By Chandan Sharma

India Ratings and Research (Ind-Ra) has rated JK Tyre & Industries Limited’s (JKTIL) commercial paper (CP) programme as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating

Rating Action

CP

-

-

Three months

INR11,000

IND A1+

Assigned

The CP will be carved out of fund-based working capital limits. 

The CP rating corresponds to JKTIL’s long-term debt.

KEY RATING DRIVERS

Consolidated View: Ind-Ra has taken a consolidated view of JKTIL and its subsidiaries to arrive at the rating due to operational and strategic linkages among them, driven by similar business profiles, and a common treasury and management team. 

Higher-than-expected Deterioration in Credit Profile:
Ind-Ra while reviewing the consolidated financials earlier this month downgraded the ratings to reflect the higher-than-expected deterioration in the consolidated credit profile in FY17 on account of lower-than-expected ramp up of operations JKTIL and Cavendish Industries Ltd (CIL). Consolidated net adjusted debt/EBITDA increased to 4.8x in FY17 (FY16: 2.5x; FY15: 3.1x) and gross interest coverage declined to 2.6x (4.4x, 3.6x). Although the credit profile is likely to improve from FY19 with a gradual ramp-up of CIL’s operations and higher utilisation of the domestic capacities, it will remain below Ind-Ra’s previous expectations. 

DSCR to Remain Comfortable:
Consolidated debt repayments are likely to be INR1.8 billion in FY18. CIL’s repayments would start from FY19, resulting in debt repayments peaking to around INR4.3 billion. However, in case operational performance improves as anticipated, debt service coverage ratio is likely to remain comfortable at around 1.5x over FY18-FY20. JKTIL has committed lines to fund its capex plans in India. The company has taken an additional sanction of INR3.5 billion to refinance its existing high-cost loans. It has also tied up a MXN450 million of term loan for funding Voluntary Retirement Scheme in Mexico. JKTIL reported average peak fund-based working capital utilisation of around 85% of during the 12 months ended October2017. JKTIL’s working capital requirements have also come down from the peak seen in March 2017. As a result, Ind-Ra expects cash flow from operations to improve in FY18. 

Decline in Performance in 1QFY18, Improvement in 2QFY18:
The Negative Outlook on the long-term ratings reflects the possibility of a further similar rating action if the company does not substantially improve its credit profile over the next six months to move it in line with Ind-Ra’s expectations. Consolidated EBITDA margins declined around 1,333bp yoy to 5% in 1HFY18 (FY17: 14.7%; FY16: 16.2%). However, this could be attributed to the following one-off events in the June 2017 quarter: 1) the decline in the sale of commercial vehicles due to BSIV implementation and 2) lower offtake by original equipment manufacturers and dealers due to GST implementation from July 2017. Moreover, a higher procurement price of natural rubber during 1HFY18 impacted the profitability.

However, it would be boosted in 2HFY18 due to a decline in rubber prices from their peak in February 2018 and the recent imposition of anti-dumping duty on imported Chinese truck & bus radial (TBR) tyres. The latter is likely to result in a 10%-15% increase in prices of imported tyres. The TBR segment accounted for around 67% of the consolidated revenue in FY17. However, EBITDA margin would remain sensitive to any volatility in input prices, including those of rubber and crude oil, considering raw material costs stood at about 58% as a percentage of revenue in 1HFY18. 

Consolidated EBITDA margins improved in 2QFY18 to 9.5% (1QFY18: negative 0.1%) driven by an improvement in revenues to INR20.6 billion (INR18.1 billion) as well as a decline in rubber prices. 

Future Performance Key:
Due to the weak 1QFY18 performance, JKTIL’s consolidated net adjusted leverage is likely to exceed 5x in FY18. JKTIL’s ability to ramp up existing capacities as well as manage operating margins is key to improvement in its credit profile. Ind-Ra estimates that JKTIL would need to generate a quarterly EBITDA of around INR3.5 billion on a steady state basis from 2HFY18, to align its credit profile with the rating triggers. However, a delay in achieving the desired EBITDA levels would increase the probability of net adjusted debt/EBITDA remaining above the negative trigger in FY19 as well and that could trigger a rating action. 

Acquisition to Augment Product Portfolio:
CIL’s acquisition provides JKTIL around 1.2 million of additional TBR tyre capacity (operational capacity: 0.7 million tyres), almost increasing its capacity by 50% in the segment. This should augment the company’s prominent position in the segment. It would also gain entry into the two-wheeler tyre segment with around 6.3 million tyres/year. This will allow JKTIL to offer a full spectrum of products to its distributors and increase its penetration in the domestic market. In FY17, the overall capacity utilisation at CIL was around 31% and 61% at JKTIL. However, the overall capacity utilisation was dragged down by the declining utilisation of bias capacities due to the radialisation trend in the TB segment. Capacity utilisation in the TBR segment was high in both JKTIL and CIL. In 1HFY18, the company has seen near full utilisation of its domestic TBR capacities and has plans to increase the capacity at CIL using the unused machinery from CIL acquisition. CIL has also witnessed improving utilisation in the two-wheeler segment with the increasing acceptance of its Blaze brand of tyres in the replacement market. 


RATING SENSITIVITIES

Negative: A negative rating action could, individually and collectively, result from: 

- a lower-than-expected improvement in the operational performance in 2HFY18 leading to the expectation of consolidated net leverage remaining above 4x in FY19 and/or or weaker-than-expected cash flows due to longer working capital cycle leading to stressed liquidity, and/or CIL’s lower-than-expected operational performance

Positive: An improvement in operating metrics leading to consolidated net leverage reducing below 4x on a sustained basis could lead to the long-term rating Outlook being revised to Stable.


COMPANY PROFILE

JKTIL standalone entity, incorporated in 1974, has six plants in India, with an installed capacity of 16.7 million tyres annually. The company acquired Tornel Tyres in 2008 with an installed capacity of 6.7 million tyres for INR2.7 billion. The company acquired CIL in April 2016 with an installed capacity of 10 million tyres for INR21.95 billion. Dr. Raghupati Singhania is the chairman and managing director of the company. JKTIL reported consolidated revenue of INR76.9 billion in FY17 (FY16: INR69 billion) with net income of INR3,652.2 million (INR4,696.1 million). 

FINANCIAL SUMMARY – Consolidated
 

Particulars

FY17

FY16

Revenue (INR million)

76,894

68,982

EBITDA (INR million)

11,324

11,166

EBITDA margin (%)

14.7

16.2

Gross interest expense (INR million)

4,404

2,524

Profit before tax (INR million)

5,352

6,595

Net income (INR million)

3,652

4,696

Source: JKTIL, Ind-Ra


RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

14 November 2017

11 January 2017

30 July 2015

Issuer rating

Long-term

-

IND A+/Negative

IND A+/Negative

IND AA-/Negative

IND AA-/Stable

Fund-based and non-fund-based limits

Long-term/Short-term

INR26,810

IND A+/Negative/IND A1+

IND A+/Negative/IND A1+

IND AA-/Negative/IND A1+

IND AA-/Stable/IND A1+

Long-term loans

Long-term

INR19,811

IND A+/Negative

IND A+/Negative

IND AA-/Negative

IND AA-/Stable

Term deposit

Long-term

INR600

IND tAA-/Negative

IND tAA-/Negative

IND tAA/Negative

IND tAA/Stable

CP

Short-term

INR11,000

IND A1+

-

-

-


COMPLEXITY LEVEL OF INSTRUMENTS

For details on the complexity levels of the instruments, please visit https://www.indiaratings.co.in/complexity-indicators.

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Applicable Criteria

Analyst Names

  • Primary Analyst

    Chandan Sharma

    Associate Director
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    +91 124 6687239

    Media Relation

    Mihir Mukherjee

    Manager Corporate Communications and Investor Relations
    +91 22 40356121