JK Tyre & Industries Limited (530007) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the JK Tyre & Industries Limited Conference Call hosted by Emkay Global Financial Services. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Chirag Jain from Emkay Global Financial Services. Thank you. And over to you, sir.

Thank you. Good morning, everyone. On behalf of Emkay Global, I would like to welcome you all to the 3Q FY '25 Earnings Conference Call of JK Tyre & Industries Limited. Today, we have with us senior management team represented by Mr. Anshuman Singhania, Managing Director; Mr. Arun K. Bajoria, Director and President, International Business; Mr. Anuj Kathuria, President, India Operations; Mr. Sanjeev Aggarwal, Chief Financial Officer; and Mr. A.K. Kinra, Financial Adviser. We'll begin the call with opening comments from the management team, followed by Q&A session. Over to you, sir.

Yes. A very good morning to all of you. It is my great pleasure to welcome you all to the JK Tyre Q3 FY '25 Earnings Call. First of all, I would like to extend my warm wishes to all of you and your family for a very Happy New Year 2025. To begin, I would like to share some broad highlights of the Indian economy and then the auto sector, followed by the Q3 business performance. The Indian economy continued to maintain its position as a bright spot in the global economy landscape. However, its performance during the year '24 was a mixed bag. While the economy displayed a remarkable resilience in the face of global uncertainties, continued domestic issues impacting sentiments to a certain extent. Going forward, a robust tax collection, government thrust on infrastructure and private CapEx aided by policy reforms is likely to drive the GDP growth. As per the RBI forecast, the real GDP growth of the Indian economy for the FY '24, '25 is expected to be around 6.6%, which continues to remain the fastest growing globally. The Indian automobile industry is one of the key drivers of growth for the economy. Presently, third largest in the world and expected to become the #1 in the next 5 years. The auto sector has started showing signs of the recovery. 2/3 wheeler sales have witnessed a strong growth and the passenger car segment continues to grow at a low single digit. Tractor demand is also rising, supported by healthy agri production. The CV segment is anticipated to benefit from the increased public and private CapEx and consumption boosting measures announced in the Union budget. Coming to our quarter performance Q3 FY '25, we achieved a healthy growth in the replacement market on a Q-on-Q basis. However, modest growth in the OEM limited the overall domestic growth, which reflected a broader economic trend. Going forward, the replacement market demand remains promising and the OEM segment is on a recovery path. Export was sustained on a Y-on-Y basis despite global uncertainties, trade challenges and supply chain constraints. In quarter 3 FY '25, operating margins were impacted by rising -- increasing raw material costs, particularly in the natural rubber. To mitigate cost pressures, the company continues to take necessary measures, including price revisions, enhancing product mix and cost optimization. TBR and PCR continues to be critical for the business segment for us. We are strategically enhancing capacities in collaborating manner. Earlier announced expansion projects at Banmore Tyre Plant for PCR and Laksar Tyre Plant for TBR are progressing well, and with state-of-the-art equipment being installed. Our radial capacity continues to be optimally utilized, and our focus is to sweat our assets to maximum to generate higher returns for shareholders. Our clear focus and technologically advancements in product design and research and development has allowed us to set new benchmarks within the industry. Further, we are strengthening our tech-enabled manufacturing efforts to improve efficiency while ensuring highest quality standards. These efforts are being recognized by the OEMs, and are facilitating expansion of our global footprint. As a part of our digital transformation journey, we have recently established Digital & Analytics Center of Excellence to enhance data-driven operational efficiencies. JK Tyre is the first Indian tire company to join the global RE100 club, targeting for 100% renewable electricity by 2050. JK Tyre is a sustainably-led organization, focusing and investing resources in developing sustainable, innovative and value-added products, in line with our vision to be a green and trusted mobility partner. We have tied up sustainability-linked loan with International Finance Corporation, a first in India -- Indian tire industry. Now, I would request Bajoria ji to talk about the performance of Tornel, Mexico.

Thank you very much, MD sir. I will now share the highlights of Mexican economy and thereafter, JK Tornel, Mexico, for the third quarter of financial year '25. As per the IMF's World Economic Outlook report, Mexico's real GDP is projected to grow by 1.8% in 2024 and 1.4% in 2025. Now, moving on to the financial performance of JK Tornel. Revenues for Q3 stood at MXN 1,282 million, equivalent to INR 507 crores compared to MXN 13,101 million in constant currency terms. The decline in revenue was primarily due to the Christmas holidays and the appreciation of the Indian rupee against the Mexican peso. However, EBITDA margin remained steady at 7.9%. Higher raw material costs, particularly natural rubber prices continue to be a key area of focus. The overall raw material basket in Q3 increased by approximately 12% on a quarter-on-quarter basis, which we have largely passed on to the customers. Additionally, the Mexican peso depreciated by 6% against the U.S. dollar in the last quarter, which should support JK Tyre's exports in the coming quarters. Our capacity utilization in the PCR category remained high at 90%-plus. To reinforce our dominance, we have launched new premium products in higher rim sizes, further strengthening our product portfolio, catering to the evolving needs of advanced markets like USA, including domestic market. As part of our strategy to expand in the domestic market, we continue to expand our distribution network. Additionally, we are supplying more cost-effective products to mass merchandisers. We are proud to announce that JK Tornel's plants in Mexico have been awarded with the prestigious Sword of Honor award by the British Safety Council. This recognition is a testament to our unwavering commitment to workplace health and safety management. I would now request Mr. Sanjeev Aggarwal ji to talk about the financial performance of this quarter.

Thank you, sir. Thank you very much. So let me brief you about the key highlights for Q3 FY '25. The first one is the consolidated revenue for the quarter were recorded at INR 3,694 crores, which remained flat on Y-o-Y basis. EBITDA margins during the quarter were recorded at 9.1% vis-a-vis 12.2% in the previous quarter, which has contracted by 309 basis points due to sluggish demand in OEM and the higher raw material cost, primarily driven by a significant rise in natural rubber prices. Profitability at EBITDA level were recorded at INR 335 crores in this quarter. Cash profit stood at INR 212 crores, and the profit after tax was recorded at INR 57 crores. Consolidated capacity utilization for the quarter was 78%. The utilization of radial capacities remained over 80%. Consolidated exports stood at INR 560 crores, flattish on year-on-year basis. Subsidiary companies, Cavendish Industries Limited and JK Tornel, Mexico, contributed significantly to the revenues and profitability on a consolidated basis. Cavendish posted a top line of INR 1,025 crores, the highest ever for a quarter with EBITDA of INR 92 crores, registering a margin of 9%. Earnings per share on a consolidated basis stood at INR 1.88 per share during the quarter. Return ratios, ROCE and ROE continue to be in double digits and net debt stood at INR 4,319 crores for the quarter ended December '24 as against INR 4,340 crores in the previous quarter. Leverage ratios, net debt to equity and net debt to EBITDA were at 0.89x and 2.4x as on December '24, respectively. The balance sheet of the company continues to remain healthy. We have already circulated our earnings presentation, which is available on our website as well as on stock exchange website. And now we open the forum for the questions-and-answers. Over to you, Chirag. Thank you.

[Operator Instructions] The first question comes from the line of Abhishek Jain from AlfAccurate Advisors Private Limited.

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, 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 raw material -- average raw material prices have increased 2% on a quarter-on-quarter basis. And here, I would say that here the natural rubber prices have played -- it has actually played a little havoc here. 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 Asia belt. So these -- all these have impacted in terms of the increase in the natural rubber prices. So the whole basket of raw material prices have increased to 2% on quarter-on-quarter basis.

But in our numbers, basically, we see that there is an impact of the 320 bps on the quarter-on-quarter 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 the inventory that was lying at the company or something else?

Yes. Actually, what has happened is that in quarter 1 and quarter 2, we had taken some strategic stocking of the material, which helped us to evade some of the cost in quarter 2. But then that strategic inventory had depleted. And quarter 3 saw the full impact of the raw material.

Okay. So most probably that...

If I may add to what Anuj ji just mentioned, the good thing is that most of the inventory has already been consumed in Q3 first price high. So in Q4, we can expect improvement -- some improvement probably on this side, unless there is again some increase in raw material prices going forward. So that is uncertain. But yes, there has been the major impact of the raw material prices in Q3.

Okay.

And your other question was on the replacement volumes being higher and still the margins kind of -- see, margins have been impacted overall by the raw material, as we explained. And just to clarify, replacement margins and OE margins are not very different as of now. And wherever the OEMs, they have also been kind of -- the indexation is there with the raw material price increase. So, we have been able to get, 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 OE.

But just to tell you that replacement market in terms of the numbers from the previous corresponding quarter, we had grown at 16%. And Passenger Car Radial had grown at 24%.

Okay. And sir, on the Mexico, basically, there is a significant depreciation of Mexican peso versus INR. So, that has gone down to INR 5 to INR 3.8 this time despite a...

INR 3.95.

INR 3.95. Despite that, very strong revenue growth we have seen in quarter-on-quarter in last 3, 4 quarters in Mexican -- in terms of the Mexican pesos. So, just wanted to understand if we convert into the rupee, we get a 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?

Yes. We are doing 2 things. One, straight away 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 MXN 21 to a dollar. But now it is back to about MXN 20.55. So, our exports, already they were taking place, but now we are going to increase our exports many more times so that we can get advantage of this higher peso earning. So that is one. And secondly, as I have mentioned that we are now supplying the tires 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 compared to the present product portfolio where we had lower -- higher rim sizes. And now we have taken care of that action.

But what we have seen that in the last quarter, we have -- there was antidumping duties on the Chinese tires, plus you are talking of the export will grow significantly. Despite all these things, we have not seen any improvement on your numbers even on the top line or even on the bottom line. So, just wanted to understand how the revivals will come.

See, the first thing which I had mentioned in my small opening remarks, the quarter 3 typically is a shorter quarter because we have 16 days of closed plant in December due to Christmas holidays. In Mexico, the third quarter, we are only working effectively for 2 months and 17 days. So, that is the main reason that despite all this, 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 on the Cavendish. So, they have seen a very strong growth quarter-on-quarter wise on the Cavendish. Is it because of the some benefit of the amalgamation? Or is there any increase in the capacity utilization, plus that there's a decline on the margin of the Cavendish? So despite the increase in the sales, there is a significant decline in the margin? And what is the reason of a significant increase in the top line on a quarter-on-quarter basis?

No, Cavendish, as we said that it has done the ever best quarterly sales of INR 1,025 crores. We have increased -- as we had earlier shared, we have had a CapEx plan, which -- 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 is in line with what the impact of the raw material, although we have been trying our best to pass 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 parent company. And on amalgamation, you asked on the merger, I don't think so there are any things as of now. Once it happens, then we will have to see the impact of that.

[Operator Instructions] The next question comes from the line of Mitul Shah from DAM Capital.

Sir, just one clarification on this carry forward inventory of high value in this quarter. So as peers indicated due to raw material pressure, Q3 versus Q4 gross margin more -- would be more or less flattish or maybe even slightly adverse. Compared to that, because of those carry forward inventory, our margin impacted much in Q3. So, do we expect Q4 margins 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 and mining activities. And I think the budget has also given a 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 trust on premiumization continues.

Sir, I'm asking for the impact of the carry forward inventory on the margins, Q3 versus Q4?

Mitul ji, we have -- I have already indicated that because in the Q3, the major impact was of the carry forward 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 to how much would be the export to North America right now roughly?

North America, our total exports is 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 1 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 that export is only 5%, right?

On the exports to USA from Mexico.

Understood. So, 95% of the export is already protected. Sir, last question is again on the replacement side. Within replacement, which segment from FY '26 point of view, you see to be the highest growth generator, be it a CV or farm equipment because CV has not been great in past 1 or 2 years. So on that base, do you think CVs to come back significantly on the replacement side? I'm talking about domestic market.

In the replacement market, we expect both the truck and bus radial, as well as the passenger car radial to be the 2 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 of the tires because of the additional running of the vehicles is also -- so we expect that the total market potential for PCR to further grow. And TBR also with the road infrastructure, the other -- government's trust on infrastructure, further mining activities will drive the demand for TBR as well. So these are the 2 growth segments we look forward.

Understood, sir.

And sorry, just to add, the 2-wheeler also is doing well. So the 2-wheelers also will see a very good demand in the market because -- both in the OE as well as in the replacement.

[Operator Instructions] The next question comes from the line of Chirag Jain from Emkay Global Finance Services.

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 we have -- wherever price revision we could do, we have done that and also we have improved our product mix. There is still some recovery, 4% to 5% to be done. We have to abide by the competitive market scenario. And 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%. Bias also utilizations are at around 70-plus percent. And this includes whatever capacities have already been 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 for the next 1, 1.5 years? Or we are fairly comfortable in terms of the capacities that we have?

We already have an ongoing CapEx program of INR 1,400 crores, out of which INR 1,000-plus crores is for the PCR expansion, which we have already shared and another INR 400-odd crores is a combination of TBR and all steel light truck radial. So that is going on, on track.

So, we are right now undergoing this implementation of our project. We will assess the market going forward and announce CapEx further.

Okay. This capacity utilization numbers that we shared, that doesn't include these 2 expansion on PCR and all steel radial?

No, these are not yet in place.

The next question comes from the line of Amar Gaur from Axis Capital.

I had twofold questions. One, if you could please break down your growth in India business in terms of volumes and pricing, if you could, please?

Kindly 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?

How much is pricing and volume?

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

So, by previous quarter, you mean quarter 2 of FY '25?

Yes, as compared to quarter 2 of FY '25.

Okay. And could you also highlight which are the segments where you saw higher growth versus slightly lower growth in which segments? 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 OEs, most of the segments have seen a decline. Would that understanding be correct?

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

So on a sequential basis? Sequential?

Sequential basis previous quarter?

Yes. So it was better than the previous quarter in the OE.

And sir, maybe I missed the Cavendish numbers. Is it close to INR 1,000 crores?

INR 1,025 crores, yes.

INR 1,025 crores. Okay. Okay. And sir, on the RM side, I know you have answered this question. Let me ask it 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, would you expect -- what kind of improvement can we expect sequentially on the RM side? Would it be 100 bps, 200 bps, anything that you can indicate based on your purchases that have happened over the last 2 months or so?

See, just to clarify, what I said is that in Q2 -- Q1 and Q2, we were carrying some low-cost inventories. I'm talking about raw material inventory here. And in Q3, we saw the full impact of the raw material inventory. What is expected is that going forward, the RM cost is further likely to -- the RM basket is further likely to increase by 1% to 2% in quarter 4. So definitely, whatever inventories that we have, which are going to be carried forward from quarter 3 will definitely give us some benefit for quarter 4. And again, the quarter 4 impact of raw material will be seen in the subsequent quarter.

Understood. Understood. And finally, if you can indicate what is the YTD CapEx that you have done and what do you expect for the full year?

So as we discussed earlier, we have been implementing INR 1,400 crores worth of CapEx at this point in time. And majorly, this is for the expansion of PCR capacity. It is about INR 1,025 crores. And the balance INR 400 crores is [Technical Difficulty].

I wanted to know YTD, how much CapEx have you done in this?

So this is, again, on an annual basis, the outlay is about INR 800 crores in this 3 quarters period. We have already spent about INR 600 crores.

[Operator Instructions] The next question comes from the line of Abhishek Jain from AlfAccurate Advisors Private Limited.

Sir, how much is the current net debt of the company and what is your debt reduction plan? And the company has taken loan from the IFC, how much benefit will come into the finance?

Sir, you are talking about IFC loan? Can you please let me know what is it that you are asking? Sorry, the question was not very clear.

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

Yes. So, net debt of the company today is INR 4,317 crores, which is net of the cash available with the company already. And the $100 million worth of loan which we have tied up with IFC is for the expansions, which are under implementation at this point in time. And partly, this is also to replace 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?

Sir, how much is the debt reduction plan in the medium term?

Debt reduction.

So the debt reduction on the long-term borrowing basis, we have been going ahead as per schedule and what we envisaged earlier, that's only in the short term. The working capital borrowings have gone up in the last 9 months period. And this is to maintain the strategic inventory and also some inventory were accumulated. But this is going to get corrected in next -- maybe in a quarter or so, in 1 to 2 quarters, I would say.

So, that means that finance cost will go down in the next financial year, sir? [Technical Difficulty]

Yes, we are hoping for that. Yes, definitely.

Okay. And sir, your combined and installed capacity is around 35 million tires per annum, given that around 82% to 83% capacity utilization. Currently the total revenue is around INR 3,650 crore or INR 3,700 crores. If you take the 95% capacity, your peak revenue would be around INR 4,300 crores. So -- and you are adding another INR 1,400 crores kind of the revenue -- INR 1,400 crores kind of the capex. So, that means the quarterly limit of that would be around INR 350 crores. So, can you assume that your peak revenue on a quarterly basis would be around INR 4,600 crores, INR 4,700 crores post this completion of capex?

So, 2 things. One is that the major expansion is for PCR capacities. And the total capacity utilization at this point in time in PCR radius, as Anuj ji mentioned earlier, was 90% plus. And also for the radial -- truck and bus radial is quite high. The overall utilization is at about 80% because of the bias capacity also being there. So the overall revenue definitely will go up in 2 years period by almost about the same number as we are expanding, so which is about INR 1,400 crores plus. So that should add to the total revenue.

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

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 in this thing. Plus we will also be making our best efforts to pass on the -- whatever is the under recovery in FY '25 to the market in FY '26. 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'll have to kind of keep it as of now that. But maybe in the next quarter, we'll be able to give you a sharper number on that.

[Operator Instructions] Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to the management for the closing comments.

Thank you. Thank you so much for participating in Q3 earnings call today. And I hope we have given you all the clarifications to your questions. And I would like to once again thank you on behalf of the management team. 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.