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Cost pressures loom

OEM growth moderates; exports outshine   

CEAT’s (CEAT IN) standalone revenue improved 4.1%/1% YoY/QoQ to INR 29.8bn in Q4. This was led by overall volume rise of 5.4% YoY (flat QoQ), with realization per tonne decreasing 1.3% YoY (up 1% QoQ). Replacement volumes grew 5% YoY, OEM volumes saw a moderate drop and export volumes surged 22% YoY. Standalone EBITDA rose 6.5% YoY but was down 5.3% QoQ to INR 3.95bn. EBITDA margin rose 40bps YoY but dipped 80bps QoQ to 13.3%, led by higher marketing expense and EPR provisions (but partially offset by better product mix). The management expects the RM cost basket to move up by 3-4% in Q1FY25, led by rise in crude/NR prices.

Eyeing exports-led double-digit volume growth

Exports growth was strong at 22% in Q4, driven by robust volumes in the Middle East, Brazil and Europe. CEAT is focused on expanding its exports business and is eyeing growth in the US, Europe and LATAM through launches in PCR, OHT and TBR segments. EPR regulations may have a 100-120bps impact on margin, going ahead, which may be offset by product mix improvement and price actions. Gross debt dipped INR 4.7bn to INR 16.29bn with debt-EBITDA ratio at 0.97x.   

Valuation: Maintain Reduce; we lower TP to INR 2,632

We believe the tyre sector may have reached its peak margin (from raw material-related benefit). Historically, the stock price peaks closer to an earnings upgrade cycle, which happens closer to margin peaks (Exhibit 1); Q4 may be the start of earnings downgrade cycle. Since we view margins to have peaked in FY24, expect FY24-26E EBITDA/ EPS CAGRs to be paltry at 3.3% /4.5%. Strong catalysts for a sustained upmove are limited (barring any sharp reduction in RM basket, which is unlikely in the medium term, in our view). Price increases in an environment of softening demand will be monitored. Expect FY25E/26E EBITDA margin at 12.5%/12.6%, factoring in the impact of the EPR regulation as well. With capex intensity behind, FY24-26E cumulative FCF generation may be INR 20.4bn. We maintain Reduce and lower our TP to INR 2,632 from INR 2,850 on 14x (previously 15x) FY26E P/E.

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