Buy CEAT Ltd for the Target Rs.4,393 by Motilal Oswal Financial Services Ltd
Margins to expand going forward
Expects to close the Camso acquisition in Q2
* CEAT’s Q1FY26 earnings stood at INR1.15b, below our estimate of INR1.5b, impacted by lower-than-expected margins, higher interest costs, and lower other income. The company, however, continues to outperform in its key segments. Margins are expected to improve from Q2 as the benefits of softening input costs are likely to be visible.
* CEAT’s focus on strategic areas such as PVs/2Ws/OHT/exports (to support margins), coupled with prudent capex plans (to benefit FCF), is expected to drive improved returns in the long run. We reiterate our BUY rating on the stock with a TP of INR4,393 (based on ~18x June27E EPS).
Earnings miss due to lower margins and higher interest burden
* CEAT’s Q1FY26 earnings at INR1.15b were below our estimate of INR1.5b, impacted by lower-than-expected margins, higher interest costs, and lower other income.
* Net sales grew 10.5% YoY to INR35b (in line) in 1QFY26, aided by healthy YoY volume growth, mainly for the OEM and replacement segments.
* OEM’s volume growth was driven by strong performance across all segments. International volumes remained flat due to macro headwinds. Realizations improved on a YoY basis.
* Segment mix: Truck/bus - 30%, 2/3Ws - 27%, PV - 21%, OHT - 15%, Others - 7%.
* Market mix: Replacement - 53%, OEM - 28%, Exports - 19%.
* Gross margin contracted ~250bp YoY/68bp QoQ to 36.8% due to higher RM costs YoY.
* EBITDA margin contracted 100bp YoY (down 30bp QoQ) at 11.0%, below our estimate of 11.5%. While the input cost basket was flat QoQ, margin contracted 30bp QoQ due to lower ASP and higher marketing spends in 1Q.
* Interest burden was also higher than expected at INR821m (est. INR650m).
* Other income was lower at INR47m vs. our estimate of INR70m.
* Adjusted for VRS expense of INR32.9m, PAT declined 23% YoY to INR1.15b, below our estimate of INR1.5b.
* Capex for 1Q stood at INR2.3b and was funded by internal accruals.
* In 1Q, CEAT repaid debt to the tune of INR1.12b, bringing total debt down to INR18.1b. D/E stood at 0.40x, while debt/EBITDA stood at 1.21x (stable QoQ).
Highlights from the management commentary
* Domestic outlook: Management expects to post double-digit revenue growth for FY26, led by sustained high growth in the replacement segment for 2Ws and CVs through the year. However, PV replacement is likely to remain muted. Overall, it expects to record high single-digit volume growth in 2Ws, mid-singledigit growth in CVs, and low-single-digit growth in PVs. OEM demand may taper off compared to Q1 levels. However, given its new wins and ramp-up in higher sizes, CEAT is expected to outperform the industry. It expects high single-digit growth in both PCR and TBR within the OEM segment.
* International business outlook: Channel destocking has paused, likely improving demand sentiment in the coming quarters. Management expects a gradual pickup in agri and radial OEM demand in Europe, with the PCR segment demand also stabilizing. In the non-specialty business, Africa is witnessing healthy demand, while challenges persist in Latin America (currency depreciation) and the Middle East (a key market for CEAT). However, demand sustainability will be contingent on how tariffs settle for different regions.
* Guidance on input costs: While input costs were stable QoQ in Q1, management expects a 1-2% QoQ decline in Q2. Further, with improving demand macro, the export mix is likely to improve in coming quarters, thereby supporting margin expansion.
* Update on Camso: Sri Lanka currently faces a 30% reciprocal tariff (covering both tyres and tracks) on exports to the US, effective 1st August, marking a decline from 44% earlier. Ongoing negotiations between the two nations may lead to further reductions. If tariffs remain unchanged, CEAT plans to shift part of the tyre production to India to leverage any relative tariff advantage for exports to the US. However, the track production will continue to be based in Sri Lanka.
* Update on capex and debt: The company has already invested capex of INR2.3b in Q1, which is in line with its FY26 annual capex guidance of about INR9.5-10b (including maintenance). The consolidated debt currently stands at INR18.1b. Management expects this to inch up to INR35-36b by FY26 end. This will be driven by: 1) outflows related to Camso; 2) partial funding of capex; and 3) dividend payouts
Valuation and view
* The replacement segment is expected to remain the key growth driver. In OEMs, the outlook appears healthy for 2Ws and tractors, with a pick-up anticipated in the TBR segment. Following the integration of Camso, the international business contribution will rise to 25% from 19% currently.
* CEAT’s focus on strategic areas such as PVs/2Ws/OHT/exports (to support margins), coupled with prudent capex plans (to benefit FCF), is expected to drive improved returns in the long run. We reiterate our BUY rating on the stock with a TP of INR4,393 (based on ~18x June27E EPS).
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