India Ratings and Research (Ind-Ra) has assigned JK Tyre & Industries' (JKTIL) Rs 200 million term deposit programme an 'IND tAA' with a stable outlook.
The ratings reflect the 27.3% yoy increase in JKTIL's volumes in the domestic TBR market in FY15 (FY14: 17.7%). The company has benefitted from the increasing trend of radialisation in the segment (FYE15: 33%) due to its leadership position and long track record in the TBR segment. According to the company, the radialisation in the segment is expected to increase to 40% by FYE16. Radial tyres contributed around 51% to revenue in FY15 (FY14: 46%).
Ind-Ra expects the medium & heavy commercial vehicle industry to see volume growth of 13%-17% yoy in FY16 (FY15: 16%; FY14 negative 25.3%) on an uptick in industrial and mining activities, government spend-driven infrastructure activities and pent up replacement demand in 2HFY16. JKTIL derives around 70% of revenue from the MHCV segment and thus a revival in demand is likely to benefit the company. Ind-Ra expects the replacement demand in the segment to also improve significantly FY16 onwards.
JKTIL's consolidated EBITDA margins increased 120bp yoy to around 12.6% in FY15. This was above Ind-Ra's expectations. The agency expects the company to sustain the margins over FY16-FY17 due to a continued favourable raw material price environment, increased contribution from radial tyres and efficiency gains from the new unit in Chennai.
JKTIL is incurring capex of Rs 14.3 billion over FY15-FY17 to augment its radial tyre capacity in India, which will be debt funded to the extent of Rs 10.3 billion. This exposes the company to project execution risk which is mitigated by the brownfield nature of the capex. JKTIL already incurred Rs 7.3 billion of the capex by 1QFY16. It also incurred the capex of Rs 1.36 billion in FY15 to increase its passenger radial capacity in Mexico.
JKTIL's consolidated net leverage (net adjusted debt/EBITDA) slightly increased in FY15 to 3.0x (FY14: 2.8x; FY13: 4.1x) because of the debt raised for the capex in FY15, while gross interest coverage marginally improved to 3.6x (3.2x, 2.7x). Ind-Ra expects the debt raised for the capex over FY15-FY17 to affect the credit profile in FY16. However, the net leverage is expected to improve beyond FY16 and should fall below 2.75x in the absence of any capex for expansion.
Improving profitability has aided cash flows with cash flow from operations increasing by 22.7% in FY15. Free cash flow was negative in FY15 due to the capex on expansion in Chennai. However, cash accruals of the company will improve with a further improvement in the profitability, which should aid liquidity. Moreover, the company's working capital use was comfortable at around 72% over June 2014-May 2015. The project loan for the current expansion has a three-year moratorium period from the commissioning date of Apr.01, 2016 with a 10-year repayment period. Debt repayment is likely to peak at around Rs 2.2 billion (in India) and debt service coverage ratio should remain around 2x in the medium term.
The industry is already facing a decline in revenue in the T&B bias segment due to increasing radialisation, and capacity utilisation has fallen across major players. The domestic industry also saw a minor decline in prices in the range of 1%-4% in FY15 in various segments, but it has not affected the profitability of tyre companies due to a simultaneous decline in raw material costs. Higher competition among players leading to increased pricing pressures could affect JKTIL's profitability and credit profile.
