ICICIdirect has selected JK Tyre as techno-funda pick. It has recommended 'Buy' in the range of Rs 534-525 for target of Rs 635 with stop loss of Rs 485, for duration of 6 months. The broking house gave the following technical and fundamental outlook:
Technical Outlook
The share price of JK Tyre remains in a strong up trend as highlighted by the rising peak and trough formation on all time frames. The stock hit an all time high of | 535 in September 2014 and thereafter entered a secondary corrective phase over the last two months. Pictorially, the sideways consolidation since September 2014 till date appears to have taken the shape of bullish Pennant formation. A Pennant formation is a bullish continuation pattern comprising of narrow price action between two converging trend lines which marks a temporary pause within an uptrend as bulls take a breather after a strong advance and gather steam before embarking upon the next upmove.
The price action in Monday’s trade has seen the stock register a breakout above the bullish Pennant pattern thus signalling end of secondary consolidation and resumption of the next up leg thereby offering fresh entry opportunity to ride the ongoing uptrend from a medium term perspective.
The retreat in price from life-time high of Rs 535 saw the stock find decent buying support near the 38.2% retracement of the preceding rally (Rs 258-535) placed around Rs 430 levels. Time wise, the August-September 2014 rally took six weeks while the same was retraced by just 38.2% while consuming eight weeks. Limited price correction and extended time correction highlights the overall positive price structure. We believe the stock offers a good reward/risk set-up to ride the next up move Rs 635 in medium term being the 161.8% extension of the last intermediate up move (435 to 527) as measured from recent higher trough of Rs 482.
Fundamental Outlook
With expectations of a revival in the economy, JKTIL's capacity expansion plan seems to be perfectly timed to benefit from the economic recovery. We believe the government's focus on a revival of the capex cycle will benefit the truck segment, which forms the bulk of sales for tyre makers. Thus, capacity constraints faced by the company are likely to ease as the new facility will enhance TBR capacity by 8 lakh tyres per annum to 22.7 lakh and also increase the PCR capacity by 15 lakh tyres per annum to 97.9 lakh. Also, JKTIL is focusing strongly on exports as evidenced by strong growth (doubling of exports from FY12 levels).
Natural rubber prices have declined to Rs 140/kg levels this year from the highs of Rs 250/kg in 2011. Rubber, which contributes 60% of total raw material costs, thus, swings the gross/operating margins. The major difference in this cycle vis-à-vis previous business cycle has been the pricing discipline shown by the industry, which has led to an increase in profitability for the overall industry. JKTIL's margins have also significantly improved to double digit levels due to favourable impact of operating leverage as capacity utilisation levels have hit ~80%. Going ahead, with economic revival, capacity utilisation for most players is likely to remain high, thereby ensuring industry pricing discipline.
With an expectation of a revival in capex cycle, we are optimistic about the revenue, earnings growth possibilities for JKTIL- the leader and pioneer in the TBR segment. With net debt levels appearing to have hit a peak and likely to ease downwards, we believe the major market concern is likely to be alleviated. Post FY16E, strong FCF generation makes us positive on the business as next phase of growth begins. It is expected to be posting >20% on return ratios front with a declining D/E ratio (From 2.3 FY14 to 1x FY17E). With a strong rise in peer valuations on demand recovery and favourable rubber prices, JKTIL's valuation at ~4x/3.2 EV/EBITDA on FY16E/17E is alluring.
Shares of the company gained Rs 33.8, or 6.58%, to trade at Rs 547.75. The total volume of shares traded was 380,206 at the BSE (3.17 p.m., Monday).
