Capacity boost

New Delhi, Dec. 29: Tyre manufacturer J K Industries Ltd plans to offer technology partner Germany’s Continental AG an equity stake to bolster its financial position as it needs cash for debt repayment and capacity expansion.

The New Delhi-based tyremaker is planning to expand its modern truck radial plant located in Mysore. It has an external debt of Rs 650 crore, which needs to be repaid over the next three to four years.

Sources said JK’s chief H. S. Singhania went to Germany and held discussions with Continental officials for supply of superior technology and equity participation.

“JK is trying to convert its technical tie-up with Continental into an equity tie-up,” he said, adding Singhania would hold a meeting with his top officials this week.

The firm would not be able to offer an equity of more than 15 per cent as the promoters holding is only around 40 per cent while the rest are together being held by mutual funds, financial institutions and the public.

“JK is in a Catch-22 situation,” he said. “If they offer more equity to Continental then there are chances that they might have to relinquish management control within the next five years.”

“But they again need money for debt repayment and capacity expansion as they have to compete with global tyre majors, which are coming to India.”

JK’s main domestic competitors are top-ranked MRF Ltd and Apollo Tyres Ltd.

Analysts said the country's radial tyre market holds tremendous growth potential, since it is in a nascent stage, which is forcing global tyre majors to set up manufacturing facility.

Less than 2 per cent of truck and bus tyres are radials although commercial vehicle tyre makes up more than 70 per cent of the $2.2 billion domestic tyre industry. In contrast, they make up more than 75 per cent of car tyre sales.

Last month, Apollo Tyres Limited tied up with Europe’s biggest tyre maker Michelin to form Michelin Apollo Tyre Limited, which would make radial tyres for commercial vehicles and market Michelin tyres.

The agreement between Michelin and Apollo, which has almost a quarter of the domestic tyre market, was formed after Apollo ended its existing technology supply agreement with Continental AG .

The new venture, where Michelin will hold 51 per cent equity and Apollo 49 per cent, would invest Rs 322 crore to set up a manufacturing facility for truck radials.

However, JK does not have the financial strength of Apollo, the official said.

“JK’s shares are being traded between Rs 60-70 while Apollo’s shares were being traded at Rs 250-260,” he explained.

The tyremaker has posted revenues of Rs 2,077 crore for the financial year 2002-03, which runs between October to September.

Operating profit for the year stood at Rs 197 crores, while net profit was at a lower Rs 22.09 crore.