JK Tyre shares hover near record high, can potentially double in next 3 years, says analyst

Domestic brokerage house Emkay Global has initiated coverage on JK Tyre with a 'buy' call and a target price of Rs 415, suggesting a 55% potential upside over its Monday's (October 9) closing of Rs 266.8-odd level. The brokerage believes JK Tyre's stock price can potentially double over the next three years.

Following the development, the scrip is trading near their record high levels of Rs 291 on NSE on Wednesday. The stock settled 0.69% higher at Rs 269 apiece on October 10. The scrip has gained nearly 4% in the past one month and 45% on a year-to-date (YTD) basis.

In terms of technicals, the 14-day relative strength index (RSI) of the JK Tyre stock stands at 47.4, signalling it's trading neither in the overbought nor in the oversold zone. The stock has a beta of 1.0, indicating average volatility in a year.

JK Tyre shares are trading higher than the 20-day, 50-day, 100-day, 150-day and 200-day moving averages but lower than 5-day and 10-day moving averages.

Amid the tyre industry's structural improvements, including curtailed imports, enhanced export competitiveness, premiumisation, and calibrated capex, Emkay said JK Tyre has been outperforming peers over the past 12 quarters as against over 20% underperformance in FY13-20 via structural transformation in competitive position (higher-than-peer spends on R&D, marketing, distribution expansion), operating efficiencies, and financial discipline (calibrated capex).

"Over 80% drop in TBR (truck and bus radial tires), PCR (passenger car radial) imports since FY20 on government’s push for domestic industry protection, sharp rise in export competitiveness (China +1, India’s inherent labour cost advantage), premiumisation and controlled capex (largely brownfield expansions/de-bottlenecking) have improved the tyre industry’s underlying structure," it said.

The brokerage expects stable-to-positive medium-term growth prospects, with 7% volume compound annual growth rate (CAGR) till FY26E; outpacing capacity additions, amid general focus on calibrated capex.

"We built in around 8%/58% revenue/PAT CAGR for FY23-26E; this, with sizeable deleveraging (1.4 times net debt/EBITDA in FY26E versus 3.5 times in FY23), should boost FY26E return on capital employed (ROCE) to 21% (FY23: 11%), driving valuation convergence towards larger peers," it said.

The brokerage believes that consequent to strong 58% compounding in EPS (earnings per share) growth, and accelerated ESG/sustainability efforts, JK Tyre’s valuation multiples would start converging towards that of peers or industry average.

Key risks, as per the brokerage, include sharp demand slowdown, major spike in RM, and adverse outcome in CCI ruling.