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View - Increased focus on digital initiatives over past 2-3 years  

We interacted with the management of CEAT alongside our visit to its Tamil Nadu (TV) plant. While TN plant contributes <10% of revenues, the purpose of the visit to dwell more into digital and automation aiding cost controls and manufacturing efficiencies. Key takeaways from interactions are, 1) Revenue growth expected to be single digits in FY25 supported by growth across the OEM, replacement, and exports. 2) CEAT is enhancing focus on EV tyres with platform-wins in 2W, PV and CV segments. 3) RM cost is expected to be flat QoQ for 4QFY24E however, recent volatility in NR and crude can influence margins in 1QFY25E. 4) TN plant to see TBR capacity expansion over 12-18 months. 

TV plant visit was centered around, 1) showcasing strong product line-up in TBR, PCR (both for domestic and exports) and EV, 2) recent launches such as motorcycle steel radials for high performance bikes (import substitute and ASP 2x of average segment fitment) where co supply to RE Himalayan 450 and Shotgun 650, and 3) overall cost reduction through digitalization initiatives at plant level. To steer exports growth, co has showcased products in PCR (for touring and SUV segment) and TBR segment (both for US and Europe). We believe, going forward, exports growth will be led by OHT and entry into US markets, however near-term headwinds led by red sea issues could lead to a rise in logistics costs in the Europe route over the 2-3 months. Our FY24/25/26 consol EPS are unchanged and we maintain ‘Neutral’ on the stock with TP at Rs2,982 based on ~15x Mar-26 EPS. Valuation at 15.4x/14.4x FY25/FY26 consol EPS (v/s 10yr LPA of ~17x) do partially reflects the positives. 

Key takeaways from interaction and plant visit

* Growth strategy intact for domestic and exports – Co is well-positioned to achieve medium-term targets of, 1) sustaining the leadership in the 2W segment backed by the new product launches in super premium category (350-1,200cc segment), 2) continue market share gains journey in PCR led by new SKU launches including for ultra-high-performance segments for both domestic and exports and 3) growing export market revenues by 2X to ~Rs40b by FY26E. Overall have ~700 SKUs and would expand to 1000+ SKUs. Have launched ~150 SKUs in 9MFY24.  

* Outlook positive (but no change vs 3QFY24 call) - The domestic replacement market is anticipated to grow in single digits. Within this, scooter segment would grow by double-digit. In exports, the company expects headwinds in the European market. However, Latin America, Africa, South-East Asia and Middle East markets are likely to report positive growth. From 1QFY25, CEAT would start selling its PCR and TBR tyres in addition to agri tyres in the US market. The target is to increase the share of exports from ~18% currently to ~25% in three years. On the margins side, RM is expected to be flat QoQ in 4QFY24E, but are are expected to increase slightly QoQ due to higher prices of natural rubber and crude derivatives.

* Indicative digitalization pay back at 2-3 years – The impact of used case based digital initiatives are being measured as, 1) finance KPIs (conversion cost and margins etc.) and 2) operational KPIs (throughput, energy, scrap and quality etc.). Some of the notable results over past 2 years are, 1) increase in exports, OE sales, 2) technology platforms and 3) reduction in NPDs and turn around time.

* Exports to grow on low base and new launches - CEAT indicated that it expects to increase its exports revenue mix to ~25% from the current ~19%, led by, 1) foraying into new markets, 2) customized product offerings, 3) ramping up capacities and 4) winning orders from legacy OEMs. The company highlighted that it has low presence in the replacement TBR market, which the company will be capitalizing in the coming years to drive growth. New products in TBR and PCR will be launched in the US ahead.  

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