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Moderation in capex guidance is positive

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CEAT 3QFY22 results missed estimates led by weak volumes (~2% QoQ decline due to weak replacement/OE demand) and RM pressure (~4% increase in RM basket). This as a result led to record low EBITDA margins at 5.5% (‐340bp QoQ). However, we expect reversal in margins to normalized level at 10‐11% gradually over FY23/24 led by 1) growth in replacement/exports volume and 2) focus on market share gains in high margin segments like 2W, PCR, OHT (~60% mix over next 4‐5 years). CEAT has prioritized high margin segments such as exports and OHT over TBR (being a low ROCE biz). Hence, the management has cut capex guidance by Rs2b for FY22 to Rs8b and FY23 at Rs7.5b, which should limit the increasing debt level (expect to peak by FY23).

Nearterm challenges like RM inflation pass through (need another ~5% price hike to offset the same) and increased debt level to 0.7x D/E (v/s 0.6x in 1HFY22) are key variable to watch for over FY22/23. CEAT is a play on i) healthy replacement/OE outlook going forward as supply chain normalizes, ii) timely capacity addition and iii) focus on margin lucrative segments. We have cut FY23 EPS by ~21% while have maintained FY24 EPS. We maintain ‘BUY’ on the stock with Price Target at Rs1,471 based on ~15x FY24 EPS. Current valuation at ~16.8x/11.7x of FY23/24 consol EPS do partly factors in above challenges.   

Result Highlights

* CEAT’s 3QFY22 consol revenue declined 2% QoQ (+9% YoY) at Rs24.1b (est at Rs26.1b, cons at Rs22.3b) as overall volume declined ~2% QoQ/ 5% YoY.  

* Gross margins contracted 290bp QoQ to 34% (est at 37%) led by ~4% increase in blended RM basket. However, ~140bp impact of inventory correction likely normalize in coming quarters. This has resulted in record low EBITDA margins at 5.6% (‐340bp QoQ, est at 8.7%/cons at 9.7%). Consequently, EBITDA declined 39% QoQ/ (‐59% YoY) at Rs1.3b (est at Rs2.3b/cons at Rs2.2b).

* Weak op performance was partially offset by lower dep at Rs1.1b (est at Rs1.2b) and lower tax at 10.7% (est at 27.2%) resulting in Adj. loss of Rs151m (v/s profit of Rs430m in 2QFY22, est profit at Rs563m/cons at +Rs672m).

* Total debt increased to Rs22.6b as on Dec'21 (v/s Rs20.04b as on Sep'21) resulting in D/E of 0.7x (v/s 0.6x as on Sep'21).

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