Buy CEAT for the Target Rs 4,228 by Motilal Oswal Financial Services Ltd
Weak 1Q; performance to revive in 2H
* CEAT’s 1QFY27 consolidated earnings of INR40m were far below our estimate of INR502m due to significantly higher-than-expected interest costs, despite margins coming in line with our expectations.
* Demand outlook continues to remain healthy across all key segments in India. While margins are likely to remain under pressure in the near term, we expect them to gradually revive in 2H as input costs cool off from their current highs and price hikes are able to offset the cost pressure. Moreover, Camso’s performance is expected to start improving in 2H as it gains full control of operations. While we have cut our FY27 earnings by 22% to factor in the sharp rise in interest burden in 1Q, we refrain from changing our FY28E earnings. We reiterate our BUY rating on the stock with a TP of INR4,228 (based on ~18x FY28E EPS).
Margins in line; PAT misses estimates due to high interest costs
* Net sales grew 22.3% YoY to INR43.2b in 1QFY27, beating our estimates, aided by healthy YoY volume growth across segments. International business continues to recover well and was the fastest-growing segment YoY.
* Realizations improved both sequentially and on a YoY basis, primarily due to price hikes taken in the domestic and international markets.
* Segmental mix: Truck/bus 29%, 2/3Ws 27%, PV 22%, OHT 15%, Others 7%. ? Market mix: Replacement 51%, OEM 30%, Exports 19%.
* Gross margin contracted 290bp YoY and 580bp QoQ to 32.9%, primarily due to a high-teen increase in RM basket prices on a sequential basis.
* While other costs were managed well, EBITDA margin contracted 250bp YoY (down 560bp QoQ) to 8.5%, in line with our expectations. EBITDA declined ~6% YoY to INR3.7b (ahead of our estimate of INR3.5b).
* Interest burden was much higher than expected at ~INR1.5b (est. INR900m), largely due to the forex impact of INR480m on loan provided to its Sri Lanka subsidiary.
* This led to a lower-than-estimated adj. PAT of INR38m, down 97% YoY (est. INR502m).
* Capex outflow for the quarter stood at INR2.93b. Debt increased to INR32.4b from INR30b QoQ, and as a result, the D/E ratio rose QoQ to 0.65x. Net working capital also rose sequentially to INR1.38b.
* CEAT has announced capex of INR12b to be invested by 2031, primarily aimed at raising 2W capacity by 53k tyres per day (current capacity is at 80k units per day).
Valuation and view
Demand outlook continues to remain healthy across all key segments in India. While margins are likely to remain under pressure in the near term, we expect them to gradually revive in 2H as input costs cool off from their current highs and price hikes are able to offset the cost pressure. Moreover, Camso’s performance is likely to start improving in 2H as it gains full control of operations. While we have cut our FY27 earnings by 22% to factor in the sharp rise in interest burden in 1Q, we refrain from changing our FY28E earnings. We reiterate our BUY rating on the stock with a TP of INR4,228 (based on ~18x FY28E EPS).
For More Research Reports : Click Here
For More Motilal Oswal Securities Ltd Disclaimer
http://www.motilaloswal.com/MOSLdisclaimer/disclaimer.html
SEBI Registration number is INH000000412
