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Decent quarter; new capex likely to curtail FCF

CEAT’s Q4FY21 performance was a beat on consensus expectations driven by faster than anticipated revenue growth (up ~50% YoY). The growth momentum was driven by outperformance in PV/CV segments. However, gross margins are beginning to reflect commodity price pressures (down 365bps QoQ). On balance sheet side, consolidated debt fell by ~Rs5.1bn YoY to ~Rs14.2bn (FY20: ~Rs19.3bn) while debt/equity ratio reduced to 0.42x (FY20: 0.66x).

Outlook for H1FY22 remains a concern on demand slowdown due to covid surge and OEM production stoppages. Profitability is likely to remain in check on rising input costs (e.g. crude derivatives). Announcement of fresh capex of Rs12.1bn towards TBR capacity (190 TPD) expansion is likely to curtail FCF generation. Sharper than expected deterioration in FCF is a key downside risk. Maintain BUY.

* Key highlights of the quarter:

Revenues grew ~50% YoY to ~Rs23bn due to sharp growth in replacement sales in Q4 along with rebound in OEM production. Gross margins decline was curtailed at 41.8% (down 365 bps QoQ) driven by better fixedcost absorption (470 bps QoQ) on account of higher finished goods inventory. Revenue mix has continued to skew towards CV (truck & bus/LCV) segments (contribution up ~400bps from in 2H vis-à-vis 1H at 45%), which we believe is a drag on margins. Employee costs declined marginally (by 14bps QoQ) as other expenses remained flat due to the tight cost control. Adjusted PAT grew ~4% QoQ to Rs14.2bn. Capex for FY21 was limited to Rs6.4bn (FY20:Rs11.7bn) which helped generate FCF of ~Rs7bn in FY21. CEAT has continued its VRS scheme aggregating ~Rs125mn in FY21. It declared a final dividend of Rs18 per share for FY21.

* Commercial segment leads to growth:

CEAT has likely fared well vis-à-vis domestic peers, which we believe is attributable to: a) faster growth in the PV, CV segments led by the new capacity coming on stream at Halol plant; b) new product innovations have aided market share gains in existing OEMs (e.g. Hero Motocorp, Mahindra); and c) OEM preference for new SUV launches OEM (e.g. Mahindra Thar, Nissan Magnite).

* Maintain BUY:

We like CEAT’s growth rebound story; however, rise in capex intensity over next few years is likely to curtail our FCF generation, increase leverage (FY23E: Rs 20bn). We have also cut our FCF assumptions (FY22E/23E: Rs -1.7bn/ Rs 0.8bn). We tweak our earnings for FY22E/ FY23E by ~-4/-5% respectively. The stock now trades at ~1.5% FCF yield on FY23E basis. We value CEAT on SoTP basis with a target multiple for India business at 15x (unchanged) FY23E EPS. Maintain BUY with a revised target price of Rs1,663 (earlier: Rs1,741).

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