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We downgrade CEAT to REDUCE from Buy while cutting our target price by ~27% to Rs3,600 from Rs4,900, valuing the stock at 20x Mar-28E EPS. CEAT posted a strong Q4, with revenue growth of 18% YoY driven by healthy traction across the replacement, OEM, and international segments. EBITDA was up 49% YoY, with margin expanding by 50bps QoQ to 14.6%. However, the near-term outlook seems challenging, particularly in H1FY27, as the management expects a further ~15-20% RM price hike in Q1FY27 over Q4FY26. To offset this sharp inflation, the mgmt has taken ~5% price hikes (in replacement) in Mar-26 itself, with further 5% hikes to be taken in a staggered manner in May/Jun; this is likely to drive a moderation in demand in H1. We believe that while such price hikes could support value-led growth in FY27, they raise risk of the quantum of the cost passthrough in a competitive setup which could further hurt demand/margin. Also, growth for CAMSO is expected to be back-ended, given the ongoing transition phase, with cost pressures persisting through to FY27 and meaningful margin benefits likely to flow only FY28E onward. Hence, we slash FY27E/28E EPS by ~47%/17%, factoring in a sharp margin reset from 12.3%/13.3% earlier to 9.6%/12% now.

Strong top-line performance with QoQ margin expansion

Standalone revenue grew 18% YoY with EBITDA up 49% YoY and EBITDAM up 50bps QoQ to 14.6% on 40/30bps QoQ decline in other expenses/staff costs amid 20bps gross margin contraction. Adjusted PAT was up 113% YoY on higher-than-expected other income, lower interest expense. Subsidiary revenue (C-S) was down 8% QoQ with GM down 170bp QoQ, EBITDAM flattish QoQ at ~3%

Earnings call KTAs

1) The mgmt highlighted that the broader demand environment remains uncertain even in H1, hit by geopolitical (West Asia) and fuel price concerns. While near-term demand is supportive given continued momentum from GST cuts across segments, overall industry growth is expected to moderate, particularly as the price-hike impact (5% over Mar-Apr and another 5% (staggered) planned over in May-Jun starts being absorbed.

2) MHCV replacement demand is expected to grow in a high single digit, on better economic activity, favorable seasonality, and an ageing fleet, while PCR replacement demand stays weak in FY26 (~1–2% growth) albeit expected to improve to ~3–5% in FY27 driven by better OEM traction.

3) Within OEMs, TBR demand remains strong (double-digit growth), while PCR demand is seeing healthy single-digit growth.

4) RM basket has seen a sharp price escalation (crude up from ~USD65/bbl to +USD100/bbl; natural rubber up from Rs190/kg to Rs244/kg; Rupee depreciating from Rs91 to Rs94), highlighting the need for further price hikes to offset the RM pressure.

5) FY27 capex guidance is Rs1.3–1.4bn, with a cautious stance in Q1 and gradual ramp-up thereafter.

6) Capacity utilization stays healthy at ~85–90%, with balance sheet strong enough to support planned investments. 7) Integration of CAMSO is underway, with full value-chain control expected from Q1FY28 and revenue ramp-up from H2FY27 and meaningful margin benefit likely only from FY28.

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