Buy Ceat Ltd for the Target Rs.3,734 by Motilal Oswal Financial Services Ltd
Healthy margins in 2Q, setting the base for 2HFY27
* CEAT’s 2Q consolidated earnings of INR1.2b were above our estimates due to a 110bp QoQ EBITDA margin expansion. This improvement was aided mainly by price hikes and operating cost reduction despite RM pressure.
* Demand outlook cotinues to remain healthy across all key segments in India, while the high base will lead to growth moderation in 2HFY27. Though raw material prices are expected to remain elevated, price hikes will help offset the inflation, and as a result, we expect margins to sustain in the near term. Control of the entire value chain in FY28 and the ramp up of CAMSO will drive margin expansion over the medium term.
* Due to better-than-expected performance this quarter, we raise our FY27E earnings by ~14%. We reiterate our BUY rating on the stock with a TP of INR3,734 (based on ~17x FY28E EPS).
PAT beats estimates as margins expand QoQ
* CEAT’s net sales grew 26.2% YoY to INR47.6b in 2QFY27, beating our estimates, aided by healthy YoY volume and realization growth across segments. Volumes inched up QoQ, led by the OEM and international business segments.
* Realizations improved both QoQ and on a YoY basis, primarily due to price hikes taken across segments.
* Segmental mix: Truck/bus 27%, 2/3Ws 28%, PV 23%, OHT 16%, and Others 6%.
* Market mix: Replacement 50%, OEM 30%, and Exports 20%.
* Gross margin dipped 630bp YoY but grew ~70bp QoQ to 34.6%. RM basket prices grew in the high-single digits on a QoQ basis.
* EBITDA margin dipped 370bp YoY (up 110bp QoQ) to 9.6%, against our est. of 8.2%. EBITDA was down ~9% YoY to INR4.6b. The YoY margin contraction was primarily attributable to RM pressure.
* The company incurred a one-time exceptional expense of INR130m as compensation for employees who opted for the VRS.
* Interest burden was much lower than expected at ~INR870m (est. INR980m).
* Led by lower-than-expected costs and QoQ margin expansion, CEAT’s 2QFY27 earnings beat our estimates, despite declining 35% YoY to INR1.2b.
* Capex outflow for the quarter stood at INR4.93b. Debt increased to INR38.5b, from INR32.4b QoQ, and, as a result, the D/E ratio rose QoQ to 0.77x. Net working capital was also up sequentially to INR2.58b.
* CFO for 1HFY27 stood at INR3.4b, with FCF at negative INR4.6b
Valuation and view
Demand outlook continues to remain healthy across all key segments in India, while the high base will lead to growth moderation in 2HFY27. Though raw material prices are expected to remain elevated, price hikes will help offset the inflation, and hence, we expect margins to sustain in the near term. Control of the entire value chain in FY28 and the ramp up of CAMSO will lead to margin recovery over the medium term. Due to better-than-expected performance this quarter, we raise our FY27E earnings by ~14%. We reiterate our BUY rating on the stock with a TP of INR3,734 (based on ~17x FY28E EPS).
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