase was because of product mix and raw material price going down so I wanted to understand how much of the contribution in margin has happened because of improvement in product

So the improvement in margins as we see over the sequential quarter is around 280 basis points so here it is a combination of various factors definitely the raw material prices have further softened , the raw material prices has come down around 5 to 5 .5% during the quarter that is one , the other is that as Mr. Sanjeev Aggarwal has also mentioned that we have been working diligently on the premiumization and offering better innovative products in the market, especially in the PCR segment one is our capacity utilizati on has been at its peak, second we have been also been able to get more tyres which are of the higher rim sizes, 16 inch and above has also grown significantly. Those products have better margins. Not to undermine the continuous drive on operational effic iency that is being worked . We have been doing a lot of work on tech-enabled manufacturing that is also giving us the returns, so it is an all-around combined effort and also selectively on certain SKUs we have also taken some price increases . So actually if you see all the boxes that are required are being ticked and one more point is that the current expansion that is happening in Banmore which was announced the capex for which was announced last year Rs.530 Crores that is also giving us the capability to go and produce more tyres of the higher rim sizes so going forward also that will help in further premiumization of the PCR segment.

Got it and secondly again if I see at the gross margin level and if I compare it year-on-year so our RMC las t year for September quarter was close to 70% and it has dropped to now 60% so there has been an improvement of 10% in gross margin , but the similar level of improvement has not happened in EBITDA margin and if I can see the most glaring increase is in employee cost which has kind of sustained over the last six quarters so at what level do we see this employee cost stabilizing because in this current quarter also it has increased by 26% whereas our revenue has grown only by 3%?

You are right. There has been a reduction in the gross margin from almost about 70% to 60% and which was eaten away somewhat through the higher employee cost, due to impact of annual increase which has taken place and some of the long -term agreements which we have signed with the labor unions at some of our plants so these are some of the reasons which has partially offset the benefit.

Sir at what level do we see this stabilizing because again this quarter the employee cost was up by 26% which is kind of quite significant?

As I said because of reasons as mentioned the employee cost is up. This is also because of the increase in production levels.

Right but year-on-year if we see the volumes it is in single digit so the prod uction volume has not significantly increased in tandem with employee cost?

So, the impact of the benefit of long -term agreements will come over period . This is for next three years we will not see any increase in the contract cost . This benefit will be there over the period.

Lastly sir my question was around the capex plan so as you mentioned the second phase of PCR is currently on and TBR is also 260 Crores TBR so this is expected by end of fourth quarter this year?

So the both the projects are progressing well and in fact some of the capacities have already come into commercial production and these are be ing ramped up. In the case of TBR the ramp up will get completed by the end of this fin ancial year and also for PCR will happen in very first month of the next financial year.

So what would be the total contribution to revenue in relation to this two capex specifically?

Okay and now we have announced one more new capex of Rs.1,000 Crores almost having an execution of close to two years and in which segment have we announced this capex?

This is broadly in the PC R segment since there is a very good growth in the PC R segment in the Indian market and also in the overseas market we are ge tting opportunities with the expected anti -dumping duties against the other Asian countries . So, we are expanding capacities in the PCR segment.

All right sir I thank you for answering all my question I will come back in the queue.

Thank you. The next question is from the line of Jinesh Gandhi from Motilal Oswal Finance Services. Please go ahead.

Hi sir congrats on very strong performance . Continuing on the question on the capacity addition which we have announced so what kind of capacity addition will this lead to.

We have announced Rs.1025 Crores and we are looking at expanding the capacity by 20% from our total available capacity of 15.5 million tyres per annum.

The quantum of capacity addition in PCR segment since this is only for PCR what kind of capacity expansion will happen for PCR is my question?

So this is actually the broad announcement which we have made and the plans are under consideration and we are wo rking out all these details , but very broadly as I said earlier the expansion is going to be majority for PCR.

Okay got it and second question pertains to this 8% volume growth in the quarter which we have seen in the domestic market. Can you give breakdown between the growth in domestic replacement and OEM as well as what was the decline in the export on the volume side on year-on-year basis?

Domestic market witnessed a volume growth of 8% over the corresponding quarter , in the replacement market our volume growth was 7% and in the OEM we grew by 18% and in the domestic market in the passenger vehicle and commercial vehicle t yres we have witnessed a volume growth of 9% on a year in year basis.

It got disconnected sir. Can we take the next question.

Yes please take up.

The next question is from the line of Bharat Bhagnani from Living Root Analytics . Please go ahead.

Yes hi everyone good morning . You know I just wanted to ask Sanjeev ji. Sanjeev ji I think you had mentioned a couple of quarters back regarding the tax rate by when can we see the tax rate coming down I mean is the entire thing absorbed by now?

So we will be able to absorb the MAT credit by the end of this financial year We cannot adopt this in between and in any case there is some unabsorbed MAT credit available so that will get utilized in this financial. From next financial year we will see a new rate of tax.

So it will be that 26% range 25%?

Whatever the applicable tax rate in that financial year that will in effect.

Right and you also announced recent ly I think yesterday that you are going for a capex increase, you are doing a capex to increase the capacities so these will be like yo u mentioned primarily in the PCR segment , PCR radial segment , but I think are we utilizing our current capacities fully?

So I think it was clarified earlier by Anshuman ji, 95% of our capacities are utilized at the moment.

Okay, so this can go up to 100 or this is where we are at currently , this is where we will be at the current capacity.

With some efficiency project of course, we can fetch higher output, which continue to do so. Since the new capacity f rom Rs.530 PCR has come up and is under ramp -up stage. We will not face capacity constraints.

Okay and this will be an existing plant itself, right?

That is correct.

The final question is that we primaril y being a leader in the T BR space we are now focusing our energies towards the PCR segment. I think after Mr. Anuj has come in more so I think then what are we looking at you know couple of years down the line in terms of revenue mix we want to bring the T BR cyclicality down or I mean what is the idea behind now focusing on PCR more?

Just to clarify this point while the focus will be on PCR it does not mean that the focus on TBR is not there the focus continues to be on TBR also , in fact if y ou see at our Laksar plant we are already taken up the capacity expansion. Our participation with the OEM has gone up , our reach in the replacement market is also being enhanced also we have been launching some power SKUs , why we call them power SKUs because these are SKUs which is giving better value to our customers to give a few examples the fuel efficient or the fuel saving tyres XF series, the extra mileage Series XM the specifically . We have now started designing tyres for the mining application becau se we understand that mining applications are becoming more stringent so X F Series so there is a lot of focus on TBR as well. We will be focusing on TBR and we will also have an enhanced focus on PCR because there the headroom is even better.

Got it and I think in a recent report research report that had come out it mentioned that you know your Vikrant and Challenger brands the proportion of revenue from them have come down significantly so are we to say that these will be phased out and yo u are not keen on continuing the low-end brands which were essentially competing with the Chinese imports.

We are increasing our premiumization all across and these brands were created for some other purpose when there were lot of Chine se influx and now we are focusing on higher premium mix. so going forward we will be enriching our product mix more.

So finally Anshuman Ji then one thing in the PCR also then are we looking at rim size of 15, 16 inch and above . We are not looking at anything below that right because that is a very competitive space again.

We are catering from whole from 12 in ch up to even 18 , 19 in ch and we are also participating with OEMs in the lower rim sizes as well and that also h olds a good market right now in the after market as well . We will be continuing to cater to this smaller rim sizes also and we will increase our ratio going in the higher rim sizes.

Okay. Thank you so much, thanks and all the best.

Thank you for taking my question sir and congratulations for a very good set of numbers . Sir I have one question regarding the raw material basket you said that for this quarter you are expecting around 3 to 4% increase in the raw material basket and you also said that you would try to maintain your margin trajectory at a similar level seen this quarter so Sir where are we seeing this delta come from what is your strategy it will come from price increases , product mix , geographical mix improvement something like that so can you throw some light on how will you able to cope this price increase and maintain your margins that is my first question?

Yes, very well you heard that right well our margins will remain sustain ed because of various reasons because as you heard that our increase in premiumization of products across the segment, for example in the PCR the higher rim sizes then we have introduced a lot of new products in the PCR itself and then truck radial as well . We have introduced the fuel saver and the X F series and then the X M series that is one , the other thing is that we are seeing the demand to be quite robust. We will be catering into this demand wherever we are seeing opportunity in terms of our selling price increase we will be doing that , our capacity utilization has been at a very good level so our efficiencies are also panning out so these are some of the area s in which we are focusing and expected raw mater ial price increase could also set that off.

Okay sir. Sir my second question is regarding the demand scenario for your international business like T ornel and Cavendish how are you seeing in near term how the demand is shaping up in the international market?

Well in the international market first of all that we are seeing that the worst is sort of behind us, there has been some signs of normalization in the channel inventory and imp roving customer confidence and business sentiment. There has been in some markets cooling off of the inflationary pressures , also the interest rates have peaked out so we are making continuous efforts in terms of our expanding in our global market presence and we are seeing that there will be improvements going forward in the H2FY2024.

Thank you so much sir thank you and all the best team.

Thank you. The next question is from the line of Mitul Shah from DAM Capital. Please go ahead.

My first question is on export side. Export if you can give either in value terms or volume terms Q2 versus last year Q2 how much decline we have witnessed?

But on quarter and quarter basis in value term there has been 26% improvement.

And that is why Anshuman Ji just said that the worst is behind us now and we are seeing an upward trajectory.

Just to add if you see the four quarters of last year, quarter one and quarter two was quite good for exports, but in quarter three and quarter four the demand had fallen sharply now in quarter one we saw some recovery and quarter two has again been better as Anshuman Ji said quart er two was 26% better than quarter one so going forward we expect that quarter three is generally not a very strong quarter for exports because of the year end change and all that, but quarter four onwards we expect that the demand should be robust the only thing which you have to watch for is the geopolitical situation and which way it goes.

Sir this 6% decline in volume or value.

Value decline.

Second question is on this new capacity addition and capex as we are high lighting more focus on the PCR in this incremental capacity and that to o again is focus towards the higher inch ring size so what could be the revenue potential once this entire new plant goes at a close to 100% utilization, incremental revenue?

Revenue from the new project which we are envisaging to set up will be 1:1

Can you give roughly ballpark number in terms of a revenue breakup likely between the PCR and non-PCR in this incremental capacity?

As I said earlier we are still working out the details and we have decided to invest about Rs.1000 Crores and the details will follow and we will inform you in due course.

So lastly on this capex side. This Rs.1025 Crores would be spent over next one year from this October?

So Rs.500 Crores roughly incremental capex for one year like and existing capex already we are in the range of Rs.400, 500 Crores so broadly overall capex would be 1000 Crores per year for next two year can we assume that?

Yes that is right but on the existing capex which are undergoing at this point in time most of the capex has already been done so maybe some amount of capex payments and other things will continue in to the next financial year but okay you can take about that number.

Yes sir and last this QIP any timeline any indicative as per your internal assessment?

We are preparing the relevant requirement we are preparing papers for that but we would like to maybe target within this financial year I would say.

Okay sir thanks and all the best.

Thank you. The next question is from the line of Tushar an Individual Investor. Please go ahead.

Hi sir good morning and congratulations on the gr eat set of numbers. My question is on the capex side actually . If we see in the latest quarter our cash flow generation is roughly around Rs.350 Crores and for the entire year we can roughly generate Rs.1100 Crores cash and accordingly over the next two ye ars we can generate Rs.200 Crores cash which is more than sufficient for Rs.1 000 Crores capex that you have just announced then why are we looking at to dilute equity to raise Rs.500 Crores?

Good question this is I think to strengthen our balance sheet further and deleverage the company as this has been a point of discussion all the time that the company's balance sheet was slightly leveraged. In the last two years you would have seen a lot of improvement there on the debt reduction and also because we are undertaking the capex of about Rs.1,000 Crores so this could be m ix use of the capex and also the strengthening of the balance sheet and general corporate purposes.

Okay sir . It is also my humble request to the company to maybe wa it for the higher price to do this QIP as our company valuation is much lower compared to previous. Thank you sir.

Thank you for the opportunity and sir congratulations on the good set of numbers. So my question is on the EV side so sir if you can could you provide about the current market share in the EV tyre segment?

Well we are very focused on the EV opportunities and we have in our earlier expansion project which we had announced and going forward we have a full capability of making EV tyres in the commercial space which is the CV with truck and buses and even in the passenger and two three -wheeler we hav e the full range of products and we will have the compatibility of making these tyres in these new projects as well. We have witnessed in two three wheeler space growth in this and even in the PCR it is picking up and we have we are also supplying our EV tyres to various OEMs and presently having a good volume going forward and currently on the passenger side we have the HP E which is the EV tyre and in the commercial tires JUX E in the bus segment and E-Blaze for the two & three-wheeler segment and We are pa rticipating with OEMs and very closely working with Tata Motors, Ashok Leyland and also VCV on the EV front . Well right now the market is small , but we are doing some bits of numbers in the replacement markets as well.

Okay and also that we are exporting?

We are currently not exporting the EV tyres.

Any plan for this?

Yes we will explore as this market evolves we will explore the export opportunities as well.

Okay thank you so much.

Thank you. The next question is from the line of Marsal an Individual Investor. Please go ahead.

My first question is regarding this Banmore this capacity plant so what was our capacity utilization during this quarter?

95% plus.

So like there is a bit confusion here because like what I have seen in the press release that this with this Rs.31 2 Crores we have expanded our capacity by 12 lakhs unit but then we are again increasing by the similar 31% but the c apital outlay is almost double no change but Rs.617 Crores what is the reason for this one?

You are talking about the capex investment or you are talking about utilization?

No. I am talking about capex regarding this Banmore pla nt the second phase. In the first phase we have increased the capacity from 39 lakh to 51 lakh at a cost of Rs.312 Crores.

Right.

And like this increase by 31% and in the phase two again we increas ed capacity by 31% but the capital outlay is Rs.312 Crores but capacity is Rs.617 Crores why?

So as I have been saying in all the calls this point is raised that debottlenecking program and the balancing programs are the reasons for our lower capex which we had underta ken and now this expansion further is a full kind of a Brownfield expansion plan . Also over the last two years the costs have gone up and some cost element increase is there and also because now there are couple of equipments which were not required earlie r in earlier expansions those equipments are also going to be installed this time so that is the reason for increase in the capex cost.

So in the first phase the number of unit increase was 12 lakh right.

Total expansion earlier a lso in the first phase was almost about Rs.16 lakh and the second phase also was about something of that number and now it is of the capacity 19%. This also includes not only the passengers but also some other areas, the other segment.

That is fine sir but like in the first phase we increase d capacity by 12 lakh unit which was 31% of 31 lakh right.

Can you can you please discuss this separately with me I will explain and clarify you.

Your good name sir, how to reach you on which number.

You can reach out to me through email I will reply to you.

Okay and my second question was that regarding this employee cost. There has been mentioned by the previous participant we can see that like as compared to S eptember 2022 our revenue has gone up by 10% but employee cost has gone by 30% and the reason explained by the management team was in the like sort of excuse sir , it is a humble request there is no need to any excuse we need some concrete action as we can see leading company like Wipro Limited their profit was down, their executive chairman has taken lower salary, their CEO has taken lower salary so what I am saying to make annual increment is not a regulatory or is not like obligation that we have to make increment every year I think something need to be done here because the employee cost has gone by Rs.50 Crores, so request to you and request to Anshuman Ji that I think going forward there is no need to give this like end March increment or the higher per cent or it is in March you have to give increment but like definitely we need to see that like how the profitability and how the revenue is increasing.

Okay sir. Thank you so much.

Thank you. The next question is from the line of Shashank Kanodia from ICICI Securities. Please go ahead.

Good morning sir and congratulations for a great set of numbers so just if you can share some thoughts of yours regarding the competitive intensity in the aftermarket so was ther e any price action by us or by competition corresponding in the aftermarket for this quarter.

There was no such price increases in the aftermarket but however as mentioned by Anuj Ji that in the select categories in the aftermarket we have increased our prices.

Okay but there has not been any price cut by us or any of the competition or is it so?

Well there is always a competitive scenario in the aftermarket and we are completely watchful and setting our prices accordingly.

But has there any price cut by the competition is what I am asking?

Anuj ji would you like to mention.

See actually as Anshuman Ji was explaining that there are market forces so segment by segment there would be or even I would say geography by geography there would be some specific offer, some scheme that is running . But overall, I would say that broadly the prices are maintained across most of the category and we also had done t he similar thing and for select segments we have also taken some increases so over all if you see net , net in the replacement market I would say it was maintained.

Okay sir, Sanjeev Ji if you can share the raw material basket details in terms of procurement cost per kg for natural urban carbon and synthetic rubber?

No sir I wanted to have the raw material procurement cost RM basket?

We have already discussed the raw material basket , there is a correction by almost about 5% during the quarter.

Procurement cost for natural over carbon black if you can share?

Individually is not readily available with me but you can s end me a query and I can reply to that.

Right and sir this RM basket is up 3 to 4% for this qu arter is also an indication from the management, right?

Yes.

Thank you . The next question is from the line of Siddharth Gupta an Individual Investor please go ahead.

Good afternoon sir. Sir I wanted to know have you decided on any price for the QIP or are we going to wait for a better price in the coming months?

I think this is not the time to decide about the prices we have to go as per the SEBI pricing formula so that we will discuss and decided at the later stage.

Okay that is it, that is it from my side. Thank You.

Thank you . T he next question is from th e line of Sagar from Retail Investor . Please go ahead.

So what would be the revenue mix by market at standalone level?

The revenue mix for the standalone level is OEM comprising of 30%, replacement 55% and export nearly around 15%.

What would be the revenue mix by product line at standalone level?

In terms of the standalone the truck & bus segment would be 55% , passenger segment would be 32% and non-truck will be 13%.

As there are no further questions I now like to hand the conference over to the management of JK Tyre for closing comments.

Thank you so much . I would like to once again thank you everyone for joining us today discuss Q2 FY2024 performance. We hope we have been able to reply to your questions to your satisfaction. Thank you so much everyone.

Thank you. On behalf of ICICI Securities Limited that conclude this conference. Thank you for joining us and you may now disconnect your line.