JK Tyre Rolls to All-Time High: 181% Surge From 52-Week Low in 9+ Months

JK Tyre’s Record Surge to a New All-Time High

The all-time high of JK Tyre can be a result of many factors. Its previous all-time high was made on 18 December 2023 at ₹ 393. It took 11 days to create a new all-time high at ₹ 406.4 on 29 December 2023. In between, it made a low of ₹ 355.70 on 21 December 2023, implying a correction of over 9.49%. It may represent a change in the investors’ sentiment about the company due to improved financial condition or may represent overvaluation. Let’s go through the factors contributing to its all-time high.

Factors Contributing to a Stock’s All-Time High

Positive Earnings Reports

• In the last three years, its revenue has increased by over 50%, and similar growth may be expected in the upcoming years.
• Due to comparatively lower cost of goods and higher revenue, its gross profit increased by over 50% year-on-year in Q2 FY24.
• In the last three quarters, its net income has increased by over 150% year-on-year. In Q2 FY24, its net income increased by 371.86% YOY and reached ₹ 242 crores.

Favorable Industry Trends

• Online markets have become a place to buy almost everything, including tyres. The e-commerce revolution has expanded to almost all over the country, which companies like JK Tyre are now capitalising on. Most online sales are focussed in Tier-I and Tier-II cities where space is expensive; thus, only limited stock can be kept in the showroom.
• According to Expert Market Research (EMR), the Indian tyre industry is expected to grow at a rate of 6.68% (CAGR) from 2024-32. JK Tyre, one of India’s leading tyre manufacturers, is poised to gain from such a trend.
• It is known to very few people that electric cars need different types of tires compared to internal combustion engine cars. The government’s focus on achieving the carbon emission targets has given rise to a new vehicle segment, indirectly a new segment for tyres. JK Tyre is already selling its EV-specific tyres and will hold a significant portion of the market share depending on the customers’ response.

Analyst Ratings

According to Simple Wall Street, JK Tyre & Industrial Ltd. is overvalued by 79.8% at CMP ₹ 389.8. Its fair value is ₹ 216.74. Its net profit margin increased to 3.8%, higher than last year, i.e., 1.3%. Its earnings are expected to grow at 18.8% per year, which is faster than the Indian market growth rate of 16.3%. According to the Snowflake analysis JK Tyre has a solid track record that pays a dividend with an adequate balance sheet.

Potential Scenarios Following an All-Time High

(Based on the chart of 1-month timeframe)

Converting numbers and candles into information can provide us with the market’s stance on the stock, which may help us make correct investment decisions. If we take the monthly data from January 2015, we have observed that it has made five all-time highs after a gap of at least a month. Since June 2023, it has been making an all-time high every month, with the price going below the previous month’s low only once. Considering such a sudden jump in stock price and expecting the price to move in a similar way, making a new high every month, one can consider entering the stock at the price of one’s liking. Stop loss should be set at the low of the previous month so that an exit can be made at the first signal of weakening of the trend.

Making Informed Investment Decisions

For any stock, reaching an all-time high is a significant milestone. Still, conducting thorough research and considering various factors is essential before making investment decisions. To make informed choices that align with your investment goals and risk tolerance, one needs to analyse the company’s fundamentals, industry trends, management’s strategy, and overall market conditions.

Company’s Financial Health

• In FY23, JK Tyre had a debt of ₹ 4882 crores covered by a free cash flow of ₹ 333 crores and cash & equivalents of ₹ 175 crores. It shows a huge difference between the debt and funds, which makes it important for the company to increase the amount under free cash flow or cash & equivalents.
• In the short term, it has a liability of ₹ 5261 crores covered by assets of ₹ 5410 crores. The assets of ₹7508 crores cover its long-term liabilities of ₹ 4161 crores. There is a small gap between assets & liabilities in the short term, which indicates that the company needs to maintain the proper level of assets to handle any challenging financial situation.
• In the last four years, its dividend payout ratio has continuously increased even when its debt is not adequately covered by free cash flows and cash & equivalent, which may not be a good sign for the company’s financial stability.

Industry Outlook

• Personal vehicles have become a symbol of success, and their purchase has become easy due to increasing disposable income. The demand for vehicles indirectly affects the demand for tyres, so similar growth can be seen amongst the tyre manufacturers.
• Rapid urbanisation is increasing the demand for various things in smaller cities, which was earlier seen in Tier-I cities. Public transportation systems cannot keep up with the pace, so people have started to purchase personal vehicles even if they are at the lowest price. It will indirectly increase the sale of tyres.

Market Sentiment

JK Tyre, influenced by multiple factors, has given impressive growth over three years in terms of revenue, gross profit, net income, etc. Its growth trajectory is expected to continue due to the 6.8% CAGR growth rate expected in the Indian tyre industry until 2032. Despite being overvalued, its stock is still being purchased by investors, which can be investors’ confidence or a market frenzy. Its substantial debt, partially covered by cash flow and assets, highlights the need for prudent financial management. Due to urbanisation and rising disposable income, the overall growth in personal vehicle demand further supports the positive industry outlook. Investors need to conduct detailed research, considering factors like company fundamentals, industry trends, and financial health, to make informed investment decisions.