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Thursday, December 17, 2009

JK Tyre & Industries Ltd:Future growth prospects and outlook,why its moving?Target price?latest news and buy/sell/hold?

Scripscan:JK Tyre & Industries Ltd

Story:JK Tyre & Industries Limited engages in the manufacture and distribution of tires, tubes, and flaps for the transportation industry primarily in India and Mexico. The company offers tires for trucks, buses, light commercial vehicles, passenger vehicles, and farm vehicle tires. It also provides truck radials, car radials, and off the road tires. In addition, the company franchises retail stores under the JK Tyre Steel Wheels brand name. It exports its products to the United States, Europe, South America, and the Middle East. The company was formerly known as J.K. Industries Limited and changed its name to JK Tyre & Industries Limited in April 2007 in order to capture the brand ‘JK Tyre’ and its value in the company’s name.Despite concerns on account of spiraling raw material prices and strike at its Rajasthan plant, we find JK Tyres (JKT) an attractive valuation pick. We are factoring in a sharp drop of 27% in our FY11 consolidated earnings estimates to Rs 38.5 per share. For standalone business, we expect a 25% decline in FY11 earnings to Rs 30 per share. For its subsidiary, 'Tornel' we expect a 41% earnings decline in FY11 to Rs 8.5 per share. We are conservative in our estimates on Tornel due to limited availability of information.Despite such a sharp drop in FY11E earnings, at CMP of Rs 150, the stock trades at a PER, EV/EBIDTA and P/B of 3.9x, 4.2x and 0.7x respectively. We believe that there is ample scope for positive surprises - like commencement of new TBR capacity from October 2009, increase in PCR capacity by 10% to 5 mn tyres in FY11, price hikes to pass on the cost pressures. Similarly for Tornel, higher capacity utilization is likely to result in positive surprises. We are not assuming any significant increase in capacity utilization at the current juncture. We initiate coverage on the stock with a Buy rating and a target price of Rs 192.

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