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Margins to remain under pressure in the near term

We met with the CEAT management at the annual RPG Conference on 26th May’26. The company outlined a roadmap for Camso integration, highlighting key growth drivers and the potential for the business to achieve 20-25% EBITDA margin over the coming years. In India, while demand across segments remains healthy currently, it is likely to moderate in the near term following sharp price hikes expected to offset rising input costs. Further, replacement demand for TBR is expected to grow in single digits, PCR at 3-5%, and scooters in high single digits in FY27. Raw material prices are expected to witness a sharp 15-20% QoQ increase in 1Q. While CEAT has already taken a 5% price hike, under-recovery remains at 5%, which is expected to keep near-term margins under pressure. We expect CEAT to clock a CAGR of ~11%/12%/13% in revenue/EBITDA/PAT over FY26-28. Overall, long-term integration benefits disclosed from Camso are likely to offset near-term concerns on margin pressure. We reiterate our BUY rating on the stock with a TP of INR4,228 (based on ~18x FY28E EPS).

Valuation and view

* Focus on improving brand equity helps drive market share gains: CEAT has placed a strong emphasis on effective marketing and branding (~2.0-2.5% of sales) for its products. To position its products competitively, it has developed creative advertising campaigns based on research and consumer insights and has invested in innovative marketing programs. Since the 2W and Passenger Car segments are consumer-facing, factors such as brand loyalty, visibility, and recall play a significant role in creating replacement demand and improving market share. This has helped the company establish a strong brand across segments. For instance, it is now the market leader in the 2W segment with ~31% share. In PVs, it is now the third-largest player with ~17% share. Further, with a gradual ramp-up in the TBR segment, it is now hitting ~10% market share in this segment.

* GST 2.0 has been a boon for the industry: Auto demand has seen a marked revival across segments post GST 2.0. For the tyre industry, this has led to a pickup in both replacement and OE demand, as well as across all key segments.

* Sharp rise in input costs to drive near-term margin pressure: The cost of key raw materials, including crude and rubber, has spiked in recent months, with the raw material basket expected to rise almost 15-20% on a QoQ basis in 1QFY27. While CEAT has taken a 5% price hike in recent months, it intends to take a similar hike in the next couple of months to pass on the entire impact. This sharp surge in input costs is likely to hurt margins in the near term. Overall, we expect CEAT to clock a revenue/EBITDA/PAT CAGR of ~11%/12%/13% over FY26-28, with growth expected to be largely back-ended.

* Valuation and view: The GST rate cut has supported growth in the tyre demand, both in replacement and OEM segments. However, the recent surge in input costs is likely to exert near-term margin pressure, as the industry may require a couple of quarters to pass on the entire impact. Further, while the recent Camso acquisition is expected to take time to normalize, we remain positive on the long-term benefits that this acquisition can deliver for the group. Hence, we reiterate our BUY rating on the stock with a TP of INR4,228 (based on ~18x FY28E EPS).

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