ET INTELLIGENCE GROUP: JK Tire Industries can see that improvements in its various product portfolios and increased capacity will be positive drivers of its revenue growth in the coming years. This will give investors confidence in the company’s ability to generate sufficient cash flow to service its debt burden and boost the company’s share price, narrowing the valuation gap with its peers.

JK Tire is the first company in the domestic market to capture 34% of the market share of truck radial business (TBR) tires. This allows the company to capitalize on consumer preference for radial technology over nylon or bias tires. It will also benefit from the gradual recovery in truck sales over the past few months.

The commercial vehicle manufacturer reported stronger sales growth compared to industry growth in the first half of the fiscal year. The company reported a 47% increase in sales for the segment, compared to a 40% increase for the industry as a whole.

As the preference for radial tires increases, operating profits will also increase in the long run due to higher premiums. Tires. “Our TBR tire penetration in India is expected to increase by 29-30% and may increase to 65-70% in the next three years as the domestic market becomes more dynamic. Our main driver is profit. Arun Bajoria, President and Director, JK Tires The Delhi-based company reported a consolidated operating margin of 12.3% for the September 2014 quarter.

According to Bajoria, there are two reasons for the debt repayment. First, there will be a healthy and sustainable demand for the products manufactured in the new plant.

This means that increasing production is not an issue as other companies expand their nylon tire production capacity. Secondly, 30-40% of the new loan of Rs 1.03 billion raised over the next three years is raised in foreign currency. The overall cost of loans is reduced due to lower interest rates on overseas loans. Theoretically, the growth in commercial vehicle tire sales matches the growth in GDP, while the growth in passenger vehicle tire sales is 1.5 times the GDP. As at the end of September 2014 quarter, the company’s consolidated debt stood at Rs. 22.97 billion. The company expects standalone debt to reach Rs. 160-170 billion by 2016.

A Mexican subsidiary called JK Tornel, acquired in 2008, has achieved higher growth in the radial tire segment. The company is in the process of expanding the passenger car capacity of its Mexican subsidiary by 50% and converting its bias tire plant into industrial tires. The Mexican subsidiary mainly supplies tires for Nissan cabs operating in New York, but also takes orders from other global automakers.

The stock trades at a 50% discount to its local peers, largely due to concerns about its leveraged balance sheet. However, increased revenue contribution from the higher margin TBR division, coupled with a tighter pricing policy, may reduce the stock’s debt burden.