By: Yudhan Patil and Mannu Arora
JK Tyre plans to reduce net debt by Rs 600 crore on a consolidated basis in the current financial year, its CFO Sanjeev Aggarwal told ETCFO. The finance executive expects demand to rebound strongly beyond Q1, as he hopes for “good levels” of growth for the full year.
In the just-concluded FY21, JK Tyre reduced its borrowings by Rs 930 crore. This reduction, which was about 17 per cent, mainly came on the back of faster-than-expected recovery, resulting in robust cash accruals for the company. JK Tyre posted 5 per cent revenue growth in FY21, clocking Rs 8,722 crore.
In the long-term, the CFO plans to reduce borrowings by about 45 per cent. JK Tyre’s net debt stands at Rs 4,600 crore as of March 31, 2021 close. Edited excerpts.
Q: Will the second Covid wave have a material impact on your Q1 business?
Sanjeev Aggarwal: The impact of the second wave has been limited. This can be reflected in capacity utilisation which is estimated to be significantly higher for the June quarter of FY22 as against 25 per cent in Q1FY21.
We have been seeing good demand. With the unlocking of the economy again, the momentum is expected to further pick up. We will certainly see some growth for Q1 even though it will be largely on account of the low base. But we expect a strong rebound in demand for the upcoming quarters.JK Tyre CFO Sanjeev Aggarwal
Q: How much growth are you targeting for FY22? What is your outlook for aftermarkets, exports and OEM business?
Sanjeev Aggarwal: We grew about 5 per cent on the top line in 2020-21. As mentioned, we are fairly bullish on demand, and therefore expect to clock good levels of growth for this financial year 2021-22. It would be difficult to share a specific number but prospects are shaping up quite well. The outlook for each of the businesses seems robust. Having said so, we remain cautious amid the possibility of the third wave. We will not undermine the pandemic situation and will continue to closely monitor the progress on that front.
Q: What gives you optimism for good levels of growth?
Sanjeev Aggarwal: There have been a host of factors behind this optimism. First and foremost, the government’s increased focus on infra is a major growth driver. The government has been spending huge on roads and building infrastructure. This augurs well for the tyre industry.
Second, as more and more states gradually unlock the economy, more pent-up demand is expected to come. There is a strong recovery expected on the cards.
Further, the automobile sector seems to be ramping capacity, which itself is indicative of the resurgence in demand likely in the near term.
Trend wise, we expect premiumisation to pick up as strong demand for the SUV category has been witnessed off late. We plan to sell bigger size tyres and further enhance our innovative product portfolio.JK Tyre CFO Sanjeev Aggarwal
To support this growth, we plan to ramp up our dealer network and brand shops. We added some 1,400 dealers and opened 90 odd brand shops in FY21. We expect the same run rate to continue for FY22.
Q: You ended FY21 with 75 per cent capacity utilisation. What plans do you have for FY22?
Sanjeev Aggarwal: Yes, our average capacity utilisation was around 75 per cent for FY21, due to 10 months of effective operations. There was a significant pick-up in the last couple of quarters.
For FY22, if no more disruptions occur and recovery goes as per the plan keeping demand intact, then we expect capacity utilisation to be in excess of 95 per cent which we saw for the Q4FY21.
Q: You plan to invest Rs 200 crore over the next two years to raise capacity by 10% or so. What was this capex amount previously, and could you shed more light on the plan?
Sanjeev Aggarwal: Yes, we have plans to spend Rs 200 crore over the next two years. We normally have Rs 80-100 crore annual maintenance capex, this would be in addition to that amount. This investment is a part of our overall capital deployment strategy. We plan to debottleneck the capacity.
Another part of the plan is to continue reducing the debt and further strengthen the balance sheet.
Q: What are your debt reduction plans for FY22?
Sanjeev Aggarwal: We reduced debt by 17 per cent in FY21; the net debt as of FY21 close stands at about Rs 4,600 crore. This was possible as we witnessed faster-than-expected recovery during the latter part of FY21, which helped us generate more cash and we, therefore, repaid more of our borrowings than what was initially planned.
For FY22, too, we expect a double-digit reduction.
There is a scheduled repayment of about Rs 600 crore for this financial year which would translate to about 13 per cent reduction, and if the pandemic situation remains under control then higher cash accruals could be there, which will be used to accelerate debt reduction. Long-term, we plan to reduce debt by 45 per cent over the next three years.JK Tyre CFO Sanjeev Aggarwal
Q: Are you seeing millennials purchasing tyres online?
Sanjeev Aggarwal: The trend is picking up, but it is mainly for lead generation. We have tied up with e-commerce firms like Amazon, Flipkart, as well as with online car search ventures like CarDekho.com.
Q: What has been the impact of rising petrol prices on your business?
Sanjeev Aggarwal: It would be too early to comment on the impact of the rising petrol prices on the tyre industry. Maybe we would be able to give some colour in a couple of quarters.
Q: How do you plan to tackle inflationary pressures?
Costs Inflation has picked up of late. We may pass on some of the cost increase to our customers, but we expect the prices of the raw material to soften in H2FY22.JK Tyre CFO Sanjeev Aggarwal
There may be some impact on profitability for Q1FY22, but we will try to protect the margins through operational efficiency improvement and other cost optimization measures, as was done in FY21 across various heads of fixed costs.