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Profitability on a comeback trail

CEAT has corrected ~16% in past three months and during this period, though outlook on demand did not change, raw material basket (RMB) cost declined by ~7-8%, resulting in limited scope of cut in FY24-25E earnings. Additionally, CEAT is expanding into OHT exports space with rising SKUs and wider distribution network and is planning to expand capacity in its all radial Ambernath (Maharashtra) facility from 60TPD to 140TPD in next 12-18 months. We believe, amidst low growth and high competition in domestic replacement tyre market, CEAT is looking forward to ramp-up exports briskly in FY24-25 from current ~20% revenue mix. CEAT has its portfolio of EV-dedicated tyres ready, across categories, with low rolling resistance and higher silica content. With capacity utilisation in TBR space across FY23 set to be in the band of 75-80% for CEAT, capex for FY23-24E is likely to be sub-Rs10bn p.a., helping it avoid any increase in debt on books. We upgrade the stock to HOLD from Reduce with DCF-based TP of Rs1,414 (earlier: Rs1,377), implying ~14x FY25E earnings, with increase in TP being driven by a quarter’s rollover in our DCF

* As per our analysis, post eight quarters of increase in RM/kg cost till Q1FY23 for CEAT, EBITDAM declined ~900bps from its H1FY21 highs to ~6%. In Q3, RM/kg declined ~4% QoQ and is set to see similar decline QoQ in Q4, too, resulting in GM expansion of ~500bps from its Q1FY23 lows and ~200bps over Q3FY23. Thus, amidst subdued replacement demand environment, weaker demand in higher margin 2W segment and lower off-take from higher margin exports, favourable moves in RMB costing is helping CEAT resurrect its profitability. With focus increasing towards higher margin OHT segment tyres and PCR/TBR exports, we believe, directionally, CEAT is moving towards a better revenue mix, aiding its EBITDAM.

* CEAT is planning to ramp up its current capacity of 60TPD to 140TPD in radial OHT segment in phases through its Ambernath facility over the next 12-18 months . Thus, from current revenue mix of ~7-8% from radial OHTs, we believe it can move up to 15%+ levels from FY25E, giving profitability a larger cushion against highly the competitive domestic T&B tyre space. With OHT product quality being well established in export markets for CEAT, capacity building, increasing SKU options (currently a third of BKT), enhancing brand image/distribution reach are the key drivers for CEAT to ramp up OHT revenue, we believe.

* CEAT is planning to consolidate capex of ~Rs8.5-9bn in FY23E and is aiming for a sub-Rs9bn capex in FY24E. With TBR operating at sub-80% utilisation, CEAT’s plan to avoid further investment into TBRs in the near term is a welcome move, amidst improving EBITDAM, we believe. This should help CEAT avoid adding further debt on books and remain largely FCF neutral, taking RoCE up ~12% by FY25E

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