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Emerging 'consumer' leader; best-placed to resist RM volatility

We initiate coverage on CEAT with BUY and TP of Rs3,650 (17x Sep-26E PER; likely upside: 31%). Despite street concerns about margin volatility due to spike in RM prices, our analysis points to gradual de-linking of tyre industry profitability from the underlying RM (gross margin 4-5% higher now than the corresponding RM level 2Y ago). Backed by best-in-class R&D, industry-leading marketing spends, and OEM relationship focus, CEAT has outperformed across parameters in the last 5Y, with leadership in consumer categories (now #1 in 2Ws; strong #3 in PCR), and is showing greater resilience to RM volatility vs peers. We build in RM-led pressure in the near term; price hikes, accelerating growth, and sustained high utilization are seen driving margins back to FY24 levels thereafter (30% EPS CAGR over FY25E-27E), with RoCE at ~19%.

Tyre profitability gradually getting delinked from RM on structural changes

While the street is concerned about tyre industry margins due to persistent RM price inflation in the past 6 months, our analysis points to gradual de-linking of tyre profitability vs underlying RM price movement, visible in gross margins now being ~4-5% higher than the corresponding RM level 2 years ago (refer to Exhibit 1). We believe this is on account of the ongoing structural transformation in the tyre space, in the form of i) a more balanced industry structure (dilution in dominance of MRF; refer to Exhibit 2), ii) focus on capital discipline with calibrated capex plans (unlike lumpy spends of the past), iii) premiumization trend (eg SUV-shift in PVs, rising radialization in Truck-Bus), iv) GoI thrust on local production (import restrictions levied in CY20 continue; CVD extended by 5 years), and v) emerging export opportunity (China +1, higher focus by Indian players).

CEAT: Consistent outperformer; focused actions driving improved positioning

Led by its thrust on i) best-in-class R&D, ii) industry-leading sustained marketing spends, iii) OEM relationship focus (particularly in the fast-growing SUV/EV segments), CEAT has outperformed the industry over the past 5 years across business/financial parameters, emerging as the leader in 2Ws (~33% market share now vs. ~8% in 2011; MRF now at ~25%), and a strong #3 in PCR (~16% share vs 3% in 2011), while also displaying the highest resilience to RM price volatility (has gained gross profit market share over the years). CEAT now targets leadership in PCs/UVs as well, amid a) focused marketing spends, and b) further thrust on higher rim sizes (16”-17” already the largest segment). Bulk of R&D is now geared toward better positioning in areas like US exports and TBR.

Growth accelerating; multiple profitability drivers in place

CEAT posted 9% volume growth in Q1 (6% in FY24) backed by replacement and exports; outlook is improving, with expectation of double-digit replacement growth and continued exports recovery. The ongoing 2W revival and OHT export thrust (expansion under way for 160MT/day vs 105MT/day now) are added growth drivers. Pricing flexibility (aided by a more balanced industry structure), rising demand, and controlled capex (resulting in sustained high utilization levels), and better mix (exports, larger SUV tyres that command 5-8% higher margin) are enabling companies (incl. CEAT) to pass on the rise in RM costs via calibrated hikes (being absorbed in the market, per channel checks).

All-around improvement to continue; initiate with BUY and 31%

upside We build-in 10%/30% revenue/EPS CAGR over FY25E-27E. Healthy profitability growth along with calibrated capex spends (growth over coming 2-3 years to be supported by brownfield) would help further strengthen the balance sheet and boost RoCE to ~19%. Holistic improvement in positioning and financials would drive a re-rating in our view; we initiate coverage on CEAT with BUY and TP of Rs3,650/sh at 17x Sep-26E EPS, with potential upside of 31%

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