Buy Ceat Ltd For Target Rs. 4,600 By Emkay Global Financial Services Ltd
We attended CEAT’s analyst meeting on developments in the Camso acquisition. KTAs: 1) The acquisition (not built in) is in line with CEAT’s capital allocation priorities and supports its 3 growth pillars – premiumization, globalization, higher margin OHT. 2) CEAT plans to invest USD171mn in upstream capacities and working capital (part of USD225mn deal value; balance USD44mn payable after 3Y for the brand). 3) FY26 revenue run-rate of USD130-140mnpa (FY23: USD213mn); near term subdued on phased customer transition and margin softness, amid interim sourcing from Michelin; margin to inch up to high teens, to 20% in 4-6Q. 4) Camso’s US/EU exposure: 50/36%, which is competitive despite tariffs (20% in SL; no local US manufacturing). 5) Due to Rs10bn core capex and Michelin payout (USD137mn), a Rs10-12bn debt hit is seen in FY26; consol leverage to be comfortable. Despite Camso’s near-term softness, CEAT poised to disproportionately benefit from demand upturn, on strong consumer facing segment exposure, sustained share-gain across categories, exports/OHT focus with LT benefits from Camso (refer to Voice of the head: Cusp of entering a new league). We highlight potential ~4-6% near-term earnings risk, on transitory headwinds at Camso (expected at 12-18M on the RM front and much less on the sales front, per management), though likely to lead to ~13% EPS accretion on normalized basis; retain BUY; TP: Rs4,600, at 20x Jun-27E PER.
Strategic Camso acquisition to accelerate premiumization and globalization
CEAT has completed the USD225mn Camso acquisition effective 1-Sep (all approvals in place). Two world-class facilities (250MT/day; tyres and tracks 50:50) provide access to a global brand and customer base of 40+ OEMs and 200+ distributors. CEAT will invest USD171mn toward capex/working capital (USD137mn paid in FY26), with another USD44mn payable after 3Y for the brand. Camso complements CEAT’s 900-SKU OHT portfolio and aligns with its key growth pillars of premiumization, globalization, and high-margin OHT. Camso’s plants, currently at 50% utilization, offer headroom for growth.
Camso transition: muted near-term; margin accretion by FY28
Near-term revenue to be subdued (vs expectation of USD130-140mnpa; USD213mn in FY23) as CEAT to sell to Michelin (offtake arrangements in place) amid phased customer transition with full takeover targeted over the next 3-4 quarters; margins too to remain subdued over coming 4-6 quarters as CEAT will initially purchase semi-finished products from Michelin amid establishment of upstream capacities (mixer, calendar) in the next 18M (USD30-40mn capex in 2Y); EBITDAM to stabilize at high-teens, to 20% in 4-6Q.
Tariff position stable; domestic tailwinds from GST cut
CAMSO revenue exposure in US/EU is 50-55%/35-37%; it remains competitive despite tariffs, as tariffs on tyres/tracks from SL remain at 20%, keeping competitiveness intact, given the absence of local manufacturers in US; India’s 50% tariff being evaluated for possible SL routing. Domestically, GST rationalization should aid 2W/farm tyres, while PV trends shift to larger-rim size, where CEAT is gaining share due to entry into OEMs.
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