CEAT – Capacity Expansion

We rate CEAT a BUY. Leading tyre manufacturer engaged in manufacturing over 7 million tyres every year and commanding ~13% market share in India. Manufacturing facilities include three manufacturing plants, ten outsourcing units and three 2-3 wheeler plants controlled by CEAT. Caters to various user segments including heavy-duty T&B, LCV, Earthmovers and Forklifts (speciality segment), Tractors, Trailers, PC, Motorcycles / Scooters and Auto-rickshaws. Exports to more than 120 countries across Europe, Africa, Asia and has an established network in North and South America. During Q2 2010, net sales
increased by 9% y-o-y to INR7,145 million. Standalone PAT stood at INR615 million, compared to net loss of INR288 million during Q2 2009.

Investment Highlights

Strategic focus. CEAT expects to dominate in select segments in the domestic as well as in the export market. With globalization of the economy, new segments are getting created. It has chosen some key segments where it will focus its entire marketing activities in the future with a view to achieve leadership status. ‘Select and dominate’ will be CEAT’s strategy in all product categories especially premium categories. Further improvement in product mix and margins will be the key operational deliverables of the entire strategy.

Robust financial performance. CEAT has shown improved financial performance year over year. Sales have always been on rise since 2001 with a CAGR of 11%. It has sound capital base with substantial liquidity in hand. Exports registered a CAGR of ~18% during 2003- 2008 and are expected to be a major revenue driver in future also. Unprecedented cost push and subdued demand, however, reduced the margins of the company during the financial
year 2008-09.

Growing sales network. The company has a robust sales network consisting of 34 regional offices and over 3500 dealers. In addition, there are more than 100 CEAT shoppes, the exclusive outlets for urban customers. It has also implemented a new initiative during 2008-09 and has already opened close to 100 CEAT hubs, the exclusive outlets for addressing the needs of the Trucks & Buses segment. With these initiatives, CEAT’s direct reach to the consuming community is expected to grow significantly.

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