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  • CMP : 2,547.0 Chg : 7.60 (0.30%)
  • Target : NA
  • Target Period : 12-18 Month

15 Sep 2022

Cautiously optimistic on demand, margin recovery …

About The Stock

CEAT, part of RPG group is one of the India’s most reputable tyre manufacturers established in 1958. It has prominent presence in India as well as in key international markets with 7 manufacturing plants & 51,000+ sales touchpoints.

  • FY22 Channel Mix: Auto OEMs: 24%; Replacement: 56%; Exports: 20%  
  • FY22 Segment Mix: PV: 18%; CV: 40%; Farm & OHT: 14%; 2W: 28%
  • It is presently operating at ~80% capacity utilization levels
  • It has ~4,600+ dealers, 380+ CEAT exclusives, presence in >110 countries
Management Meet Highlights
  • Domestically, company is witnessing healthy demand traction from the OEM’s front with replacement demand being steady in nature. Robust demand is particularly being witnesses in the PV space with chip supply issue easing while steady MoM improvement is seen in the CV space
  • On the exports front, demand in Europe & Indonesia is muted amid negative economic scenario. Sri-Lanka on the other hand is witnessing 50-60% decline in volumes with CEAT earning steady margins (unchanged).
  • On Margins front company expects Q2FY23 to be on similar lines as Q1FY23 with recovery seen from Q3FY22 onwards. Overall company aims to achieve ~10%-12% operating margins over medium term. Replacement market business remains more lucrative in terms of margin than the OEM.
  • Over past 3 years’ company has expensed ~₹3,300 crores out of planned ~₹4,000 capex w.r.t capacity building across Chennai and Ambernath plant. Capex for FY23E is planned at ~₹900 crores while the same for FY24E is seen at ~₹ 700 crore, with peak revenue potential pegged at ₹13,000 crore.
  • Company remains committed towards keeping Debt/EBITDA at <3x.
Key Triggers for future price performance
  • Organic growth in business over FY22-24E amidst cyclical upswing in CV space and secular growth trend in PV domain. With controlled leverage on B/S and plans for expansion company is set for meaningful growth ahead.
  • Company focuses to remain technologically advanced by spending on upcoming technologies like Electric Vehicle specific tyres, Smart Tyres, etc.
  • Addition of new models like Mahindra XUV700, Tata Ace EV, Olectra EV bus, etc. from existing OEMs leading to deeper relations.
  • Commitment to retain leadership in electric-2W space with >50% market share with key clients being Ola Electric, Hero Electric among others

Key Financial Summary

(₹ crores) FY16 FY17 FY18 FY19 FY20 FY21 FY22 5 Year CAGR
Revenue 5,483.6 5,766.5 6,283.4 6,984.5 6,778.8 7,609.6 9,363.4 10.2
EBITDA 768.3 651.3 587.1 602.6 697.0 952.2 700.1 1.5
EBITDA Margin (%) 14.0 11.3 9.3 8.6 10.3 12.5 7.5 -
Net Profit 399.5 359.2 233.3 251.1 230.1 432.3 70.6 -27.8
EPS (₹) 108.2 89.3 58.8 62.4 57.2 106.8 17.6 -
P/E (x) 13.5 16.4 24.9 23.5 25.6 13.7 83.2 -
RoE 21.3 15.0 9.1 9.1 8.0 13.0 2.2 -
RoCE 25.0 16.5 13.5 10.9 9.2 13.6 5.5 -
Source: Company, ICICI Direct Research

Key takeaways from company’s presentation & Highlights…

  • Company expects to benefit from recent cool off in raw material prices with margin to recover meaningfully from Q3FY22. Over long term company aims to achieve double digit return ratios and margins.
  • Company expect Rm cost increase of ~2-3% in Q2FY23 over Q1FY23 with operating margins expected to be in similar lines as of Q1FY23.
  • It is currently realising ~5% of replacement sales from online channel (D2C)
  • In European region PCR segment is witnessing slowdown due to inflationary scenarios and muted economic scenario whereas OHT demand is steady.
  • Capacity Utilization across segments remained at ~80% with OHT being fully utilized. 2W tyre plant at Nagpur has current capacity of 80,000 tyres per day with current utilization stood at 55,000 tyres per day. PCR tyre capacity stood at 40,000 tyres per day with current utilization at ~30,000 tyres per day. TBR capacity stood at 140 tpd with current utilization at 110 tpd. Phase 2 of Chennai plant has capacity of 28,000 tyres per day with utilization at ~20,000 tyres per day & is part of ₹4,000 crore capex.



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