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

Ladies and gentlemen, good day, and welcome to the JK Tyre & Industries Limited Q1 FY '26 Earnings Conference Call hosted by Emkay Global Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Chirag Jain, Deputy Head of Research from Emkay Global. Thank you, and over to you, sir.

Thank you, Huda. Good afternoon, everyone. On behalf of Emkay Global, I would like to welcome you all to the Q1 FY '26 Earnings Conference Call of JK Tyre & Industries Limited. Today, we have with us the senior management team represented by Mr. Anshuman Singhania, Managing Director; Mr. Arun K. Bajoria, Director and President, International; and Mr. Sanjeev Aggarwal, Chief Financial Officer. We will begin the call with opening comments from the management team, followed by the Q&A session. Over to you, sir.

Yes. A very good afternoon to everyone. I welcome you all for the JK Tyre Q1 FY '26 Earnings Call. I'm happy to be here, and I have with me Dr. Arun Bajoria ji, Director and President, International; and Mr. Sanjeev Aggarwal ji, who is the CFO. India continues to remain a bright spot in the world, struggling with growing uncertainty and trade-related disruptions. The Indian economy has done incredibly well with the GDP growth of 7.4% in quarter 4 FY '25. Taking the overall FY '25 growth to 6.5%, which is double the global average growth, underscoring the country's resilience on back of its robust macroeconomic strength. As per RBI, the GDP is projected to grow at 6.5% in FY '26. Growing private investments and increasing localization, make in India are the key drivers, fostering India into becoming a more meaningful part of the global supply chain. Lower interest rates and improved liquidity situation declining crude oil prices and normal monsoons argue well for the growth going forward. However, global fluctuation due to U.S. tariffs and geopolitical situation continue to pose challenges. India-U.K. free trade agreement has been recently signed. It is a breakthrough opportunity, which is expected to align customer interest with broader goals of Indian industry as it maintains a balanced approach to tariff commitments, benefiting both India and U.K. manufacturing industry. Recently announced U.S. has imposed 50% tariff on the Indian imports. In Q1 FY '26, the performance of the auto industry was relatively flat. Growth in tractors, 2/3-wheeler and exports helped in holding the growth in the industry well. Domestic commercial vehicle volumes have remained flat and export has registered high growth of 23% on a year-on-year basis. PV segment continues to perform well with an increased share of SUVs, along with an overall PV sales crossing 1 million mark is encouraging and increasing the total pool of cars. With the upcoming festive season, coupled with benefit of the recent repo rate cuts and favorable monsoon conditions, we expect the consumer sentiments to improve further. In FY '26, Indian tyre industry is expected to achieve 7% to 8% growth on back of the strong domestic replacement demand despite muted OE offtakes. Premiumization continues to play a pivotal role in improving the realization. Indian tyre industry is exporting heavy -- export heavy manufacturing sector with outbound shipping, which surpasses INR 25,000 crores in FY '25, registering a growth of 10% on a year-on-year basis despite global economic uncertainties. This growth is attributed to constant investment in capacity expansion, improvements in manufacturing efficiency and increased focus on enhancing the R&D capabilities. The Indian mobility landscape is witnessing a radical shift owing to emergence of artificial intelligence and machine learning, which are regarded as the modern drivers of transformation. JK Tyre is embracing this technological shift by leveraging the use of advanced technologies at every stage of manufacturing and across functions, helping us to deliver best-in-class products. With great pride, I would like to share with you that JK Tyre is ranked amongst the top 15 strongest tyre brands globally by brand finance. This recognition marks a significant endorsement of our global competitiveness, technological strength and brand leadership. Our core focus is to delivering products and solutions, which offer a seamless blend of comfort and high performance of our customers. Recent expansions in PCR capacities have helped JK Tyre to consolidate its position amongst the top PCR tyre manufacturer in India. I'm happy to share that JK Tyre is already moving well ahead on its sustainability path by achieving 70% reduction in GHG emission by 2025, much ahead of the original plan of 50% reduction by 2030. In this quarter, we deepened our market penetration and have onboarded 240-plus dealers and 35 exclusive brand shops across India. Also 40-plus new fleet accounts have been added, nearly 1,500 mark. Moving on to the financials of this quarter. JP Tyre witnessed the best ever domestic performance. The domestic revenue grew in double-digits with innovative and premium products. Digitalization and focus on enhancing operational efficiencies are some of the other key drivers which are helping -- helped the revenue growth. Volumes in both commercial and passenger category achieved the highest sales in this quarter, driven by strong brand building initiatives, underscoring the enhanced customers' trust in our product quality. To further reinforce our brand credibility, we have launched targeted digital campaigns across the product categories, achieving an impression of over 53 million consumers. In the mobility space, 125 electric buses from Ashok Leyland Switch were launched in Chennai and was flagged off by Tamil Nadu Chief Minister. We are proud that all these buses were equipped with our tyres, JUXe tubeless tyres, which reinforces our leadership in the EV segment. The momentum has been really good in this quarter. We are fully ready to build upon the same going forward and with all our effort and dedicated to serve the customers proactively while sustaining profitable growth, benefiting all our stakeholders. Now I would like to take you through some of the key operational highlights. Best ever performance of India operation clocked quarterly revenue of INR 3,475 crores, up by 9% on a year-on-year basis as against INR 3,188 crores in corresponding quarter. The growth momentum in the domestic market remained robust in the quarter 1 with JK Tyre clocking a sales growth of 11% on a year-on-year basis, equally contributing by the OEM and the OE segment. TBR volumes in the replacement and OE market grew by 7% on a year-on-year basis. Passenger line radial category registered a significant volume growth in the replacement market by 32% on a year-on-year basis. Similarly, export volume also registered a robust growth of 39% on year-on-year basis. Farm category volume picked up pace with replacement and OE markets achieved a growth of 26% and 69%, respectfully, on a year-on-year basis. 2/3-wheeler category volumes registered a robust growth in OEM segment by 53% on year-on-year basis. Raw material and selling price. On a quarter-on-quarter basis, raw material prices remained flattish, whereas average net sales realization improved by 1.3%, mainly through product mix improvement. As a part of deleveraging journey, we have been constantly reducing our debt levels. As on 30th June '25, gross debt on a consolidated basis stands reduced by INR 324 crores. Projects under implementation involving a CapEx of INR 1,400 crores are progressing as per schedule. CapEx outlay for the full year stands at INR 900 crores to INR 1,000 crores. Now I would request Bajoria ji to talk about the performance of JK Tornel.

Thank you, MD, sir. I'll start by sharing some brief highlights of the Mexican economy, followed by JK Tornel's performance for this quarter. Mexico is one of the largest trading partners of U.S.A. with 80% of its exports going into U.S. Given such huge exposure to U.S., the heightened volatility continues to remain an area of concern. But on the other hand, around 50% of Mexican exports are USMCA, United States-Mexico-Canada Agreement compliant, which are projected to rise to 75% in 2026, attracting 0% tariff. Mexico's Central Bank is also playing a crucial role in stabilizing the economy by easing the monetary cycle, and it has lowered the policy rates, TIIE to 8.5% by the end of this quarter. Further, local currency, Mexican peso has depreciated against U.S. dollar by 13% year-on-year which was 19.5% in Q1 of FY '26 versus 17.25% in Q1 of financial year '25, which bodes well for our future exports. Revenues of JK Tornel for Q1 FY '26 were recorded at INR 505 crores, up 12% over previous quarter of Q4 FY '25, reflecting continued resilience of our products in domestic and export markets despite the ongoing uncertainties. Further, revenues in constant currency stood at MXN 1,147 million, up by 7% quarter-on-quarter versus MXN 1,234 million in Q1 of FY '25, lower by 7%. To further strengthen our product portfolio and enhance customer base, we have started the development of ATV, which is all-terrain vehicle tyres, a profitable business in U.S.A. In addition to above, we are foreseeing a revival of sales in the U.S. markets on account of clarity with respect to non-applicability and further postponement of tariffs on tyre exports from Mexico to about 90 days as of now. Further, we are fully ready to capture a potential opportunity in passenger and light truck market on account of closure of competing tyre company's Mexican plant. Now I would request Mr. Sanjeev Aggarwal, our CFO, to talk about the financial performance of JK Tyre for the first quarter of FY '26.

Thank you very much, sir. I will briefly share the key highlights for Q1 FY '26. The first one is the consolidated revenue for Q1 FY '26 were recorded at INR 3,891 crores, which is up by 6% on Y-o-Y basis as against INR 3,655 crores in the corresponding quarter. Consolidated EBITDA for Q1 FY '26 was recorded at INR 424 crores versus INR 516 crores in the corresponding quarter last year. However, over the previous quarter, EBITDA improvement -- improved by about 10%. EBITDA margins during Q1 were recorded at 10.9% versus 10.2% in the previous quarter. Cash profit for Q1 stood at INR 309 crores, up by 17% on Q-on-Q basis. Profit after tax for the quarter stood at INR 155 crores. Capacity utilization for Q1 was nearly 80% on a consolidated basis. However, the utilization of radial capacities remained over 85%. Exports remained resilient during Q1 despite the ongoing U.S. tariff-related uncertainties and other geographical challenges -- geopolitical challenges. However, exports of passenger car tyres witnessed a strong traction on both year-on-year basis and on Q-on-Q basis. Cavendish Industries Limited posted a top line of INR 800 crores in Q1 and recorded an EBITDA of INR 51 crores in the quarter. Both the subsidiaries, Cavendish Industries and JK Tornel Mexico continue to add significantly to the overall financials of the company. Consolidated earnings per share nearly doubled at INR 6.03 per share in Q1 as against INR 3.54 in the previous quarter. Return ratios, ROCE and ROE continue to remain at high levels. And net debt stood at INR 3,862 crores for the quarter as against INR 4,081 crores in the previous quarter, a net reduction of INR 219 crores on a net basis. The balance sheet of the company continues to remain healthy with robust key financial ratios. Leverage ratios, that is net debt to equity and net debt to EBITDA were 0.74x and 2.4x as on 30th of June, respectively. The scheme of amalgamation of Cavendish with JK Tyre is progressing well and has already been approved by stock exchanges and SEBI. And shareholders and creditors' meetings have been convened by NCLT, which are scheduled to happen on 3rd of September this year. So we have already circulated the earnings presentation, and which is available on our website and on the website of stock exchanges. So we can open the forum for question-and-answers, please. Thank you.

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

Congrats on the decent set of numbers. Sir, in this quarter, we have seen that margin has improved basically driven by the stand-alone numbers. So how the margin trajectory will improve in the coming quarter given that there is a fall in the rubber prices in last couple of months, if you can give some guidelines?

So there has been a margin improvement versus the previous quarter. And here, with our new and innovative products, which are very well received in the market are [ gaining traction, ] our OEM approvals and plus in the higher rim sizes in the PCR are driving good margin expansion and as well as our -- in the replacement market as well. We have -- in the replacement market in the passenger, we were up year-on-year in terms of the numbers, 32%. And that is in the passenger car line. And even in the truck bus radial, we were high single-digit on a year-on-year basis. So this is giving us confidence that going forward, this will definitely have a good traction because as you heard that the repo rate has cut, there has been good monsoon. And the thrust on the infrastructure push by the government is coming in very clearly. So this all argues well for the demand generation.

So gross margin expansion first quarter FY '26 was around 120 bps quarter-on-quarter. So how the numbers will reflect in -- from second quarter onwards as most of the tyre companies are expecting that benefit of the fall in rubber prices will accrue from the second quarter significantly. So if you can give some guideline on the gross margin front?

Yes, you are right. So as we mentioned earlier, the raw material price scenario is likely to remain benign. And if that is the case, then definitely, we will be able to -- in the demand increasing scenario, we will be able to increase our prices, which will be supported, as Anshuman ji mentioned, with the increased product -- improved product mix and increased volumes because as you are aware, we have already been implementing projects in PCR, TBR and all steel LTR tyres, which are margin accretive products. And this will definitely help us in improving the margins going forward. The NSR improvement will happen. And we are expecting that, hopefully, if the raw material prices remain within what we are expecting, we will be able to come back to the guidelines which we have been talking about for the margins -- range of margins on EBITDA level.

Okay. And sir, my next question on the Mexico business rupee versus Mexico peso average realization was INR 4.28 in this quarter, while it has now -- this exchange rate has moved to the INR 4.7 in the last 2, 3 months. So how do you see the benefit of it?

You see the benefit will definitely occur when we convert the peso to rupees while consolidating the profit and loss and the balance sheet in India. So certainly, you are right, it is going to benefit us.

And also the export...

This will be because there is a depreciation of the peso. So that will help us in exporting more. And in any case, you have heard in the opening remarks by Anshuman ji that there is a nil tariff, which has been imposed on the exports from Mexico to U.S. markets. So we will have the opportunities to grab actually, and we will increase our exports to North America as well as to other country -- other...

Brazil and LatAm.

Brazil and LatAm actually. So we are hoping that in addition to the increased domestic demand, the exports will also help us in improving the volumes and improving the margins.

So this quarter, despite the top line growth, margin turned negative in Mexico. So how do -- how can we see the numbers in the coming quarter in terms of the top line growth and plus that margin improvement? Because that -- this is the first time we are seeing the negative margin in the Mexico business, EBIT margin.

Yes. As you had heard our Managing Director say about the disruption in the Mexican market and all the industries because of the tariffs, which the tariff was going on, the tariff war and all that was going on, and they shifted from February to March. And then again, they shifted till the end of July. And now in August, they have shifted by another 90 days. So now we are feeling that it is settling down, and therefore, our sales will go up. And therefore, our bottom line is going to improve. And just to give you some kind of sense of comfort, July has been a very, very good year in the top line as well as in the bottom line.

And also one thing -- just to complete that part, hello, can you hear me?

Yes, yes. Go ahead.

Okay. So in the first quarter, there was in constant -- on constant currency basis, there was an increase in revenue by about 7%. And overall, when the pieces depreciated, so that has also helped us vis-a-vis the rupee on consolidation basis. So the revenue has gone up by 12% in a way. So this is going to be the case going forward as the uncertainties are not there now, and we can increase our -- we can focus on increasing our exports from the Mexican market.

So that means that EBIT margin of this business, which used to be 7%, 8% that will come back in the coming quarter?

Yes, absolutely, you're right.

Okay, sir. And my last question on the Cavendish. Sir, how -- what was the revenue and EBIT of Cavendish in first quarter?

So the revenues was slightly lower because of -- again, we saw some kind of a slow demand for the TBR from OEM side on that front. But I think now the replacement market, of course, has helped us to pick up the volumes. And the EBITDA margin was suffered lower because of this season only, lower revenue. But I think now we will come back to almost about INR 1,000 crores to INR 1,100 crores of average revenue for the quarter. And this will then allocate expenses over the larger number, and therefore, the margin will go back to the same levels as we have seen in the case of JK Tyres on a stand-alone basis.

The next question is from the line of Mitul Shah from DAM Capital.

Congratulations on a good stand-alone performance. Sir, my first question is on the Mexico operation, whereas previous participant also asked about the losses for the first time after a long time. And we are indicating normalized profit in next 1 or 2 quarters. So which area you think would be the progress in terms of either on the raw material side will get benefited or operating leverage or any other cost-cutting thing bringing down the promotional expense incentive, which are the areas you see scope of improvement on a sequential basis going forward?

The raw material will certainly help. We are seeing stability in the raw material index in the prices. So raw material will definitely help. The other -- also -- we have also expanded our market within continuous expansion of the market within Mexico and our export market, which is Brazil and LatAm, we are continuously engaging and expanding our dealer and channel here. That will definitely help. Also that we have also introduced our constant introduction of new ranges. We have introduced all-terrain vehicle tyres which are also highly profitable. So these are some of the areas in which our margin expansion will come. And it is a continuous process of operational efficiency, which we are continuously focused on. And the volume game with premiumization is going to definitely -- going forward is going to be helping us. And our plan of $27 million is also on track, which is adding capacity in the passenger car.

And that too in the premium tyres...

Category only...

Premium category, so that will further improve the margins.