Company Update : CEAT Ltd By Motilal Oswal Financial Services Ltd
Camso likely to take longer to become EPS accretive
* CEAT has completed the acquisition of Camso for a total deal value of USD225m, effective from 1 st Sept’25. The key takeaways from the management call for the same are as follows:
* Payment and terms: The deal value of USD225m includes three components: value of fixed assets, value of inventory, and the payment to be made for the Camso brand after three years.
* CEAT invested UDS170m in its Sri Lankan subsidiary (which it recently formed) to carry out the purchase of Camso assets and other related expenses.
* Of the invested USD170m, USD138m has already been paid to Michelin entities for the acquisition of fixed assets. The company does not expect another payment to Michelin in FY26.
* USD44m will be paid to Michelin for the Camso brand after three years.
* The balance amount would be for inventory, the payment of which will likely happen in FY27.
* Sales arrangement: Management has indicated that it will initially be selling through the Michelin network to global customers. In the meantime, CEAT will start developing a relationship with these customers in a bid to start selling to them directly over a period. Further, CEAT plans to purchase some semi-finished components from Michelin, as certain upstream equipment is currently owned by Michelin. CEAT intends to invest in this equipment over the coming years, after which it will be able to supply the same to Camso directly.
* Current business scenario: The global off-highway and mining segment is witnessing challenges. As such, Camso’s revenue fell from USD215m in CY23 to USD150m in CY24.
* The business is expected to record USD130-150m in CY25, while revenue recognition in CEAT’s financials will be lower due to sourcing and supply agreement with Michelin.
* Moreover, margins are likely to remain lower for about six quarters, as the company continues to sell to Michelin while sourcing components from it.
* The Camso business currently operates at 50% utilization levels, with production capacity of 250MT/day.
* US contributes 55% of Camso’s revenues, followed by EU at 35-37%, with the remaining coming from South Africa and other markets. Revenues are split equally between tracks and tyres.
* Camso’s gross margins will be in line with domestic OHT manufacturers in a stable business environment.
* US tariffs on Sri Lanka exports are at 20% (for both tyres and tracks), which are lower or in line with other major export countries, leading to no significant impact on competitive position due to tariffs. Moreover, there are no domestic manufacturers for this business in the US.
* Financial impact: Camso’s financials will be reflected in CEAT’s P&L from September onwards, with a full impact reflecting from 3QFY26.
* CEAT expects to invest USD30m in Camso over the next two years, largely to be invested in downstream equipment.
* The gross block for Camso is estimated at USD90-100m.
* India business updates. GST cuts are expected to support demand, particularly in the rural commuter segment, while the TBR business is expected to benefit from higher price sensitivity.
* While domestic natural rubber prices have cooled off from INR200-205/kg a month ago to INR191-192/kg currently, CEAT does not expect a significant impact of the same on margins, due to a marginal increase in international rubber prices and depreciation of INR.
Consolidate capex for FY26 is expected to be INR10b. The company has also made a payment of INR12b toward the Camso acquisition and paid out dividends in 2Q. Net debt stands at INR18b as of June-end, with Net D/EBITDA at 1.25x. CEAT expects leverage to remain under its comfort zone, despite the expected near-term increase in debt.
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. The acquisition will help further bolster its presence in the global OHT segment. Following the integration of Camso, the international business contribution will rise to 25% from 19% currently. We reiterate our BUY rating on the stock with a TP of INR4,393 (based on ~18x June27E EPS).
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