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We visited CEAT’s Halol plant, its largest PCR and TBR plant in India. Company’s focus on quality and efficiency improvement through automation, digitization and advanced analytic tools is impressive. This has helped the company reduce costs by over 15% and improve overall plant productivity. R&D investments over the last 3-4 years have started yielding results and the company has strong new product pipeline in PCR and TBR segments for both domestic and exports. CEAT is also leading in E2W tyres (50%+ SOB) and winning new EV business across segments. Medium-term focus is on growing OHT exports and entering new export markets (incl. US). Near-term demand support is expected from PCR and TBR segment as 2W tyre demand (both replacement & OE) remains sluggish. The company expects pricing discipline in the industry (despite softening RM prices) as the costs are still under-recovered by 5-6% (led by 2W segment). While we expect gradual recovery in EBITDA margin to double-digits in FY24, we remain watchful of any sustained price reversal in key RM costs. Capex for FY24 is expected to be lower than FY23 (INR 9bn). We maintain BUY with Mar’24 TP of INR 1,800 (14x FY25e EPS). Continued weakness in replacement/exports sales and reversal of RM price correction are key risks.

* 2W tyre demand remains muted; other segment faring better: 2W replacement demand remains sluggish owing to muted rural sentiments. While, T&B replacement segment is witnessing demand recovery, PCR replacement demand remains steady. In the OE segment, 2W demand remains muted while other segments are doing better. Exports are currently witnessing headwinds owing to inventory correction in EU. However, underlying demand is resilient and the company expects exports to recover over next 2 quarters.

* Expect to retain the benefit of softening RM costs: Management indicated that RM costs are still under-recovered by 5-6%, primarily led by 2Ws owing to muted demand environment and increased competitive pressure. RM prices are expected to decline by 2- 3% in 4Q (~4% decline in 3Q). The company does not intend to pass on the benefit of lower RM cost in replacement market unless required owing to competitive reasons. Overall, the management expects pricing discipline in the industry as industry peers are also yet to fully recover costs.

* Capex intensity to reduce: Management reiterated its FY23 capex guidance at INR 9bn (INR6.5bn spent for 9MFY23) and indicated of lower capex in FY24. Capex for FY24/25 is tilted towards expansing capacity fro OHT tyres. The company is working on improving margins for TBR segment (through better mix, new premium products and exports ) and plans to go slow on TBR capacity expansion till there is strong business case.

* Medium-term focus on expanding OHT segment: In the last 3-4 years, CEAT has ramped up its OHT radial capacity from ~15 ton per day (tpd) to 80 tpd currently. Utilisation currently stands at ~60-65 tpd (owing to inventory correction in EU). Medium-term focus is on ramping up the capacity to 105tpd by 2QFY24 and further to 160 tpd by FY24 end. CEAT currently has 350+ SKUs for OHT radial tyres (750+ SKU for radial+bias) vs. 1,000+ SKUs for peers. The company is planning to increase SKUs and expand in presence across

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