Add CEAT Ltd For Target Rs.1,432 - ICICI Securities
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Margin pressures likely to intensify
CEAT’s Q4FY21 performance was a beat on consensus expectations driven by faster than anticipated revenue growth (~46% YoY), driven by volume growth (~43%). On segmental basis the outperformance was led by PV/CV segments. These segments have started to witness growth moderation in Apr’21, we believe the same could continue till 1H. Lack of pricing power (big concern!) in the aftermarket segment was visible in 4Q as price hikes were limited to ~3% even as inputs costs rose sharply (up 22% through Q3FY21 to Q1FY22).
On balance sheet side, consolidated debt fell by ~Rs5.1bn YoY to ~Rs14.2bn (FY20: ~Rs19.3bn). Margins are likely to decline (~200bps) in FY22 due to input cost inflation. Capex intensity has intensified (FY22E: Rs11.5bn), which is likely to halt FCF generation (~1% yield FY23E) and RoCE improvement for FY22E/FY23E. Downgrade to ADD.
Key highlights of the call:
* Revenue growth ~46% YoY to ~Rs23bn was driven by strongest growth in the TBR/PCR segments followed by 2W/ LCV segments.
* Current market share in 2W/3W is at 28-30%, while in PCR segment it has risen to 14-16% (up from 10-11% in FY20) with new customer additions (OEMs) along with availability of fresh PCR capacity amidst import restrictions.
* Blended RM cost increased by 12% QoQ (against decline of 4% YoY in FY21). Company was able to take only 3% blended price hike in 4Q due to competitive pressures. 1Q is likely to witness further ~10% RM cost inflation. Residual price increase of additional ~8% would be needed to mitigate RM impact.
* Company has cut down on discretionary spends (e.g. marketing expenses) to protect margins. They are likely to save spends w.r.t IPL sponsorship due to curtailment of the event.
* Specialty tyre business is operating at peak capacity in Q1FY22. Current capacity is 33MT per day and is expected to be ramped up to 45MT per day by H1FY22 and further to 55MT per day by FY22-end.
* PCR segment currently has a capacity of 25k tires per day of which only 10k tire capacity is operational. Company expects the Chennai plant ramp-up of 20k tires in phase-1 and 10k in phase-2 to be operational over the next two years.
* Investment of Rs12.1bn in capacity expansion at the Chennai plant to 190TPD (90k truck radial tires per month) will be incurred over FY22-FY26.
* Project capex for FY21 stood at Rs4.7bn while that for FY22 it is expected at Rs10bn; and maintenance capex of Rs1.5bn. Peak revenue potential of the current capacity is expected to reach Rs100bn by FY23E.
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