Buy CEAT Ltd For Target Rs.3,515 by Motilal Oswal Financial Services Ltd
Operationally in line; PAT misses est. on high interest and tax
Replacement and exports to remain the key growth drivers
? CEAT’s 3QFY25 performance was operationally in line, while it reported a lower PAT at INR0.97b (-47% YoY, est. INR1.2b), due to high interest costs and tax. Management expects the international mix to rise to 26% from ~19% currently, driven by the Camso acquisition, focus on OHT, and improved distribution, especially in the US. This is not just expected to drive healthy growth but should also bode well for overall profitability. ? CEAT’s focus on strategic areas such as PVs/2Ws/OHT/exports (to help margins), along with prudent capex plans (to benefit FCF), should continue to improve its returns in the long run. Valuations at 17.9x/14x FY26E/FY27E consolidated EPS appear reasonable. We reiterate our BUY rating on the stock with a TP of INR3,515 (based on ~17x Dec’26E EPS).
Increase in rubber prices leads to a 60bp dip in EBITDA margin QoQ
* CEAT’s 3QFY25 consol. revenue grew ~11% YoY to ~INR33b (est. 33.5b), while EBITDA/Adj. PAT declined 18% YoY/47% YoY to INR3.4b/0.97b (est. INR3.5b/1.2b). The company’s 9MFY25 revenue increased ~9% YoY, while its EBITDA/PAT declined ~14%/31% YoY.
* Revenue growth was driven by ~7.9% YoY volume growth, wherein replacement and international business grew by double digits YoY, while OEM witnessed mid-single-digit growth.
* Gross margin contracted ~450bp YoY/60bp QoQ to 36.8% (est. 36.9%) due to a 1.0-1.2% increase in RM costs. While the company took some price increases, it was not sufficient to cover the RM increase. As a result, EBITDA declined 18% YoY to INR3.4b (in line with estimate).
* EBITDA margin contracted 380bp YoY/60bp QoQ to 10.3% (est. 10.5%).
* CEAT reported lower-than-expected adj. PAT at INR971m (-47% YoY; est. INR1.2b) because of higher-than-expected interest costs (led by higher debt at the beginning of the quarter and a rise in interest costs) and high tax.
* Working capital reduced QoQ, which led to a debt reduction of ~INR500m sequentially to INR18.35b. D/E stood at 0.43x, while Debt/EBITDA was 1.22x (stable QoQ).
* Capex for the quarter was INR2.8b, funded through internal accruals. The company has announced investments of INR4b towards capacity addition in Nagpur, which will increase the capacity by 30% by the end of FY28.
Highlights from the management commentary
* Outlook: For the coming quarters, in the replacement segment, CEAT expects high single-digit growth in the truck bus category, double-digit growth in 2Ws, and low single-digit growth in the farm and passenger categories. However, in the OEM segment, 2W OEM is likely to grow in the high single digits, PV in the low single digits, and CV OEMs are likely to remain weak in the near term
* RM costs inched up 1.0-1.2% QoQ in 3QFY25. CEAT has received a 3-4% price hike in the indexed category of OEMs and a discussion-based price hike in the commercial segment of OEMs. In replacement, it has taken price increases in commercial and farm segments to the extent of 1% to 1.5% in 3Q; about 4% in the passenger in replacement; and a minor increase in 2W/3W at the end of 3Q.
* Capex for 3Q stood at INR2.5b, with full-year guidance maintained at ~INR10.5b. The board approved a 2W capacity expansion at Nagpur to 100k tyres per day.
* Camso acquisition will help improve contribution from international business to 26% post-integration, which currently stands at 19%. The share of the OHT segment, currently at 15%, is likely to more than double after this integration.
Valuation and view
* Management has guided a double-digit volume growth in both replacement and export segments. Further, the OEM demand displayed some improvement, mainly driven by the 2W segment, though a broad-based recovery remains absent. However, given the higher financing costs, we have cut our FY25/FY26E EPS by 9%/3%.
* CEAT’s focus on strategic areas such as PVs/2Ws/OHT/exports (to help margins), along with prudent capex plans (to benefit FCF), should continue to improve its returns in the long run. Valuations at 17.9x/14x FY26E/FY27E consolidated EPS appear reasonable. We reiterate our BUY rating on the stock with a TP of INR3,515 (based on ~17x Dec’26E EPS).
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