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Intend more price hikes to cover RM inflation

View and Valuation – Volume growth and price hikes going hand in hand CEAT 1QFY25 were mixed bag as revenues/Adj.PAT were in-line while EBITDA margins were below estimates at 12% (est 12.8%, -120bp YoY/ -110bp QoQ) led by RM basket inflation of ~5% in QoQ and higher marketing spends. Overall result disappointed despite healthy volume growth (double digit) in the replacement and exports segments. With the recent volatility in NR prices (while crude derivatives are stable), RM basket inflation of 5- 6% QoQ expected in 2QFY25E. This was partially offset by aggrieve price hikes of ~2.4% in CV, PCR 2.5-2.8%, 2W/3W ~1%. While full benefit of OEM indexation (~2%) and exports/replacement price hikes to play put in 2QFY25E, it would need 2-3% further hikes to cover up for RM inflation. CEAT has guided a high single-digit volume growth in FY25, fueled mainly by healthy demand in the replacement and export markets. Factoring in increase in RM costs and marketing spends, we cut FY25/26 consol EPS by 3.5%/0.6%. Going forward, focus on high margin segments such as exports ramp-up (~20% of sales) and OHT to aid volumes and margins. Valuations at16.3x/14.1x (vs 10yr LPA of ~17x) do provide limited upside. Hence, we maintain ‘Neutral’ on the stock with revised TP at Rs2,851 (vs Rs2,868) based on ~15x Mar-26 EPS.

Result Highlights – Mixed bag despite healthy volume print

* Consol revenues grew by 8.8% YoY (+6.7% QoQ) at Rs31.9b (est ~Rs31.2b) as overall volumes grew 8.2% YoY. Replacement/Exports volumes grew double digit YoY while OEM volumes grew by single digit. Undertook price hikes across segments (including hike taken in July’24) ~2.4% hike in CV segment, PCR – 2.5- 2.8%, 2W/3W ~1%. Evaluating further price increase in Aug’24 if needed.

* Consol gross margins contracted ~310bp QoQ (-180bp YoY) at 39.2% (est ~40%) led by RM inflation. RM basket grew ~5% QoQ in 1QFY25 and expect to increase further by 5-6% in 2QFY25.

* Higher other expense due to higher marketing spends (due to IPL/T20 world cup) at Rs6.7b (est Rs6.6b, +8.2%/+2.4% YoY/QoQ) led EBITDA de-growth to 1.1% YoY (-2.2% QoQ) at Rs3.8b (est Rs4b, cons Rs3.9b) with margins at 12% (est 12.8%,-120bp YoY/-110bp QoQ).

* Led by steady operating performance, Adj. PAT came in lower at Rs1.5m (est Rs1.8b, cons ~Rs1.5b). Profit from JV came in at Rs52.9m (v/s Rs94m in 4QFY24 and Rs24m in 1QFY24).

* Consol debt remained largely flat at ~Rs16.5b in 1QFY25 (v/s ~Rs16.3b in 4QFY24). Overall capex for 1QFY25 at Rs2.54b (vs ~Rs2.6b in 4QFY24 and Rs11.2b in FY24)

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