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Camso’s acquisition – Strategic yet expensive!

View – Accelerate focus on high margin OHT and exports segments

CEAT has entered into an agreement with Michelin to acquire Camso brand’s compact construction equipment (CCE) bias tyre and high margins bias tracks business. We see this acquisition as strategic positive for CEATs’ long-term goal of expanding OHT (~15% of consol topline as of 2Q) and exports (~19% topline). Acquisition to help CEAT widen its product portfolio (into bias tracks and compact construction tyres) besides gaining access to global customer base of 40+ OEMs and premium OHT distributors. It will also have access to applications in agri, harvesters, power sports and other categories using the same technology. Despite this positive, we see this deal expensive at ~7x EV/EBITDA (TTM) given limited market opportunity with underlying industry growth muted at 2-3% for CCE and 5-7% for bias tracks. Our calculations suggest this acquisition will likely be margin accretive by 30-40bps while ~5% EPS dilutive in FY26E and ~13% accretive in FY27E. We have maintained an ADD rating with revised SoTP based TP of Rs3,617 (15x FY27E EPS to base business and 20x to Camso). Valuation at 17.5x/12.5x FY26/FY27 consol EPS (v/s 10yr LPA one year forward of ~17x) do partially reflects the positives.

Key takeaways from the call

* Acquisition to be synergistic in mid-long term – Through Camso’s acquisition, CEAT will get access to 1) global ownership of the premium brand, 2) customer access in the EU and US for both OEM (40+ customers including JCB, CNH, Kubota to name a few) and aftermarket (200+ dealers/distributors). CY24 revenues expected to be lower than CY23 revenues of USD213m with potential to take it up to USD250m. Margins of the acquired operations are mid-teens.

* CEAT will have new line of business in the form of bias tracks - Tracks are conveyor belts used in compact construction equipment (CCE), harvester and agri segment which requires different technology. Market size is ~USD1b/year of which ~50% is premium where Camso is placed no 2 with market share of ~20% (leader in harvester and no. 2 player in CCE). It has high EBITDAM (mid-teens), proprietary technology and less competitive. There is no play of value segment.

* Product portfolio to complement existing business – Camso is one of the large player in CCE tyres as well with market share of ~10%. As indicated by the management, the overall market size is ~USD1b of which <25% is premium. CEAT has large presence in agriculture segment though its specialty business while it would get an entry in to CCE segment though Camso. CEAT realizations for specialized category tyres is USD3-4/kg while the same for Camso is USD5.5-7/kg.

* CEAT to have access to other applications beyond CCE - Camso global has revenues run rate of USD1.2m from its existing plant from the US, the EU and SL from compact construction, mining, power sports etc. As a part of the deal, Michelin will exit CCE tyres and tracks business completely while it can transfer some of the remining categories to its own brand during the course of 3 years.

* No incremental capex envisaged as existing capacity have enough capacities – Don’t expect significant capex in the initial 3-4 years as Sri Lanka (SL) facilities are upgraded in last 3-4 years. Overall capacity is ~200mtpd (split equally for tyres and tracks) with current utilization at 60-65%, which indicate enough growth headway.

* Expect acquisition to be margins accretive but EPS dilutive in FY26E – Acquired business is currently experiencing a decline with CY24 revenues (led by lower offtake from end customers) and margins (led by continuation of fixed cost) are expected to be lower than CY23. However, margins are 15-20% range (vs CEAT at 11-12%) with overall margins expected to be accretive on blended basis. OHT is generally higher margin than other business.

Other key highlights

Acquisition funding - Expect to fund the acquisition though combination of equity (~30%) and balance ~70% by debt. Will not go for equity raise. Amount paid for the acquisition is similar to amount spent on green field capex but getting access to customers/markets/brand which otherwise would take time.

Financial profile – Camso’s revenues have moved in the range of plus minus 5% post covid.

* Revenue split - ~53% OEM and 47% aftermarket o Geography split - ~60% from the US, ~30% from Europe, ~4% from South America and balance from rest of the world.

* Margin profile – Mid teens and ROCE to be better than India business.

* Outlook - Expect 2024 revenues to be lower than 2023 (USD213m) led by headwinds in OEM segment and transitionary impact. Margins are also expected to decline as fixed cost decline is not expected (especially employee cost). Expect recovery from FY26/27 onwards

Post-acquisition share of OHT segment for CEAT consol to increase to ~25%.

* Acquisition to reflect in consolidated accounts which is expected from 1QFY26. Expect business to be carried out through separate entity in SL which will be owned by CEAT while co is evaluating option of the same can be done through existing SL entity.

* Camso has SKU range is complete within CCE - Camso is working on industry first tyre sizes for both tyres and tracks. Expect to add 750+ SKUs post this acquisition and will be increased to 1,700+ SKUs.

* Camso has 600+ employees including R&D in SL and outside SL, product development team outside SL. Don’t see any layoff of employees.

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