By Pallavi Bhati

India Ratings and Research (Ind-Ra) has downgraded JK Tyre & Industries Limited’s (JKTIL) Long-Term Issuer Rating to ‘IND A-’ from ‘IND A’. The Outlook is Negative. The instrument-wise rating actions are as follows:

Instrument Type

Date of Issuance

Coupon Rate

Maturity Date

Size of Issue (million)

Rating/Outlook

Rating Action

Fund-based and non-fund based limit

 

 

 

INR26,500 (reduced from INR26,810)

IND A-/Negative/IND A2+

Downgraded

Proposed fund-based and non-fund based limit*

 

 

 

INR310

Provisional IND A-/Negative/Provisional IND A2+

Assigned

Long-term loans

 

 

 FY34

INR15,874 (reduced from INR19,811)

IND A-/Negative

Downgraded

Proposed long-term loans*

 

 

 

INR3,937

Provisional IND A-/Negative

Assigned

Term deposits

 

 

1-3 years

INR600

IND tA/Negative

Downgraded


*The ratings are provisional and shall be confirmed upon the sanction and execution of loan documents to the satisfaction of Ind-Ra.

Analytical Approach: Ind-Ra continues to take a consolidated view of JKTIL and its subsidiaries to arrive at the ratings, due to the strong operational and strategic linkages among them, driven by similar business profiles and a common treasury and management team.

The downgrade reflects JKTIL’s lower-than-expected operating performance leading to the net leverage (net debt/EBITDA) coming in at 5.6x in FY20 and breaching Ind-Ra’s negative rating sensitivity of 3.5x. Also, the interest coverage (EBITDA/interest expense) was 1.8x in FY20, below the rating category median.

The Negative Outlook reflects Ind-Ra’s expectation of the net leverage remaining above the negative rating sensitivity in FY21 as well on account of COVID-19-related demand and supply disruptions.

KEY RATING DRIVERS

Stretch in Credit Metrics; Deleveraging Delayed Further: The FY20 net leverage (FY19: 5.1x, FY18: 7.8x) was higher than Ind-Ra expectations. It was also higher than the management’s guidance of 3.2x. While the company’s debt reduced slightly to INR55.5 billion at FYE20 (FYE19: INR57.6 billion; FYE18: INR58.1 billion), the net leverage increased due to lower capacity utilisation amid a slowdown in the domestic auto industry, especially in the medium and heavy commercial vehicles (M&HCV) segment, which accounted for around 61% of the total revenue during 1HFY20. Although the production ramped up for two-wheeler/three-wheeler (2W/3W) tyres at JKTIL’s subsidiary, Cavendish Industries Ltd (CIL), it was offset by the volume decline in the truck and bus (T&B) segment both at CIL and JKTIL standalone. Also, the interest coverage ratio reduced below 2x in FY20 (FY19: 2.1x, FY18: 1.6x) and is likely to remain below the rating category median in FY21.

JKTIL has postponed its debt-funded capex plans for the expansion of the truck and bus radial (TBR) facility in CIL to FY22-FY23 and also rationalised the outlay to INR5.9 billion from INR6.75 billion by deferring the expansion of its tractor facility. These were earlier planned over FY20-FY21. Nevertheless, Ind-Ra expects JKTIL’s leverage to remain elevated in FY21 at 4.5x-5x, because of a) lower-than-expected EBITDA generation on account of a weaker demand scenario due to COVID-19-related disruptions, and b) a lower-than-expected debt reduction on account of the Reserve Bank of India-prescribed moratorium availed by the company. Ind-Ra expects the leverage to reduce below 3.75x only by FYE22. Timely deleveraging will remain a key rating monitorable.

Revenue Adversely Impacted Due to Large Exposure to M&HCV Segment: The revenue declined sharply by 16% yoy to INR87.2 billion in FY20 (FY19: 25%, FY18: 8%), due to lower average realisations on account of a higher decline in the sales volume of T&B tyres, a high-value segment.

The tyre sale volumes to the M&HCV segment fell 17% yoy for the industry in FY20, led by a 47% decline in sales to original equipment manufacturers (OEMs) and a 7% decline in sales to the replacement market. Consequently, JKTIL’s capacity utilisation for this segment fell to 66% in FY20 (FY19: 87%) for its Indian operations. The impact of reduced OEM sales was partly offset by the replacement and export markets. JKTIL’s standalone sales volumes declined 14% yoy, driven by the T&B segment; however, the consolidated sales volume decline was limited to about 2%. This was on account of 16% yoy growth seen at CIL, primarily from 27% yoy growth in 2W/3W tyre sales due to new products added by OEMs and a healthy replacement demand.

Ind-Ra believes JKTIL’s revenues would record a high single-digit decline in FY21 as the down-cycle for the auto industry is likely to continue this year, with M&HCV segment remaining the worst hit. However, Ind-Ra expects the fall in replacement demand to be fairly lower than the fall in demand from OEMs, given increased vehicle penetration. The management has guided close to 4% growth in revenue in FY21 backed by a) the measures taken to increase the presence in the replacement market, b) thrust on export market sales, c) restrictions announced on tyre imports, d) premiumisation of 2W/3W tyre portfolio, e) new models added for passenger vehicle tyres, and f) initiatives taken for entry into the smart tyre segment. Ind-Ra believes the thrust on domestic and export replacement markets will remain the key revenue driver in FY21 to limit the adverse impact from the OEM-level decline.

Focus on Replacement and Export Market: JKTIL derived around 63% of its revenue from replacement market (FY19: 55%), 18% (9%) from exports and 19% (36%) from OEMs in 1HFY20; the mix is expected to have remained similar for FY20, as for the interim numbers. As a strategy, the company will be focusing on the replacement and exports markets, so as to offset the likely demand decline in the OEM market. The replacement market usually offers higher margins than OEMs, which will provide further support to JKTIL’s margins. Moreover, the Director General of Foreign Trade has put imported tyres under restricted category, which is likely to be beneficial for the domestic tyre companies, particularly for companies such as JKTIL with higher presence in replacement markets.

Improvement in Profitability Margins in FY20; Expected to Continue in FY21: The EBITDA margin rose to 11.3% in FY20 (FY19: 10.7%, FY18: 8.9%) on lower input prices, cost rationalisation measures undertaken historically  as well as an increase in the contribution from the replacement and export markets, which are high-margin segments. JKTIL’s input costs benefitted from about 13% yoy lower Brent crude oil prices. Furthermore, the contribution of export and replacement market increased to 81% in 1HFY20 from 64% in FY19; the mix is estimated to have remained similar for FY20 as recorded in interim numbers. The company incurred a forex loss of INR1 billion in FY20, which primarily relates to the mark-to-market adjustment on its foreign currency loans which are hedged through option contracts.

The EBITDA margin remains sensitive to any volatility in input prices, including those of natural rubber and crude, considering raw material costs represent about 60% of the revenue. While the impact of same is likely to be limited in FY21, given a benign raw material price environment, any rupee depreciation could partly offset the benefit as about 50% of JKTIL’s raw material is imported. However, the company has taken cost reduction measures which are likely to result in cost savings of more than INR2 billion in FY21, about half of which is likely to be realised in 1QFY21. These measures relate to the rationalisation of employee costs, advertising spend and other overheads. Consequently, Ind-Ra expects the company to generate EBITDA of INR10 billion to INR11 billion in FY21 (FY20: INR9.8 billion, FY19: INR11.1 billion). An improvement in the profitability margins remains a key rating monitorable.

Strong Market Position: JKTIL is among the top four tyre manufacturers in India. It is also among the leading players in the TBR segment. The company has a strong distribution network and longstanding relationships with OEMs.

Improving Product Mix: JKTIL has seen increasing contribution from the radial segment to 62% in 1HFY20 from 51% in FY15. The overall share of radial capacity in JKTIL is 58% on consolidated basis and 79% on standalone basis. The company is also ramping up the contribution from 2W/3W segment. Both radial and 2W/3W tyres are high-margin products, and increasing contribution from these segments is likely to aid EBITDA and margins in the medium term.

Liquidity Indicator - Stretched: JKTIL’s and CIL’s average peak fund-based working capital limit utilisation against their drawing power was around 91% over the 12 months ended March 2020, given the high working capital requirements and lower profit generation during the year. JKTIL’s total fund-based sanctioned limits are INR15 billion and CIL’s are INR2 billion. JKTIL achieved positive free cash flows of INR4.2 billion (FY19: negative INR3.0 billion, FY18: negative INR6.7 billion) due to working capital release on account of the lower scale of operations and higher payables although the net working capital days remained stable (FY20: 73 days, FY19: 72 days). Lower capex spending (FY20: INR2.8 billion, FY19: INR5.6 billion) also aided cash flows. In FY21, the management expects to streamline working capital through the rationalisation of receivables and inventory. Capex outgo is also likely to remain minimum and will be primarily towards maintenance.

The dividend payment increased to about 50% of profit before tax and exceptional items in FY20 (FY19: 11.4%). The company has announced a dividend of about INR0.2 billion for FY21. The company also expended INR0.4 billion for the acquisition of a 5% stake in CIL from Bengal and Assam Company Limited in FY20. The unencumbered cash and bank balance was about INR0.7 billion at FYE20.

The moratorium has been approved by the bankers of JKTIL for March-May 2020, and it has also applied for the second tranche over June-August 2020. Hence, its long-term repayments are likely be lower in FY21 at about INR4 billion and about INR5.1 billion in FY22. JKTIL also received COVID-19 relief funding from banks through loans of INR1.8 billion to be repaid within 36 months of sanction. The total obligations towards debt and interest payments are estimated at about INR9.5 billion in FY21.

Ind-Ra believes an improvement in JKTIL’s liquidity is contingent on an enhancement in its capital structure by way of either a sustained, material increase in its profitability or substantial fund infusion from promoters. The promoters infused about INR2 billion in March 2019 through a preferential issue which helped in correcting the net debt to equity ratio (FY20: 2.4x, FY19: 2.5x, FY18: 2.9x), although only to a limited extent.

Standalone Financials: JKTIL reported revenue of INR60.9 billion in FY20 (FY19: INR76.1 billion), EBITDA margin of 10.7% (9.6%), net leverage of 4.9x (4.5x) and interest coverage of 1.9x (2.3x).


RATING SENSITIVITIES

Negative: A negative rating action could, individually and collectively, result from a lower-than-expected improvement in the operational performance leading to the consolidated net leverage remaining above 3.75x on a sustained basis, and/or weaker-than-expected cash flows due to a longer working capital cycle leading to stressed liquidity, and/or CIL’s lower-than-expected operational performance.

Positive: An improvement in the operating metrics and/or capital structure leading to the consolidated net leverage reducing below 3.75x on a sustained basis could lead to the Outlook being revised to Stable.


COMPANY PROFILE

JKTIL is the third-largest tyre manufacturer in India. The company, on a standalone basis, operates six plants in India, with an installed capacity of 15.4 million tyres annually. The company acquired CIL in April 2016. CIL has a total installed capacity of 9 million tyres annually. In FY20, JKTIL increased its stake in CIL to 86.4% from 80% previously.

In FY09, JKTIL acquired Mexico-based Tornel Tyres, which has an installed capacity of 7.9 million tyres.

 FINANCIAL SUMMARY-Consolidated

Particulars

FY20

FY19

Net revenue (INR million)

87,249

103,678

EBITDA (INR million)

9,876

11,191

EBITDA margin (%)

11.3

10.7

Interest coverage (x)

1.8

2.1

Net leverage (x)

5.6

5.1

Source: JKTIL, Ind-Ra

 

 



RATING HISTORY

Instrument Type

Current Rating/Outlook

Historical Rating/Outlook

Rating Type

Rated Limits (million)

Rating

29 March 2019

28 November 2017

24 August 2017

11 January 2017

Issuer rating

Long-term

-

IND A-/Negative

IND A/Negative

IND A+/Negative

IND AA-/RWN

IND AA-/Negative

Long-term loans

Long-term

INR19,811

IND A-/Negative

IND A/Negative

IND A+/Negative

IND AA-/RWN

IND AA-/Negative

Fund-based and non-fund based working capital limits

Long-term/Short-term

INR26,810

IND A-/Negative/IND A2+

IND A/Negative/IND A1

IND A+/Negative/IND A1+

IND AA-/RWN/IND A1+/RWN

IND AA-/Negative/IND A1+

Term deposits

Long-term

INR600

IND tA/Negative

IND tA+/Negative

IND tAA-/Negative

IND tAA/RWN

IND tAA/Negative



COMPLEXITY LEVEL OF INSTRUMENTS

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

SOLICITATION DISCLOSURES

Additional information is available at www.indiaratings.co.in. The ratings above were solicited by, or on behalf of, the issuer, and therefore, India Ratings has been compensated for the provision of the ratings. 

Ratings are not a recommendation or suggestion, directly or indirectly, to you or any other person, to buy, sell, make or hold any investment, loan or security or to undertake any investment strategy with respect to any investment, loan or security or any issuer.

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About India Ratings and Research: India Ratings and Research (Ind-Ra) is India's most respected credit rating agency committed to providing India's credit markets accurate, timely and prospective credit opinions. Built on a foundation of independent thinking, rigorous analytics, and an open and balanced approach towards credit research, Ind-Ra has grown rapidly during the past decade, gaining significant market presence in India's fixed income market. 

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Analyst Names

  • Primary Analyst

    Pallavi Bhati

    Senior Analyst
    India Ratings and Research Pvt Ltd DLF Epitome, Level 16, Building No. 5, Tower B DLF Cyber City, Gurugram Haryana - 122002
    0124 6687256

    Media Relation

    Ankur Dahiya

    Manager – Corporate Communication
    +91 22 40356121