IGI Logo

Poised for a broad based growth from second half of FY23

CEAT, a leading manufacturer of Tyres is poised for a good growth in topline as well as bottomline driven by strong uptick in the automobile industry. With a market share of ~28% in the 2W segment (contributing ~28% of the volumes),the pick-up seen at the start of the current year looks promising to us. Good monsoon, fading away of the Pandemic and positive sentiments are all turning good for the sector. Passenger Cars and Utility Vehicles (PCUV) is benefitting from the new launches and easing of the chip shortage and is the best performing segment for the company. Replacement demand has also picked up well in Q1 FY23 which along with robust exports shall drive numbers in the ensuing quarters. Capacity expansion on the OHT business mainly for exports (20% of volumes) business shall assist margins as well. With crude oil prices softening, the impact on margins shall be seen from Q3 FY23 onwards with a lag. Pipeline of price hikes should cover up for the past and future rise in RM prices if any. Despite increasing capex, we expect financial leverage to remain in control (Net debt /Equity <1x and Net Debt/EBITDA <3x) thus not straining the balance sheet. Considering a strong demand outlook and improving profitability and return ratios, we build in Sales/EBITDA/PAT CAGR of 19%/40%/110% over FY22-FY24E. We recommend a BUY on the stock with a target price of ?1,498 (P/E of 17x over FY24E earnings).

Muted Q1 performance does not dent our confidence

CEAT reported a decent topline growth at 9% qoq at ?28.1 bn on volume growth of 8% and above 1% growth in realizations. Comparison on yoy basis will not give us the right picture as the base was too low due to second wave of the pandemic. The management mentioned that they have observed a pick up in overall demand on the domestic OEM side, replacement as well as exports. Replacement demand for 2 wheelers is picking up quite well (15% qoq growth). The best growth was reported by the replacement PCUV segment (20%) while the truck demand was flattish. Within exports, OHT segment is the best performing one with a robust growth led by expansion in Europe, heat wave over there and demand catching up well. EBITDA margins (5.9% v/s 7.2%) were however hurt due to high crude prices leading to costlier raw material basket. RM to sales expanded to 68.3% from 66.5%. Depreciation expenses too expanded as capacities are expanding. Recurring PAT (including the share of JVs and associates) stood at ?94 mn, down from 63%. Including exceptional gains of ?7mn, reported PAT came at ?25.5 mn.

Multiple drivers to elevate margins from H2 FY23

Management mentioned that in July they had taken ~2% blended price hike while in August they will be undertaking 4% price hike which would be enough to take care of the RM costs surge and assist margins too. Increase in capacities from 60-70TPD to 80TPD and further more from there should provide growth in topline as well as margins. Higher growth in Replacement segment (50% of volumes) growth would eventually surpass the low margin OEM growth (which is looking strong currently owing to easing of chip shortage) and assist margin growth. Exports (20% of volumes v/s 14% in FY21) shall lead to margin improvement too. We expect EBITDA margins to increase to 9%/10.4% in FY23E/24E from 7.6% in FY22.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at www.lkpsec.com/#foo

SEBI Registration number is INM000002483

Above views are of the author and not of the website kindly read disclaimer