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Margin peaked out

Exports and replacement growth offset by OEM deceleration   

CEAT’s (CEAT IN) standalone revenue improved 8.8% YoY but dipped 3% QoQ to INR 29.5bn in Q3FY23. This was led by overall volume rise of 12.5% YoY and dip of 1.7% QoQ, with realization per tonne decreasing 3.3% YoY and 1.4% QoQ. Replacement volumes grew 11% YoY, OEM volumes 9% YoY and export volumes 25% YoY. Standalone EBITDA surged 76% YoY but was down 8.8% QoQ to INR 4.17bn. EBITDA margin surged 540bps YoY but dipped 90bps QoQ to 14.1%, led by a rise in RM cost by ~2.5% QoQ. The management expects the RM cost basket to be range-bound in Q4, led by rise in crude prices and NR prices.

Focus on expanding reach in export markets 

In Q3, the pricing environment was stable in domestic markets. CEAT effected some price correction in export markets, to remain competitive. YTDFY24 export revenue growth was 14% YoY. CEAT is focused on expanding export business as it is margin-accretive despite price cuts. It is gaining share in the international market due to its favorable price positioning versus peers. In FY25, expect incremental exports growth via launch of PCR and TBR in the US markets, while Europe may be muted. Gross debt dipped INR 1,610mn to INR 17.29bn with debt-EBITDA ratio at 1.05x.

Valuation: Maintain Reduce; we raise TP to INR 2,850

We believe the tyre sector is likely to have reached the peaks of margin owing to benefit of raw materials. Historically we have seen stock price peaks closer to the earnings upgrade cycle which happens closer to the margin peaks (Refer Exhibit 1 on Page 3). While margins for the tyre sector have held up well till now, the earnings growth once margins peak is expected to remain at high single digit, as volume CAGR for tyres normally remains in that range over a 2–3-year period. Expect an EBITDA margin of 13%/12.9% in FY25E/26E. With capex intensity behind, expect a cumulative FCF generation of INR 15.6bn in FY24-26E. We maintain Reduce and increase our TP to INR 2,850 from INR 2,724 on 15x (unchanged) FY26E P/E.

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