Morning Insight
11 June 2015
For private circulation only
Global Economies and Equities
 Most Asian stock indices gained this morning on renewed optimism that Greece will
resolve its debt issue;
 Economists at China's central bank have sharply lowered their inflation forecast for
2015, to just 1.4% from their earlier estimate of 2.2% and shaved their forecast for
China's economic growth to 7.0% for 2015, from 7.1% previously;
 Germany’s 10-year bonds slumped, with the yield breaching 1% for the first time since
September, on a combination of new supply and a brightening economic outlook. The
yield on Europe’s benchmark sovereign securities was approaching zero only two months
ago;
 The United States has overtaken Saudi Arabia as the world's biggest oil producer in
2014. The US produced 15.9 per cent more oil in 2014 at 11.6 million barrels of oil per day
to topple Saudi Arabia's 11.5 million bpd production, according to BP Plc's Statistical
Review of World Energy released yesterday. Russia occupied 3rd position with an output
of 10.8 million barrels of output per day. The US is likely to play a crucial role in oil
economics going forward which will have a lot of implications for the international
politics and, financial and commodity markets;
Indian Economy and the Equity Markets
 Snapping its six – day losing streak, the domestic market on Wednesday surged to
recover from near eight month low, as US index provider MSCI has deferred the
inclusion of China's A stocks to its benchmark indices, rather choosing to sort out
regulatory issues. The BSE Sensex surged 359 points to close at 26,840 while the NSE Nifty
jumped 102 points to close at 8,124. The FIIs were net sellers of stock worth Rs.482.11
crore while the DIIs were net buyers of stock worth Rs.788.06 crore;
 We expect the short-term recovery in the markets to continue as the a couple of key
macroeconomic indicators provide significant optimism:
o India's current account deficit for fourth quarter ended March 2015 came down to
just 0.2% of GDP at $1.3 billion from 1.6% (deficit of $8.3 billion) in the third
quarter ended December 2014. For the fiscal year FY2015, it stood at a very
comfortable level of 1.3% ($27.5 billion deficit). This improvement is significantly
on account of crash in crude oil prices;
o The balance of payments was in positive territory with the highest ever net
accretion to foreign exchange reserves in single quarter. The addition to
reserves was $30.2 billion in Q4FY2015, as against $7.1 billion in Q4FY2014;
o Indirect tax collections have jumped 39.2% yoy in April-May 2015, with tax
collections from the excise duty showing a smart 88% yoy jump reflecting pick
up in manufacturing and additional cess imposed on diesel and petrol as well as
the clean energy cess. While the collections from the customs duty increased by
19.5% yoy, the same from service tax have gone up by 17.6% during April-May;
o India’s coal consumption was the highest in the world in 2014 at 11.1%
according to the 2015 edition of the BP Statistical Review of World Energy.
According to the report, global consumption of coal grew by only 0.4%. In
comparison, coal consumption growth in China was only 0.1%. Overall, energy
consumption in India grew 7.1%, which outperformed the global growth (0.9%).
This could possibly indicate early signs of recovery in the industrial
economy;
 However, the area of concern in poor credit growth remains – the banking credit
growth slowed to 9.8% yoy to Rs.66,33,417 crore for the fortnight ended May 29 whereas
deposits of the banks increased by 11.48% to Rs.87,89,273 crore in the reporting period as
compared to Rs.78,83,586 crore in the year-ago period;
Founder &
Managing Director
[email protected]
Equinomics Research & Advisory Private Limited - Investment Adviser
11 June 2015
Equinomics
Morning Insight
|
Indian Economy (Continued)
 Indian sovereign bonds due in 2024 fell, pushing the yield to a six-month high at 8.03%, as rising oil prices and
the prospect of inadequate rains spurred inflation concern;
Sector Development
 India has approved Rs.6,000 crore interest-free loans for cash-strapped sugar mills to help them partly clear cane
price arrears to farmers that have touched about Rs 21,000 crore. Cabinet Committee on Economic Affairs (CCEA)
has also decided that the loans would be provided to those units which clear at least 50% of their outstanding
arrears before June 30, 2015. The market has reacted to this news in a significant way yesterday – however, this
debt relief is not likely to resolve the problem of sugar industry unless the sugar prices recover;
 Car sales in India grew for the seventh month in a row in May with an increase of 7.73% as the auto industry
stayed in the slow lane on the path to recovery, while the declining motorcycle sales remained a cause of worry.
According to data released by the Society of Indian Automobile Manufacturers (SIAM), the motorcycle sales last
month slid 3.04%, while sales of LCVs down 7.19% on yoy basis. Overall commercial vehicle sales improved to
3.95% growth;
Corporate Development
 China’s realty major Dalian Wanda Group Chairman met the Prime Minister yesterday and committed $5 billion of
investments for developing industrial townships in India. It is worth noting that RCOM has over 135 acres of
land in Navi Mumbai and a business district project in Hyderabad covering an area of 80 acres and it has
already proposed to develop (monetize) them in association with the Wanda Group. We continue to
suggest accumulation of RCOM stock;
We reiterate our “BUY” recommendation on JK Tyre & Industries Ltd.
In the past few trading days most tyre stocks cracked in a big way on a lot of fearful reports in the markets saying that
the natural rubber prices are shooting up and China is dumping the tyres in the country. The natural rubber (grade
RSS-4) trades at Rs.131 per kg, the same level as it was just before the Budget presentation (in February). On
yoy basis, the natural rubber prices are down by 9% from Rs.144 per kg in June 2014. It is down by 21% from 2014year peak price of Rs.165 per kg. The crude oil prices are still down 43% from the last year’s peak price.
Hence, the cheap input prices would continue to help the tyre companies to post robust performance in FY2016 as
well.
China dumping the tyre is going on for more than a year – there is nothing new in it. We believe that
consequent to the restrictions by the US on Chinese tyres, the African market is flooded with Chinese tyres. A
few days back the government has imposed anti-dumping duty on the import of stainless steel from China.
Similarly we hope that there is a possibility of the Indian government imposing such duties on Chinese tyre.
Moreover, the natural rubber prices normally go up during the peak of the summer in the country. We do hope
that once the heat comes down, the rubber prices are likely to come down significantly. Hence, we continue to
favour JK Tyre and our conviction in the stock emanates from the following reasons;
 The stock price of more than 5-decade old branded tyre company trades at mere 6x FY2015 Consolidated
EPS of Rs.15/. The stock price has corrected by 45% from its 52-week;
 Net profit for the quarter ended March 31 2015 has gone up by 136% to Rs.105.96 crore as compared to
Rs.44.96 crore in the same quarter previous year. However, net sales for the quarter were down by 6% to
Rs.1,789.49 crore as compared to Rs.1,895.62 crore;
 Operating profit of the company grew 43% yoy to Rs.212.86 crore from Rs.149.2 crore aided by low raw material
costs. The management has indicated that it has improved the operational efficiency including power
conservation;
 While the segment profit from India operationsEquinomics
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up 41%&yoy,
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Advisory
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35% yoy!
 There are signs of revival in the growth automobile sector – for instance, the car sales in India rose by 18.14% yoy
in April, the fastest rate of growth in 30 months. In the month of May also car sales grew at 7.7%. In the last 2
years, the tyre companies benefited by cheap raw materials while the auto sales remained poor. In our
view, in the next two years, the tyre companies would be benefited by the renewal of growth in the
automotive sector. In fact, the global rating agency Moody’s has recently indicated that the Indian companies,
particularly those from the transport, metals and automotive industries are well placed to benefit from
economic recovery in the next 12 to 18 months which would be enabled by the government’s push for
reforms, lower interest rates and weaker commodity prices.
Continued on Next Page…
Equinomics Research & Advisory Private Limited - Investment Adviser
11 June 2015
Equinomics
Morning
Insight
| Equinomics Research & Advisory Private Ltd
Morning
Insight
We reiterate our “BUY” recommendation on JK Tyre & Industries Ltd. (Continued)
O JK Tyre not only has an attractive PE multiple, but also trades at an attractive valuation compared to its
peers in terms of Market Cap to Net Sales;
JK Tyre
Apollo Tyres
MRF
GOODYEAR
TVS SRICHAKRA
Market Cap
(Rs.Cr)*
2,063
8,419
14,127
1,207
1,272
Net Sales
(FY2015 in Rs.Cr)
7,384
12,726
13,190
1,582
2,161
M.Cap to Net
Sales
0.28
0.66
1.07
0.76
0.59
th
*as of 10 June 2015
o Demand in Mexico for replacement market tires is poised to grow at nearly 7.5% a year the next three
to five years, according to a new market study from Frost & Sullivan Inc. Strong local vehicle sales and a
growing economy have increased the size and purchasing powers of Mexico’s middle class population, Frost &
Sullivan said, and are driving aftermarket tire growth. Poor road conditions in some areas of the country also
help to increase tire replacement rate. JK Tornel expansion of PCR capacity by 50% is also on its way to
completion and the company shall have the benefit of increased production in coming months. Hence,
we believe that JK Tyre’s Mexican business will improve significantly going forward;
 The expansion at JK Tyre's TBR and PCR categories at Chennai tyre plant, at a cost of Rs.1,430 crore, is
progressing well as planned. This expansion is slated for completion by mid-2015. In our view, this domestic
capacity expansion is coming at an appropriate time of anticipated turnaround in the automobile sector;
JK Tornel, Mexico: Impressive Performance continues
JK Tyre acquired JK Tornel, a tyre company, in Mexico in 2008 at a cost of about Rs.270 crore. At the time of its
acquisition, Tornel had a turnover of Rs.800 crore – the same has gone up little more than two times in FY2014 at
around Rs.1700 crore. Quite interestingly, the segment profit from this Mexican operation in the last 24
months (FY2014 and FY2015) alone stands at Rs.354 crore as compared to its acquisition cost of Rs.270
crore! With penetration into OEMs like Nissan, Chrysler and Volkswagen, the business profile and market share are
likely to improve in both Mexico and North American export markets. Mexico remains one of the largest export hubs
for the North American market. Tornel is, thus, increasing capacity by ~25% (45 TPD PCR).
Outlook and valuation
The CV tyre segment is clearly witnessing a secular radicalization trend with the share of radial tyres in the M&HCV
segment increasing from 4% in FY2007 to ~29% in FY2014. Penetration of truck & bus radial tyres in the OEM
segment is ~55% while the replacement segment radicalization currently stands at ~25%. JK Tyre’s market share
in India in the M&HCV TBR segment is > 30% and in the passenger car radial segment > 12%. Going forward,
as radicalization in the truck and bus segment increases rapidly, we believe JK Tyre would be a major
beneficiary leading to higher capacity utilization levels in the TBR space. With net debt levels appearing to have
hit a peak and likely to ease downwards, we believe the major concern on leveraging is likely to be alleviated. Post
FY2016E, strong Free Cash Flow generation makes us positive on the business as the next phase of growth begins. In
the last two years, tyre stocks played out mainly on account of fall in input prices as the auto sales in the country
remained subdued. The stock price of JK Tyre has come down by ~44% from its 52W High of Rs.163. This
correction provides some added comfort on tactical ground. At the current market price of Rs.91/, the stock
trades at 5.2x FY2016E EPS of Rs.17.5 and 4.5x FY2017E EPS of Rs.20. We continue to suggest our investors to
accumulate the stock at the current market price with a revised target price of Rs.170/ (conservatively
assuming 8.5x FY2017E EPS of Rs.20.
Disclosure: I, G.Chokkalingam, personally do not hold the stock of JK Tyre and RCOM directly or indirectly through
any friends, relatives or any proxies;
Equinomics
Morning Insight
JK Tyre & Industries Ltd: Equinomics’ View on the Stock Risk and Suggested Investment Horizon
Stock Risk Profile
Investment Horizon
Low
√
1 Year
Moderate
High
Very High
1-2 years
2-3 years
3 years & Above
√
Disclosure: I, G.Chokkalingam, do not hold the stock directly or indirectly through any friends, relatives or any
proxies. I declare that I haven’t obtained any monetary benefit from the company, which is recommended here.
(Source: Capitaline, Sensex on base of 1000)
Stock Disclosure: Whether Stock Held By:
JK Tyre & Industries Ltd.
G.Chokkalingam & Family
Equinomics
NO
NO
Equinomics Research & Advisory Private Ltd
Investment Adviser
CIN:U67190MH2014PTC252252
SEBI REG. NO. INA000001712
G. Chokkalingam - Founder & Managing Director
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