IGI Logo

View and Valuation – Working towards maintaining favorable mix

CEAT 2QFY24 results were better than estimates as consol gross margins expansion of 230bp QoQ at 43.3% (est 41.4%) surprised positively. This was led by ~1-1.2% decline in blended RM basket QoQ and ~120bp due to favorable mix. On S/A basis, volumes/ASPs grew ~3.4%/0.5% QoQ, within sub segments, export/replacement volumes were flattish QoQ while OEMs volume grew double digit. With the recent increase in crude prices, the management indicated ~4% increase in RM basked. Going forward, focus on high margin segments such as exports and OHT over TBR (though capacity expansion planned) to aid volumes and margins. CEAT has maintained the capex guidance of Rs5-5.5b of project capex in FY24E. Sustained volumes in both OEMs and replacement will enable faster absorption of new capacities and drive operating leverage. This, coupled with price retention should keep margins at elevated level (13-15%). Further, with current capex plan, contribution from focus areas could scale up to 60-62% over FY24-25E, which would reflect positively on margins. We have largely maintained our FY24/25 EPS as better than expected volumes to partially offset by RM inflation in 2HFY24E. However, valuations at14.4x/13.1x (v/s 10yr LPA of 16x) do factor in positives with limited headroom for muted performance, we believe. Hence, we maintain ‘Neutral’ on the stock with unchanged TP at Rs2,344 based on ~14x Mar-25 EPS

Result Highlights - Above Est led by better than expected gross margins

* Consol revenues grew 5.5% YoY (+4% QoQ) at Rs30.5b (in-line). This was led by ~7% YoY (~3.5% QoQ) growth in volumes while average realizations fell by ~1.5% YoY (~0.5% QoQ). On YoY basis, replacement/OEM/exports grew 4%/ 10%/ 7% respectively. On QoQ basis, while headwinds continued in Europe specially in agriculture segment, co indicated demand improvement to come in from 3QFY24. On the ASP side, PCR saw a price hike of 2% in 2QFY24 while CEAT have reduced price by ~1% in TBR segment (vs competition has reduced prices by 2%) and there was 1% negative price change for LCV.

* Consol gross margins expanded ~230bp QoQ (+10.8% QoQ) to 8 quarter high at ~43.3% (est 41.4%) as led by fall in RM basket and favorable mix. Half of gross margins was led by favorable product mix while the balance was led by RM benefits. This lead to 17.8% QoQ (+1.2x YoY) EBITDA growth at Rs4.6b (est Rs3.9b, cons Rs3.6b) with 11 quarter high margins at 14.9% (est 13.3%, cons 11.9%). Consequently, consol Adj.PAT came in higher at Rs2.1b (est Rs1.5b, cons Rs1.54b). Profit from JV came in at Rs563m (v/s loss of Rs240m in 1Q).

* Consol debt declined to Rs18.9b (v/s Rs19.9b in 1QFY24 and Rs23b in 2QFY23) led by controlled capex at Rs1.7b and stable WC QoQ.

Please refer disclaimer at https://yesinvest.in/privacy_policy_disclaimers
SEBI Registration number is INZ000185632