IGI Logo

Margin to gradually start recovering; demand remains steady

CEAT reported consolidated EBITDA margin of 7% (-200bps YoY, +120bps QoQ), c.20bps above JMFe due to lower than expected RM costs. RM cost in 1Q increased by 4% QoQ but is expected to decrease by 2.5-3% from 3QFY23. During the quarter volumes increased c.7% YoY led by strong OE and replacement growth for 2W tyres. The company plans c.1% price increases in 3Q to pass-through under recovery of RM costs as it expects demand momentum to sustain in the replacement market. Given the recent correction in NR and crude prices and back-to-back price increases owing to steady demand in aftermarket, we expect gradual recovery in EBITDA margin to sustainable 10- 12% from 2HFY23. Capex guidance for FY23 stands at INR 9bn. We reduce FY23 EPS estimate by c.5% to factor-in lower margin in 1HFY23 but increase our FY24/FY25 margin by 20bps owing to gradual recovery on 15+% correction in key RM prices. We ascribe a 14x PE multiple to arrive at Sept’23 TP of INR 1,800 and maintain BUY. Weakness in replacement/exports sales and reversal of RM price correction are key risks.

* 2QFY23 –margin beat on lower RM costs: In 2QFY23, CEAT reported consolidated net sales of INR 28.9bn (+18% YoY, +3%QoQ), in line with JMFe. Overall volume increased 7% YoY (-1.5% QoQ) driven by strong OE demand. Consol. EBITDA stood at INR 2bn (- 8% YoY, +23%QoQ), 3% above JMFe. Consol. EBITDA margin stood at 7% (-200bps YoY, +120bps QoQ), c.20bps higher than JMFe driven by lower than expected RM costs (owing to adequate price hikes) partially offset by higher energy and outsourcing costs. Gross margin improved 80bps QoQ as RM basket cost increase of 4% QoQ during 2Q was fully offset by adequate price increases during the quarter. Adj. PAT came-in at INR 301mn (-30% YoY, +3.1x QoQ), 11% above JMFe.

* Demand environment: Segment wise volume growth: replacement (flat YoY), OEM (20%+ YoY), exports (flat YoY). In replacement segment, while the demand remains steady for PV tyres, it has picked up for 2W tyres. T&B tyre demand was moderate during 2Q owing to seasonality but has picked up from November. In OEM segment, demand remains strong led by increase in production on the back of easing chip supplies, pickup in rural demand and expectation of good rabi season. In the international market, volumes were flat YoY owing to macro challenges. Demand for OHV tyres continues to remain strong in US and EU. However, there has been some slowdown in EU PV tyre market owing to recessionary fears. Overall, the company expects down-trading of tyres in EU to benefit value players like CEAT over longer term.

* Margin outlook: RM cost increased by c.4% QoQ in 2Q but is expected to decrease by 2.5-3% in 3Q. The company has taken blended price hike of c.4% across categories (1- 2% in T&B/PV segments and 8-9% in 2W tyres) in 2Q. It plans to further increase prices by 1% in November. Owing to the recent correction in the natural rubber and crude prices and price increases in 2Q/3Q, we expect margin to witness sharp recovery in 2HFY23. Management highlighted that with it plans to retain the benefit of decline in RM cost in the replacement market unless required due to increase in competitive intensity.

* Capex and debt: Capex for 1HFY23 stood at INR 4.5bn. CEAT has maintained its FY23 capex guidance of INR 7.5bn for existing projects and an additional INR 1.5bn for maintenance. The company plans to increase focus in OHT segment by increasing capacity from 80TPD currently to 105TPD by Apr’24. Management stated that approval has been taken for the additional of 55TPD radial capacity in next 2 years costing INR c.3.9bn. Management indicated that basis current capacity utilization (~75-80%); there is volume growth headroom of ~15-20%. It may thus plan a new growth capex in FY24. The company is still evaluating TBR expansion capex that was postponed last year. Gross debt increased by ~INR 2bn during 2Q and the company expects debt to increase further during 2HFY23 to partly fund the capex but expects to maintain Debt/Equity ratio under 1x and Debt/EBITDA ratio under 3x.

To Read Complete Report & Disclaimer Click Here

Please refer disclaimer at https://www.jmfl.com/disclaimer

CIN Number : L67120MH1986PLC038784

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