CEAT Ltd For Target Rs.3,103 By Elara Capital Ltd
CEAT’s (CEAT IN) revenue grew 11.6% YoY (flat QoQ) to INR 32.9bn in Q3, led by volume growth of 7.9% YoY (flat QoQ). EBITDA margin contracted 70bps QoQ, led by ~1% QoQ inflation in raw material (RM) cost. Going forward, the management expects RM cost to remain flat QoQ, which, in our view, is a negative as we were expecting some benefits from the recent correction in natural rubber (NR) prices to flow through in Q4. Further, CEAT expects to hike price across replacement and export markets to pass on the inflation in RM cost. We retain our cautious stance on the tyre sector, given just 6% EPS CAGR expected through FY24-27E, and expectations of structurally high NR prices in FY26/27. We are yet to factor in the CAMSO acquisition. We reiterate Reduce with a higher TP of INR 3,103 as we roll forward to FY27E.
Healthy volume performance led by double-digit growth in replacement and exports: Overall volumes grew by 7.9% YoY to ~123k tones, led by double-digit growth in exports and replacement, even as the OEM segment achieved mid-single digit growth YoY. On the OEM side, while 2Ws posted healthy double-digit growth, the MHCV segment declined by low single-digit due to current demand headwinds. On the replacement side, while MHCV (TBR) posted robust double-digit growth, 2Ws also witnessed strong growth led by robust demand traction from rural areas (40-50% higher than urban areas).
In exports, CEAT experienced growth in most geographies, with demand from Europe remaining strong. It expects the US business to enter a growth phase, with overall share climbing to 20-25% in the next 2-3 years. Exports are expected to inch up to 26% (currently at 19%) of revenue in FY26E, post the CAMSO acquisition in H1FY26. CEAT continues to remain optimistic on demand outlook for 2Ws and PVs in the domestic market. Standalone EBITDA declined 17.6% YoY and 6.2% QoQ,with EBITDA margincontracting 370bps YoY and 70bpsQoQ, due to high inflation in RM cost. CEAT expectsRM cost to remain flatin Q4FY25, with price hikes expected across segments.
Cost of RM basket up 1.3% QoQ in Q3; outlook flat for Q4: Overall RM cost grew 1.3% QoQ, in line with the earlier guidance. CEAT received an indexation benefit of ~3-4% in Q3 from OEM partners. It expects the inflationary trend to sustain, with RM cost flat in Q4.
Reiterate Reduce; TP raised to INR 3,103: EBITDA margins for the tyre sector and CEAT may remain muted in the next 1-2 quarters. We believe the tyre sector and CEAT would have reported peak margin in FY24 (13.9% for CEAT). We expect EBITDA margin of 11.4% in FY25E, 12.2% in FY26E and 12.8% in FY27E. However, despite the likely recovery in EBITDA margin in FY26-27, we expect EBITDA CAGR of just 5% and PAT CAGR of 6% in FY24-27E. We reduce our FY25E/26E EPS estimates by 3-4%.
Through FY26-27, expect NR prices to be elevated given long-term demand and supply trends of NR (based on historical plantation trend and seven-year gestation). This may keep any sizeable recovery in margin under check. We retain Reduce with TP raised to INR 3,103 from INR 3,014 on 15x (unchanged) 2027E P/E as we roll forward to FY27E.
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