Financial statement analysis of JK Tyre and CEAT Tyre

FINANCIAL STATEMENT ANALYSIS 1

SubmittedTo Prof.SudhirKamath

SubmittedBy

AjayPrathapChoppara BhavyarunaChittajallu

SriHarshaNori NaveenaKodali SadiqKhanMd

VenkataSaiAkhilSadhuMN


AUTOMOBILE INDUSTRY:

Trends in the automobile industry decide the growth trajectory for tyre companies to a large extent. Today, the global automakers are faced with a number of challenges such as rapidly changing macroeconomic conditions, shift in consumer behavior, growing environmental concerns and unprecedented technological advancements among others. Tough there are many challenges Indian automobile industry has to face, on the other hand it has very good opportunities like GST, Make in India, huge allocation of money to Rural and Infrastructure development in the 2017-18 Indian budget.

Performance of Automobile Industry in Recent years

After declining for three consecutive years, production of commercial vehicles picked up in FY 2015-16, as the April 17 deadline for the implementation of Bharat Stage IV emission norms neared, Optimistic scenario in the infrastructure segment and sizeable exports also resulted in better performance of the M&HCV category. However, as per the predictions of ICRA, the passenger vehicle segment is likely to grow at a healthy pace. Improved economic outlook and the ‘Make in India’ thrust would provide many growth opportunities to the Indian automobile industry. Not only Make in India there are other factors which can boost automobile sector.

INDIAN TYRE INDUSTRY:

No. of Companies 39 No. of Tyre plants 60 Industry Turnover (estimation) Rs. 50000 Crore (USD$ 8.5Bn)

Exports (estimation) Rs. 10500 (USD$ 1.7Bn)


KEY FEATURES

While the tyre industry is largely dominated by the organized sector, the unorganized sector is predominant with respect to bicycle tyres.

Major players are MRF, JK Tyres, and Apollo Tyres & CEAT which account for 63 per cent of the organized tyre market.

As per the Automotive Tyre Manufacturers’ Association (ATMA), the revenues of the tyre manufacturing firms have grown at a CAGR of 12% between FY 2009-10 and FY 2014-15. The revenues of the industry in FY 2015-16 remained muted with almost negligible growth, year-on-year.

Major players have their own distribution channels and they spend huge on the R & D departments.

The major factors affecting the demand for tyres include the level of industrial activity, availability and cost of credit, transportation volumes and network of roads, execution of vehicle loading rules, radialization, retreading and exports.

INDUSTRY BREAKUP:

The Indian tyre industry caters to OEM, replacement and export markets through four broad vehicle categories: Commercial Vehicles (CV), Passenger Vehicles (PV), Two-Wheelers (TW), and others, including tractors.


MARKET SHARE BREAK UP:

OPPORTUNITIES: Focus of the Government of India on infrastructure growth In the Union Budget 2016-17, the Government of India has provided 2.21 lakh crore for infrastructure development, of which ` 97,000 crore will be spent on roadways. Greater connectivity would give a fillip to vehicle demand, resulting in greater demand for tyres in both OEM and replacement markets. Besides, massive road construction and infrastructure building activities will provide a boost to tyre demand from the construction industry. Growth in Automobile Sector:

Make in India, GST can boost automobile industry which In turn boosts tyre industry. Strong growth in demand due to rising income, middle class, and a young population. Growth in export demand is set to accelerate Domestic sales of passenger vehicles in India is expected to increase at a CAGR of 12.87 per cent during 2016-26 THREATS

Chinese tyre manufacturers Tyre imports from China to India may continue to grow at 10-12% over the next few years. The prevailing trend in the replacement market of low-cost up gradation from TBB (truck-bus bias) to TBR (truck-bus radial) tyres may continue even in future. Strained exports from China to the U.S. market due to the imposition of antidumping duties and the devaluation of the Chinese Yuan could make our Asian neighbor go for more aggressive pricing in the export markets, giving stiffer competition to Indian tyre manufacturers. (Source: ICRA Report, March 2016)


Volatility in raw material prices As a result of the sharp drop in natural rubber prices, and the resultant cut in production, the supply gap is likely to get wider in FY 2016-17. Lower inventory levels and the import restrictions on natural rubber are likely to pose challenges to domestic tyre manufacturers. Rupee volatility and heavy fluctuations in crude oil prices may exacerbate the situation.

INDUSTRY OUTLOOK A broad based economic recovery led by a massive push to infra spends, good monsoon, higher urban discretionary incomes, and a rural income turnaround may provide Indian tyre makers with exciting opportunities in OEM as well as replacement markets. The tyre demand is likely to be higher by 3.5-5.5% in FY 2016-17 and may improve further to 8%-10% in FY 2017-18. China may continue to pose a threat to Indian companies in the domestic TBR market and also in the export markets serviced by Indian tyre manufacturers. (Source: ICRA Report, March 2016)

ABOUT JK TYRE

The company is a part of the century-old JK Organization, one of India’s leading private sector conglomerates. JK Tyre is one of the leading tyre companies in India, which presents in all tyre segments.


Ranked No. 1 in Customer Satisfaction by JD Power Asia Pacific Study 2015 Awarded brand of the year 2015 by world branding forum London. JK Tyre -TATA Motors Best Supplier of the Year - at TATA Motors vendor’s conference

2015 in Pune National Award for Excellence in Talent Management 2015

JK tyre is very aggressive in product launches, in 2016 itself they have launched 121 new products. Off lately they are trying to penetrate into two/thee wheeler segments.

12 Plants across India

141 Jk Tyre selling points

4000 Dealers

23 Tyre Truck Wheels

150+ JK Tyre Steel Wheels

The company’s manufacturing operations comprise 12 modern plants strategically located across the country – Mysuru, Banmore, Kankroli, Chennai and Haridwar.

The company has 141 JK Tyre selling points pan-India which service the growing needs of more than 4000 dealers. Besides, the company markets products through 23 ‘JK Tyre Truck Wheels’ (fully equipped tyre service Centre- addressing HCV’s) and 150+ ‘JK Tyre Steel Wheels’ (exclusive passenger car tyre retail). The company focused on tyre management solutions as opposed to product sale. The Company enjoys the highest market share in truck / bus radials in India- first mover advantage; it is amongst the largest players in India’s truck bias and passenger car segments as well.

JK Tyre is a preferred supplier to all leading automotive Original Equipment Manufacturers like Maruti Suzuki, Tata Motors, Honda, Hyundai, Ashok Leyland, Mahindra & Mahindra, Volvo, Eicher, General Motors, Volkswagen, Fiat, Nissan, TAFE, BEML and Caterpillar India, Chrysler, Volkswagen, Nissan (car/light truckradial) and John Deere (Farm).

JK tyre’s last year turnover is RS. 5963 Crores.


SWOT ANALYSIS

FINANCIAL STATEMENTS: BALANCE SHEET


It seems that JK TYRES and CEAT are slowly converging on their credit policies resulting in nearly similar account receivable levels.

On comparing the inventories figures of both the companies, we find that CEAT maintains it at about 16% of its total assets unlike JK Tyres being at about 12% approximately.

We can identify that accounts payable of JK is consistent and CEAT’s accounts payables is decreased from 20% to 16% during 2013-2016 period. It indicates that CEAT’s management has been taking action to keep its accounts payable low.

Both JK TYRES and CEAT are raising equity by maintaining a stable long term debt.

Both the company’s fixed assets has shown an inclining trend over the period.

INCOME STATEMENT:

Better operating efficiencies, all-round

costreduction,deeperruralpenetration,launch of several new products acrosscategories and stable input costs by JKTYRESandreductionintheFinancecost& cost of materials consumed by CEAThelped the companies achieve thissignificantimprovementinperformance.

Wecanalsoidentifythattherehasbeena decrease in the COGS and totalexpensesmade by both the companies,which resulted in the inclining trend ofnetprofits.


CASH FLOWS:

ANALYSIS POINTS JK TYRES CEAT

MAJOR SOURCES OF CASH Cash from operations - 902 Borrowings - 301

Cash from operations-687 Borrowings - 499 Short term buyer credit – 142

MAJOR USES OF CASH DURING THE PERIOD.

Purchase of Fixed Assets – 559 Repayments – 432 Finance Costs – 250

Purchase of Fixed Assets – 706 Repayments – 629

CASH FLOWS FROM OPERATIONS COMPARED TO NET PROFIT FIGURES OF THE FIRM.

CF0 – 902 > Net Profit – 453

CF0 – 687 > Net Profit – 445.

IS CASH FROM OPERATIONS GREATER THAN CAPEX?

YES, CFO – 902 > CAPEX – 559

No. CAPEX – 706 > CFO – 687

CASH FROM OPERATIONS > CAPEX+INT PAID+ DIV PAID?

IF YES, WHERE WAS THE EXCESS CASH INVESTED?

IF NO, WHAT ARE THE SOURCES OF CASH FOR PAYMENT OF DIV, INT AND CAPEX?

CFO – 902 CAPEX+INT PAID+ DIV PAID – 850. NA YES. Net borrowings, CFO.

CFO – 687 CAPEX+INT PAID+ DIV PAID – 890 NA YES. Net Borrowings, CFO.


Though the average inventory on hand is 60 days a year for the both companies comparatively CEAT turns 5 times a year, where JK inventory turns over 4 times a year, which shows that CEAT is playing a volume game.

Comparatively CEAT has higher receivables turnover ratio than JK which means that it is collecting more receivables throughout the year.

Comparatively CEAT has higher payables turnover ratio than JK which means that it is paying more frequently and regularly.

JK has better working capital turnover ratio than CEAT as it has high turnover ratio, which means JK is efficiently using firm’s short term assets and liabilities. CEAT which has comparatively low ratio indicates that it is investing in too many accounts receivables and inventory assets to support its sale.

-30

-20

-10

0

10

20

30

40

2016 2015 2014 2016 2015 2014

JK CEAT

ACTIVITY RATIOS

Inventory Turnover Ratio Receivables Turnover Ratio

Payables Turnover Ratio Working Capital Turnover Ratio


The ideal current ratio is 2. If we identify, both the companies have less current ratio but comparatively CEAT has a better current ratio. The reason for JK’s current ratio being less than 1 is there has been an increase in the short term borrowings of the company.

The average quick ratio of JK and CEAT is almost 0.5, which means that the company can cover it’s 50% of current liabilities through its quick assets. CEAT is mainly dependent on inventory to cover its liabilities.

Both the companies do not have sufficient cash and cash equivalents to cover its current liabilities.

CEAT has better cash conversion cycle i.e. on an average CEAT is taking 30 days in converting its sales into cash, whereas JK is taking 50 days on an average to convert its sales into cash.

0

0.2

0.4

0.6

0.8

1

1.2

1.4

2016 2015 2014 2016 2015 2014

JK CEAT

LIQUIDITY RATIO

Current Ratio Quick Ratio Cash Ratio


Both the companies have good Debt Asset Ratio, which is less than 1. It shows that the companies have more assets than liabilities and could pay off its obligations by selling its assets if it needed to and both companies are not exposed to risk.

JK is exposed to more risk than CEAT, because JK has more debt to equity ratio.

JK has a stable interest coverage whereas CEAT has an increase in the interest coverage ratio because of increase in its EBIT and decrease in interest expense.

0.76 0.8 0.82 0.5 0.55 0.7

3.23.93

4.51

0.97 1.232.41

3.773.09

2.58

8.8

5.173.91

0

2

4

6

8

10

2016 2015 2014 2016 2015 2014

SOLVENCY RATIO

Debt-Asset Ratio Debt-Equity Ratio Interest Coverage Ratio


The gross profit of JK is higher than that of CEAT, because JK has been efficient in reducing their COGS which resulted in higher gross profits. Though JK has good gross profit its net profit is lower because of its increasing depreciation expenses and other expenses. Both the companies have stable operating gross profit.

Both the companies have good ROCE and ROE, but comparatively JK has edge over CEAT.

Both companies are generating major portion of revenues through capital employed and a little from assets.

Both the companies have a very little ROI but comparatively CEAT has better ROI.

0

5

10

15

20

25

2016 2015 2014 2016 2015 2014

JK CEAT

PROFITABILITY RATIO

ROCE ROE

00.05

0.10.15

0.20.25

0.30.35

0.4

2016 2015 2014 2016 2015 2014

JK CEAT

PROFITABILITY RATIOS

Gross Profit Margin Net Profit Margin Operating Gross Profit ROI ROA


Although both the companies have a return on equity of nearly 11% their underlying strengths and weaknesses are quite opposite. JK is better than CEAT in using its assets to generate revenues. CEAT seems less risky since its financial leverage is very low.

7% 2.3

4.52

10.22

8% 1.435 2.1

11

0%

200%

400%

600%

800%

1000%

1200%

Net profit margins Total assetsturnover ratio

Financial LeverageRatio

ROE

DUPONT ANALYSIS

DuPont Analysis JK DuPont Analysis CEAT


WHERE TO INVEST:

• Though JK has 24% of share in the automobile sector, ratio analysis suggests that CEAT with 5% market share has strong financials.

• CEAT has better investment options as it can be understood by looking at its debt-equity ratio which is low when compared to JK.

• CEAT has better net profit margin when compared to JK.

• CEAT has better ROI than JK.

SO, on the whole CEAT has better investment options.

Economy & Finance

Financial statement analysis of JK Tyre and CEAT Tyre