JK Tyre & Industries Limited analyst Q&A

Ladies and gentlemen, we will now begin with the question and answer session. The first question comes from the line of Abhishek Jain from Alfaccurate Advisors Private Limited. Please go ahead.

Thanks for the opportunity. Sir, in this quarter, we have seen a very significant increase in the RM cost despite a small increase in the overall RM basket. So, I just wanted to understand what is the reason of this much of increase - is there any high cost of inventory which is likely to go down in the coming quarter? And the second is that the replacement volume was much better than the OEMs in this quarter despite we have seen a contraction in the margin. So, if you can throw some color on it?

Yes, the average raw material prices have increased 2% on a quarter-on-quarter basis and here I would say that the natural rubber prices have actually played little havoc and the reason of which is actually because of the season changing and the climatic impact in this availability of natural rubber plus labor availability as well in the Southeast Asian belt. So, all these has impacted in terms of the increase in the natural rubber prices. So , the whole basket of raw material prices have increased by 2% on a quarter-on-quarter basis.

But in our numbers, basically we see that there is a n impact of 320 b ps on the quarter -on-quarter basis on the RM cost. That is much higher than the increase in the RM basket. So, just wanted to understand, is it because of the higher cost of inventory that was lying at the company or something else?

Yes, actually, what happened is that in Q1 and Q2, we had taken some strategic stocking of the material which helped us to evade some of the cost in Q2. But then that strategic inventory had depleted and Q3 saw the full impact of the raw material.

Okay. If I may add to what Anuj ji has just mentioned, the good thing is that most of the inventory has already been consumed in Q3, so in Q4, we can expect some improvement in margins unless there is again some increase in raw material prices going forward. Yes, there has been a major impact on EBITDA margins due to higher raw material cost in Q3.

Your other q uestion was on the replacement volumes being higher and still the margins have got impacted in Q3. See, the margins have been impacted overall by the higher raw material cost as we explained. And just to clarify , replacement margins and OE margins are not very different. And in the case of OEMs, also the indexation is there with the raw material price increase. Although it comes at a lag, but still, we get it. In the replacement market passing on the raw material is again depending on the market dynamics. So, it has to be seen quarter-by-quarter, but i think so margins are not very different between replacement and OEM.

Just to tell you that replacement market in terms of the numbers from the previous corresponding quarter, we had grown at 16% and the passenger car radial had grown at 24%.

Okay. Sir, in Mexico, basically there is a significant depreciation of Mexican Peso versus INR. So, that has gone down to 5 to 3 .95. Despite that, very strong revenue growth was not seen on quarter- on-quarter in last three, four quarters in terms of the Mexican Pesos. So, just wanted to understand if we convert into the rupee, we indicated very hard impact on our revenue and the margin, so going ahead, what is your strategy to overcome from this problem, is there any hedging policy or anything else, and what is the impact of this depreciation?

We are doing two things: One, straightaway due to the Peso which has gone down to almost 20.5, in fact the day the president announced 25% import duty from Mexico into USA, the Peso touched 21 Peso to a Dollar. But now it is back to about 20.55. So, our exports are already taking place, but now we are going to increase our exports many more times so that we can get the advantage of this higher peso earning. So, that is one. And secondly, as I had mentioned that we are now supplying the t yres to the evolving needs of the advanced markets, that is higher rim sizes and that is going to be a little higher profitability margin as comp ared to the present product portfolio where we had higher rim sizes and now we have taken care of that action.

But we have seen that in the last quarter, we have the anti-dumping duties on the Chinese tyres plus you are talking with the export will grow significantly. Despite all these things we have not seen any improvement on the number s even on the top line or even on the bottom line. So, just wanted to understand how the results will come?

See, the first thing which I had mentioned in my small opening remarks that Q3 typically is a shorter quarter because we have 16-days of closed plant in December due to Christmas holidays in Mexico. So, we are only working effectively for 2 Months and 17 days. So, that is the main reason. Despite all these, you are seeing a lower top line which you are absolutely right , but that will not happen in the Q4, which is January to March 2025.

Okay. And my last question is on the Cavendish. So, there is strong growth quarter-on-quarter on the Cavendish. Is it because of some benefit of the amalgamation or is there any increase in the capacity utilization plus is there a decline on the margin o n the Cavendish? So, despite that increase in the scale, there is a significant decline in margin, what is the reason for a significant increase in the top line on quarter-on-quarter basis?

Cavendish, as we said that it has done the ever best quarterly sales of Rs.1,025 crores. As we had earlier shared, we had a capex plan where the TBR capacity was increased. So, the impact of that is being seen now and going forward further impact will also be seen. On the declining of margins, it on account of impact of the raw material prices, although we have been trying our best to pas s it on to the market. But again, Cavendish also has a sizable amount going into the replacement market. So, that is the reason. Moreover, the other things are exactly in line with the par ent company. And on the merger, I don't think so there are any things as of now. Once it happens, then we will then see the impact of that.

Thank you, sir. That's all for my side.

Thank you. A reminder to all participants, you may press ‘*’ and ‘1’ to ask a question. The next question comes from the line of Mithul Shah from DAM Capital. Please go ahead.

Thank you for the opportunity . Sir, just one clarification on this carry -forward inventory of hig h value in this quarter. So, as peers indicated due to raw material pressure Q3 versus Q4 gross margin would be more or less flat tish or maybe even slightly adverse . Compared to that because of those carry-forward inventory, our margin was impacted much in Q3. Do we expect Q4 for JK gross margin level should be much better compared to Q3 if we assume raw material prices remain at the stable level?

Our outlook going forward is that demand in the replacement market is going to be promising. OE sector is right now in the recovery path. We are expecting the demand to improve and pick up in the government infrastructure, public and private capex cycles also to normalize in terms of the construction and industrial & mining activities. And I think the budget has also given lot of impetus to the MSME sector and the increase of spending from the middle class. So , on the whole, we are very optimistic on the outlook. Our thrust on premiumization continues across the sector.

Sir, I am asking for the impact of the carryforward inventory on margins Q3 versus Q4.

I have already indicated that because in Q3 the major impact was of the carryforward inventory. So, that is almost being utilized and unless there is some increase in raw material prices going forward again, so we can expect some improvement in margins.

Yes, sir. And second question is on Mexico operation. From Mexico how much would be the export to North America right now roughly?

North America, about 5% of the total export because we are exporting more to Brazil and to Latin America. But we are now increasing our exports to USA with the higher rim sizes , but then on the other hand, I must tell you that this 25% duty on the imports from Mexico into America has been put on hold by the President of USA for about one month, during which time some negotiations are taking place, because as you would have read from the papers , immediately Mexico has imposed 25% duty on any import from USA into Mexico. So, naturally, now the Americans are reconsidering and let us see what happens. But as of now, there is not much of an impact on the exports to USA from Mexico.

Understood. So, 95% of the export is already protected?

Yes. Thank you.

Last question is again on the replacement side . Within the replacement which segment from FY26 point of view you see to be the highest growth generator be it CV or farm equipment because CV was not great in past one or two years, so on that base, do you think CVs to come back significantly on the replacement side? I'm talking about the domestic market.

In the replacement market, we expect both the truck and bus radial as well as the passenger car radial to be the two growth segments. We have to wait and watch, because one thing which is clearly coming out is that the number of passenger cars that are getting into the market every month, is at a very high level, also, the replacement cycle is low because of the additi onal running of the veh icles. So, we expect that the total market potential for this year to further grow and with the improving road infrastructure, the government thrust on infrastructure for the mining activities will drive the demand for TBR as well. So, these are the two growth segments we look forward to. Just to add, the two wheeler also is doing well. So, the two wheelers also will see a very good demand in the market both in the OE as well as in the replacement.

Thanks, sir.

A reminder to all participants, please press ‘*’ and ‘1’ to ask a question. The next question comes from the line of Chirag Jain from Emkay Global Financial Services. Please go ahead.

Yes, sir, just wanted to get a sense in terms of pricing action that we have taken in various segments, if you can just share some thoughts over there?

We have increased our pricing on a quarter-on-quarter basis to 1% and wherever price revision we could do, we have done that, and also we have improved our product mix. There is still some under recovery of 4%- 5% yet to be done. We have to abide by the competitive market scenario. So, we will take that adequately when the opportunity is there.

Okay. And how is the capacity utilization looking like for us in terms of the key product segments including the recent expansion that we have undertaken?

So, in terms of capacity utilization for radial, we are in excess of 80% , for Bus also, utilizations are at around 70 % plus, and this includes whatever capacities have already expanded that have been taken into consideration.

And for PCR?

PCR, as I said, it is close to 90%.

Okay. And do we see further scope for let's say major capex over the next one, one and a half years or we are fairly comfortable in terms of the capacities that we have?

We already have an ongoing capex program of Rs.1,400 crores, out of which Rs.1,000 crores plus is for the PCR expansion, which we've already shared and another Rs.400 odd crores is a combination of TBR and all steel light truck radial. That is going on track.

We are right now undertaking the implementation of above projects. We will assess the market going forward and announce capex further.

Okay. This capacity utilization numbers that we shared, that doesn't include these two expansion on PCR and all steel radial?

No, these are not yet in place.

Understood. Understood. Yes. That's it from my side. I'll fall back in the queue.

Thank you. The next question comes from the line of Amar Gaur from Axis Capital. Please go ahead.

Yes. Hi. Thanks for taking my ques tion. I had two -fold questions. One, if you could please break down your growth in India business in terms of volumes and pricing?

Can you repeat your question please?

Yes. I just wanted to understand about 2% kind of growth that we have seen in the India business , how much of that was from pricing and how much was volume-led?

On a comparison with the previous quarter, there has been a growth in the volume by around 2% for the India operations and we have also had an improvement in the pricing by 1%.

Previous quarter you mean, Q2 FY25?

Yes, as compared to Q2 of FY25.

Okay. Could you also highlight which are the segments where you saw higher growth versus slightly lower growth, I know you indicated about OE and replacement, but in terms of end markets?

So, the growth came mainly from the PCR and the TBR segments and also in the 2/3 wheelers.

So, if I understand that correctly, in replacement , all the segments have done very well, but in OE s most of the segments have seen a decline, would that understanding be correct?.

OE, the major decline is in the TBR segment. On a year-on-year basis, actually passenger car was okay.

So, on a sequential basis?

It was better than the previous quarter in the OE.

Sir, maybe I missed the Cavendish number. Is it close to Rs.1,000 crores?

Rs.1,025 crores.

And sir, on the RM side, I know you answered this question. Let me ask you a little differently. So, if I look at the RM to sales, it's about 65% for the consolidated business, right, and you are talking about all the higher price RM has already been consumed. So, what kind of improvemen t can we expect sequentially on the RM side – would it be 100 bps, 200 bps anything you can indicate based on your purchases that have happened over the last two months or so?

See, just to clarify, what I said is that in Q1 and Q2, we were carrying some high cost inventories. I'm talking about raw material inventory. And in Q3, we have seen major impact of the high cost raw material inventory. What is expected is that going forward the RM basket may further likely increase by 1% to 2% in Q4. So, whatever inventories that we have been carrying from Q3 will give some impact in Q4.

Understood. And finally, if you can indicate what is the year to date capex that you have done and what you expect from the full year?

So, as we discussed earlier, we have been implementing Rs.1,400 crores worth of capex at this point of time, and majorly this is for the expansion of PCR capacity at about Rs.1,025 crores and the balance Rs.400 crores is for the Truck & Bus and All steel light struck radial (ASLTR).

I wanted to know year to date how much capex have you done for this?

This is again on an annual basis; the outlay is about Rs.800 crores in these three quarters period. We have already spent about Rs.600 crores.

Alright. Thanks. All the best.

Thank you. Participants, please press ‘*’ and ‘1’ to ask a question. The next question comes from the line of Abhishek Jain from Alfaccurate Advisors Private Limited. Please go ahead.

Sir, how much is the current debt of the company and what is your d ebt reduction plan, and the company has taken a loan from the IFC, how much benefit comes in?

How much is the current net debt of the company and what's your debt reduction going ahead?

So, the Net Debt of the company as on 31 st Dec’24 was Rs.4,317 crores which is net of the cash available with the company and the $100 million loan which we have tied up with IFC is for the expansions which are under implementation at this point in time and partly this loan will be used for replacing the high-cost debt in Cavendish Industries Limited.

Okay. And our debt reduction plan for the medium term, sir?

The line is not very clear. Can you repeat.

How much is the debt reduction plan in the middle term?

Debt reduction on the long-term borrowing spaces, we have been going ahead as per schedule and as we envisaged earlier. It's only in the short term the working capital borrowings have gone up in the last nine months period and this is to maintain the strategic inventory and also some finished goods inventory were accumulated but this is going to get corrected in next one or two quarters.

So, that means that finance cost will go down in the next financial year?

Yes, we are hoping for that.

Okay. And sir, with combined installed capacity is around 35 million tyres per annum , with that around 82% to 83% capacity utilization currently, the total revenue is around Rs.3,650 or Rs.3,700 crores, if we take the 95% capacity also, peak revenue would be around Rs.4,300 crores. So, adding another Rs.1,400 crores kind of the capex, so that means the quarterly run rate of that would be around Rs.350 crores. So, can you explain that peak revenue on a quarterly basis would be around 4,700 crores post this completion of capex?

So, two things. One is that the major expansion is for PCR capacities and the total capacity utilization at this point in time in PCR as Anuj ji mentioned earlier was 90% plus and also for the Truck and bus radial is quite high. The overall utilization is at about 80% because of the bias capacity . So, the overall revenue definitely will go up in two year s period almost equivalent to the amount of investments of Rs.1,400 crores plus.

And my last question is on FY'26. What kind of the margin target do you have , given that RM cost will be stable at this point of time?

See, what is expected is that it all depends on how the raw material basket plays out. We expect that it should not be as volatile as it was, plus we will also be making our best efforts to pass on whatever is the under recovery in FY25 to the market and FY26. So, both these efforts on both the sides should help normalization of the margins. So, generally, as we had earlier also said that in the longer term the industry is somewhere between that 12% to 15% range. So, let's see we will have to kind of keep it like that as of now, but maybe in the next quarter, we will be able to give you a sharper number on that.

Thank you. That's all from my side.

Thank you. Participants please press ‘*’ and ‘1’ to ask a question. Ladies and gentlemen, as there are no further questions, I would now like to handover the conference to the management for closing remarks.

Thank you so much for participating in our Q3 Earnings Call today and I hope we have given you all the clarifications to your question s and I would like to once again thank you on behalf of JK Tyre. Thank you very much.

Thank you, ladies and gentlemen. On behalf of Emkay Global Financial Services, that concludes this conference. You may now disconnect your lines.

This transcript may contain transcription errors. The Company takes no responsibility of such errors, although efforts has been made to ensure high level of accuracy. Some minor editing may have been done for better readability. In case of any discrepancy, the audio recording uploaded on the stock exchange on February 10, 2025, shall prevail.