JK Tyre can move to Rs 220-225: Rajen Shah

Rajen Shah of Angel Broking told CNBC-TV18, "Despite very subdued market conditions, tyre companies have done very well whether it is MRF, Apollo Tyre, Ceat or JK Tyre, all have posted reasonably fine numbers for the year ended March. This is because of rubber prices coming down from Rs 225-230 per kilogram to Rs 175. This good trend would continue for the current year because we expect the rubber prices to stabilise in this range of Rs 170-180. Besides crude also, if you see, year-on-year it is down about 10 percent from USD 116 to USD 104."

He further added, "Outgo on account of crude based raw material will also decline which will help improve margins and profits of these tyre companies. Besides, in the next few months the Reserve Bank of India (RBI) would lower interest rates, so that will revive the auto industry which saw flat growth last year."
"Overall, we are very positive on the tyre industry. JK looks more promising because on a valuation basis it is the cheapest as Apollo Tyres last year reported about Rs 12 kind of earnings and the stock is at about Rs 90 and so it is trading at about 7.5 times in last year earnings," Shah said.
He further added, "MRF year ended September, we took the second part of last year and added the profits to first half of this year and the EPS works out to Rs 1,650 and the current price of about Rs 15,500, so it is trading at 9.5 times. Looking at them, on average they are trading at about 8.5 times earnings. JK Tyres is trading at hardly 2.5 times. The reported Rs 50 earnings, stock is at Rs 120 so it is trading at 2.5 times."
"You cannot compare JK's management with Apollo and MRF but the price differential is too high. The valuation gap is too much and JK needs to at least move to about five PE multiple. At five PE multiple, this stock can easily move up to about Rs 220-225 levels," Shah said.