In-line, Replacement demand supports top line
Replacement demand recovery underway
* CEAT’s 1QFY21 performance was driven by replacement demand, lower RM cost and cost control efforts. While near-term operating performance would be driven by favorable mix and cost, strong volume recovery is key for CEAT to benefit from new capacities.
* We are maintaining consol. EPS estimates for FY21 but have lowered it for FY22E to factor in the higher interest cost. Maintain Buy
Favorable mix, lower RM dilutes impact of operating deleverage
* CEAT’s 1QFY21 revenues/EBITDA declined 36%/39% YoY.
* The company reported adjusted loss of ~INR178m for the quarter. Volumes declined 34% YoY and realizations improved 1.5% YoY (~3% QoQ). Revenues declined 36% YoY to INR 11.2b (v/s est. INR10.5b).
* Replacement demand recovered strongly post the lockdown (~80% of 1QFY21 revenues).
* Gross margin contracted 540bp QoQ (+70bp YoY), due to steep decline in finished goods inventory (RM cost + direct non-material cost). However, on per kg basis, gross margin improved 1-2pp QoQ, driven by favorable mix and lower RM cost (-6% YoY, +2% QoQ).
* EBITDA margin contracted ~360bp QoQ (40bp YoY) to ~9.1% (in line with est.), impacted by operating deleverage. Other expenses were low as the company controlled discretionary expenses with advertising expenses at near-zero.
* EBITDA declined ~39% YoY to ~INR1.02b (v/s est. ~INR0.96b). However, higher interest cost translated to adj. loss of ~INR178 (v/s est. loss of ~INR98m).
Highlights from management commentary
* Replacement demand saw good growth in farm/truck radials. Even 2W/PV replacement demand grew in Jun-Jul’20. However, management believes that weak macro-economic indicators would slow down replacement demand for 2Ws/PVs; however, replacement tyres for trucks should see positive growth FY21 onwards.
* All plants are operational and now operating near pre-COVID levels.
* Natural rubber prices have declined from INR135/kg in 4QFY20 to INR115/kg in 1QFY21, but has again increased to INR132/kg. However, lag impact of the above due to inventory along with benefit owing to the crude price decline during Apr’20 should come in 2QFY21 (partially offset by INR weakness).
* Consol. capex stood at ~INR1.05b during 1QFY21. Target for FY21 is ~INR6.5b while for FY22E, it is expected at INR6-7b
Valuation and view
* Relatively stable replacement demand coupled with benign RM cost and cost cutting measures should drive relatively steady performance in a weak operating environment.
* Valuations at 13.4x/11.2x FY21/22E consol. EPS does not fully capture the benefit of substantial capacity addition. Maintain Buy with TP of ~INR1,038
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