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Strong beat led by lower RM costs and product mix

EBITDA margin peaked out; uptick in commodity prices to impact profitability

* CEAT’s 2QFY24 results surprised positively with a strong EBITDA beat at INR4.6b (vs. est. INR4.2b). This can be attributed to a 2.5-3% QoQ decline in RM prices and a favorable product mix. We believe the EBITDA margin of 14.9% achieved during the quarter (up 170bp QoQ) has reached its peak. The recent uptick in commodity prices is expected to impact profitability in the upcoming quarters.

* We raise our FY24E/FY25E EPS by 7%/3% to account for a) better gross margins, b) higher ‘other income’, and c) a lower tax rate. We maintain a BUY rating with a TP of INR2,950 (based on ~15x Sep’25E EPS).

Revenue in line; healthy beat at EBITDA/PAT

* 2QFY24 revenue/EBITDA/adj. PAT grew 5.5%/2.2x/8.5x YoY to INR30.5b/ INR4.6b/INR2.1b. 1HFY24 revenue/EBITDA/Adj. PAT grew 5%/2.3x/10.3x YoY to INR59.9b/8.4b/3.5b. ? Volume during the quarter grew ~7% YoY/3.5% QoQ. Volumes for replacement/OEM/exports grew 4%/10%/7% YoY.

* Gross margins expanded 10.8pp YoY (up 220bp QoQ) to 43.3% (vs. est. 40.9%). This was partially driven by lower commodity cost (down 2.5-3% QoQ) and better product mix.

* Employee cost grew 30% YoY on account of the annual increment cycle in July. Despite this, EBITDA improved 2.2x YoY to ~INR4.6b (vs. est. INR4.2b). Consequently, the EBITDA margin expanded 7.9pp YoY/170bp QoQ to 14.9% (vs. est. 13.4%).

* Further, higher ‘other income’ boosted adj. PAT, which grew 7.45x YoY to INR2.1b (vs. est. INR1.6b)

* Debt declined INR1b QoQ to INR18.9b, primarily due to healthy cash generation in 2QFY24. Capex for the quarter stood at INR1.7b and working capital remained at similar levels as of 1QFY24.

* 1HFY24 CFO improved to ~INR7.7b (vs. INR3.9b in 1HFY23), driven by strong operating performance. Capex stood at INR3.9b (vs. INR4.5b in 1HFY23), leading to positive FCF of INR3.8b (vs. –INR683m in 1HFY23).

Highlights from the management commentary

* Outlook: 2QFY24 volume grew 7% YoY, driven by 4%/10%/7% growth in replacement/OEM/exports. Volumes grew 3.5% QoQ. Replacement growth remained flattish, while domestic volumes experienced a double-digit growth. However, exports saw a marginal decline during the period.

* RM basket expected to increase by 4% QoQ in 3Q. Crude prices have increased to USD90-95 from USD75-80, adversely impacting the cost of commodities. 

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