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Replacement and exports demand should continue to drive growth  

-      CEAT’s 3QFY24 results were in line on an absolute basis, while EBITDA margin came in at 14.1% (est. 14.6%). It declined 80bp QoQ due to a slight increase in RM cost. While commodity prices have already bottomed out, volume growth and better product mix will keep EBITDA margin range bound.    

-      While we maintain FY24 EPS, we revise FY25 EPS upwards by 4% to factor in for demand recovery in 2Ws and exports, coupled with lower depreciation. We reiterate our BUY rating on the stock with a TP of INR3,250 (based on ~15x Dec’25E EPS).

Volume growth saw a sequential decline

-      3QFY24 revenue/EBITDA/adj. PAT grew 9%/76%/4.1x YoY to INR29.6b/ INR4.2b/INR1.8b (vs. est.INR30b/INR4.4b/in line). 9MFY24 revenue/EBITDA/Adj. PAT grew 6%/1.1x/6.6x YoY

-      Volume during the quarter grew ~12.5% YoY (down 2% QoQ). Volumes for replacement/OEM/exports grew 11%/9%/25% YoY.

-      Gross margins expanded 680bp YoY (down 200bp QoQ) to 41.3% (vs. est. 43.1%). The sequential decline in gross margins was due to an increase in RM costs (up 2.5% QoQ) and price correction in the export markets.

-      Lower-than-estimated other expenses (up 70bp YoY/down 140bp QoQ) resulted in EBITDA margin expansion of 540bp YoY to 14.1% (vs. est. 14.6%). EBITDA grew 76% YoY to ~INR4.2b (est. INR4.4b).

-      Adj. PAT stood at INR1.8b (vs. INR357m in 3QFY23; in line).

-      Debt declined to INR17.3b as of Dec’23 (vs. INR19b in Sep’23 and INR23.4b in Dec’22), mainly due to healthy cash generation in 3Q.

-      Capex stood at INR2.15b with working capital at similar levels as 2Q.

Highlights from the management commentary

-      Outlook: Rabi sowing has been normal and all economic macro indicators are positive. OEM volumes should see a slower growth in CY24 due to the high base effect of CY23. However, replacement and exports should continue to perform well.

-      3QFY24 volumes grew 12.5% YoY, driven by 11%/9%/25% YoY growth in replacement/OEM/exports.

-      Replacement- The industry experienced double-digit volume growth in scooter tyres, with CEAT securing an increased market share. PVs/CVs saw low double-digit growth, while 2Ws exhibited a volume growth of 2%. TBR tyres has grown on a small base of last year, whereas OHT continued to remain weak.

-      Export volumes grew 25% YoY (flat QoQ). The company is facing a challenging environment in EU. It plans to launch two of its tyre categories (PCR and TBR) in the US/LatAm markets, where it already has a presence in OHT. Meanwhile, operations in Africa and Middle East are performing well. Sri Lanka- Business saw a strong revenue growth and profits on a YoY basis. Sri Lanka currency has stabilized.

-      Freight rates would be affected due to Red Sea crisis both on the import and export side. But it would be more significant on the western side, particularly in the EU, as opposed to China/South-east Asia, where CEAT’s most imports happen. Hence, the major influence will likely be felt on the export side, mostly to EU, rather than affecting countries such as the US/LatAm.

Valuation and view

-      A stable volume growth outlook for OEMs and an uptick in replacement demand should enable a faster absorption of new capacities and drive benefits of operating leverage. Moreover, the focus on strategic areas such as PV/2W/OHT/exports (to help margins), along with prudent capex plans (to benefit FCF) should be a long-term growth catalyst for CEAT.

-      Valuations at 16.2x/15x FY24E/FY25E consol. EPS do not fully capture the benefits from ramp-up of new capacities and prudent capex plan. We reiterate our BUY rating on the stock with a TP of INR3,250 (based on ~15x Dec’25E EPS).

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