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Key takeaways from Investor Day 2023

We recently attended CEAT’s Investor Day to understand company’s medium-term growth strategy. Over the next 3 years, the company aims to gain leadership position in PV replacement segment with 18-19% market share (15% in FY23) and targets c.400bps market share expansion in T&B replacement market. Medium-term focus is on growing OHT/PV exports and entering new export markets (incl. US). Near-term demand support is expected from OE segment as replacement demand remains sluggish. The company expects pricing discipline in the industry as RM prices remain volatile. Capex for FY24 is expected to moderate to INR 7-7.5bn. We maintain BUY with unchanged Mar’24 TP of INR 2,150 (14x FY25e EPS). Continued weakness in replacement sales and reversal of RM price correction are key risks.

* Aims for leadership in PV/2W tyres and market share expansion in T&B tyres: The company indicated that its market share in 2W replacement segment expanded by 200bps to c.28% during FY19-23. Over the same period, its PCR replacement market share also expanded by c.400bps to c.15%. Over the medium term (FY26), CEAT aims to achieve leadership position with ~18-19% market share in PV replacement segment. Its TBR market share currently stands at c.7% and the company aims for 11-12% market share by FY26. This will be led by deepening penetration in southern India where CEAT’s positioning is relatively weak.

* Medium-term focus on expanding OHT segment: In the last 3-4 years, CEAT has been ramping up its OHT radial capacity. It plans to ramp-up this capacity to 105tpd by 2QFY24 and further to ~150 tpd by 2HFY25 end. Total OHT capacity (Bias+Radial) is expected to be 330tpd by FY25. CEAT currently has 350+ SKUs for OHT radial tyres (750+ SKU for Bias+Radial) vs. 1,000+ SKUs for peers. The company is planning to increase SKUs and expand presence across geographies (initially in EU, followed by US) to grow this segment. Over the next 2-3 years, the company aims to increase revenue share from OHT segment from c.16% in FY23 to c.25%. Rising share of OHT segment is expected to be margin accretive.

* Targets doubling of overall International business in 3 years: Revenue from international business has grown 2x to c.INR 20bn over FY19-23 and the company is targeting INR 40bn by FY26. This will be led by making deeper in-roads in EU market (PV and OHV segment). CEAT is also preparing to enter US tyre market with new launches in PV & T&B segment by FY24 end. Basis the success of other Indian brands, strong positive perception about Indian OHV tyres will aid the company in expanding in European OHV tyre segment.

* Gaining traction in EV tyres: CEAT is leading in the EV segment with 40%+ market share in the E2W tyres. Leading E2W OEMs such as Ola, Ather, Vida, Chetak etc are few of its customers. The company has also started supplying electric PV tyres (TaMo, MG, BYD, Citroen are its key customers) and for electric buses (TaMo, JBM, Olectra are its key customers).

* Demand is expected to improve in 2HFY24; pricing environment remains steady: The company indicated that replacement demand remains flattish and is expected to improve during 2HFY24. However, demand from OE segment remains healthy. The company indicated that tyre prices in the replacement market largely remain stable. RM prices continue to remain volatile and focus is on improving mix (i.e higher share of premium tyres).

* Capex intensity to decline; debt to largely remain steady: Capex for FY23 stood at INR 9bn. Current capacity utilization stands between c.70-85% across segments. Capex guidance for FY24 stands at INR 7-7.5bn largely towards expansion of agri-radial tyre capacity at Ambernath. The company expects INR 10bn capex per annum over mediumterm going ahead. Debt is expected to increase by INR 1-2bn in FY25 due to increase in WC. Current Debt/EBITDA ratio stand at 2.1x and the company has maintained its guidance of a peak of not more than 3x.

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