Buy Ceat Ltd for the Target 4,500 by Emkay Global Financial Services Ltd
CEAT reported strong topline performance in 1QFY27, with consolidated revenue up 22% yoy, led by 18% yoy standalone revenue growth (2/3rd via volumes, 1/3rd via pricing/mix) amid a 15% qoq decline at CAMSO. Growth was broad-based across segments (2W/PV/CV) and channels (replacement/OEM), supported by resilient rural demand, healthy OEM off-take, and robust exports despite ME disruptions. EBITDA declined 6% yoy, with EBITDAM falling by 560bps qoq to 8.5%, led by 576bps qoq decline in gross margin on elevated domestic/international rubber prices, exacerbated by currency depreciation, resulting in a 15–16% increase in the RM basket vs 4QFY26 average. To mitigate RM inflation, CEAT implemented price hikes across replacement (7-8%), OEM (3-4%), and international businesses (5- 6%) during 1Q, with a further 8-10% increase planned in the replacement segment during Jul-Aug-26 (including 4% taken in Jul-26). While the management expects RM inflation to remain elevated in 2Q (further 8-10% increase vs 1Q), it anticipates easing toward late-2Q/3QFY27, with pricing actions progressively offsetting cost pressures. CAMSO’s recovery is expected to be back-ended as customer migration progresses (60% completed in 1Q; 90% by Sep-26), with start-up costs and underabsorption weighing on FY27 profitability before benefits accrue from FY28 onward. Factoring in healthy demand outlook across segments and margin improvement in 2H on tight industry demand-supply dynamics (Strong demand/pricing environment to drive H2 recovery), we build in ~14%/15%/17% revenue/EBITDA/PAT CAGR over FY26-29E. We maintain BUY and TP of Rs4,500 (rolled forward to Jun-27).
Growth in topline, but material dip in EBITDA, PAT, and margins
Consolidated revenue grew 22% yoy. However, EBITDA declined 6%/38% yoy/qoq, with EBITDAM down by 560bps qoq to 8.5%, led by 576bps qoq gross margin contraction. Adjusted PAT was down 90%/96% yoy/qoq. Standalone revenue was up 18% yoy (up 3.2% qoq), while subsidiary (C-S) revenue was down 15%.
Earnings call KTAs
1) Growth remained broad-based, with replacement, OEM, and international business growing in mid-teens, low-teens, and ~30%, respectively, with ~2/3rd of growth driven by volumes.
2) RM inflation remains the key near-term challenge, with domestic NR prices at ~15Y highs and international rubber prices elevated; the management expects margin pressure to persist through 2Q due to pricing pass-through lags.
3) It expects replacement demand growth to remain in mid-single-digits for MHCVs and PVs and high-single-digits for 2Ws, while OEM demand outlook remains strong, particularly in PVs and 2Ws.
4) CAMSO transition remains on track, with ~60% customer migration completed in 1Q and ~90% expected by Sep-26; profitability is expected to improve meaningfully from 2H/FY28, as customer transition and operating leverage benefits kick in.
5) Profitability was impacted by a one-off ~Rs480mn forex MTM loss on an ~$80mn Sri Lankan subsidiary loan due to sharp LKR depreciation; excluding this, finance costs are expected to remain 5% higher vs normalized 1Q level over the next 1- 2 quarters.
6) The management indicated that gross margin remained materially below normalized levels (~33% vs historical ~41%) and, therefore, sees limited risk of rolling back price increases even if commodity prices soften.
7) FY27 capex guidance: Rs13-14bn
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