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View and Valuation – Launching new SKUs for export ramp-up

CEAT 3QFY24 results missed our estimates as ~200bp QoQ contraction in consol gross margins at 41.3% (est 42.8%) surprised negatively. This was led by ~2.5% increase in blended RM basket QoQ, price correction in exports (to be competitive) and unfavorable product mix. On S/A basis, volumes/ASPs fell ~1.7%/-1.4% QoQ. Within sub segments, export/replacement volumes were flattish/+single digit QoQ while OEMs volume degrew. With the recent stability in crude prices, the management indicated RM basket likely to remain flat QoQ. 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 Rs6-6.5b 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 (13-14%). 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 increase our FY24/25 EPS by 13%/11% to factor in for exports ramp-up and higher blended margins (mix related). However, valuations at15.2x/14.3x (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 revised TP at Rs2,982 based on ~15x Mar-26 EPS.

Result Highlights - Weak gross margins while deleveraging continues

Consol revenues grew 8.7% YoY (-3% QoQ) at Rs29.6b (est Rs30.8b, cons Rs29.9b). The standalone volume grew 12.5% YoY (-1.7% QoQ) while ASP grew 0.3% YoY (-1.4% QoQ). On YoY basis, replacement/OEM/exports volume grew 11%/9%/25% with >20% growth in 2W/3W, CV and PV (low double digit) and OHT (mid-single digit YoY).

Consol gross margins contracted ~200bp QoQ (+880bp YoY) at 41.3% (est 42.8%) was led by RM basket increased ~2.5% QoQ, price correction in exports and adverse product mix, partially offset by lower ad spends and cost optimization initiatives. This led to 75.7% YoY (-8.5% QoQ) EBITDA growth at Rs4.17b (est Rs4.4b, cons Rs2.9b) with margins at 14.1% (est 14.3%, cons 13.9%, +530bp YoY/ -80bp QoQ). Consequently, consol Adj.PAT came in at Rs1.8b (est Rs1.96b, cons Rs1.7b). Profit from JV came in at Rs81.7m (v/s Rs56.3m in 2QFY24 and loss of Rs61.9m in 3QFY23).

Consol debt declined to Rs17.3b in 3QFY24 (v/s Rs18.9b in 2QFY24 and Rs23.4b in 3QFY23). Overall capex for 3QFY24 at Rs2.15b leading to overall capex for 9MFY24 at Rs6.05b.

9MFY24 performance – Revenue/EBITDA and PAT grew 6%/2.1x and 7.9x at Rs89.5b/Rs12.6b and Rs5.3b.

KEY CON-CALL HIGHLIGHTS

Volume offtake – 3QFY24 volume grew 12.5% YoY as OEM, replacement and exports volume grew. Overall volumes declined ~1.7% QoQ (led by decline in OEM volumes due to seasonality).

 - Domestic replacement volume grew 11% YoY led by 2W/3W (>20% YoY), CV, PV (low double digits YoY) and OHT (mid-single digit YoY).…expect the growth momentum to continue in replacement segment.

- During 9MFY24, Scooter segment volumes grew in double-digit, mid-single digit growth in PCR, MC and TBR. Expect the growth trend to continue in similar range.

- OEM volume grew 9% YoY – led by 2Ws and CVs while PCR volumes impacted led by small size exits. Gradually ramping up higher rim sizes.

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