Ceat - Buy -2QFY2011 Result Update by Angel Broking

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Ceat - Buy
Ceat's top-line has been recovering following the uptick in OE
volumes. However, during 1HFY2011 and 2QFY2011, capacity
constraints restricted top-line growth. EBITDA margins came in
marginally lower than our expectations at 5.2%. Margins
declined by 962bp yoy due to the sharp increase in rubber
prices. Net profit fell following the steep decline in margins.
Nonetheless, on account of attractive valuations, we maintain
our estimates as well as the Buy recommendation on the stock.
Top-line up 17.1%: Ceat clocked turnover of `843cr (`719cr)
for 2QFY2011, up 17.1% yoy aided by the 54.4% yoy growth
in OEs and about 21.6% yoy growth in replacement sales. The
domestic market, following recovery in the industrial cycle,
registered 25.9% yoy growth in 2QFY2011. Exports recorded
13.5% yoy and 46.4% qoq growth post weak performance in
FY2010.
OPM at 5.2% marginally below expectation: Ceat clocked
operating profit of `44cr (`107cr) for 2QFY2011, a decline on
both yoy and qoq basis primarily due to the spurt in rubber
prices, which resulted in a substantial 1,677bp yoy increase in
raw material cost at 69.2% (52.4%) of sales in 2QFY2011.
OPM for the quarter stood at 5.2% (14.8%).
Net profit dips 75.2%: Ceat reported net profit of `15cr (`61cr)
for the quarter, which was lower than our expectation. Higher
input costs and increased interest and depreciation impacted
bottom-line, which fell 75% yoy while it increased 10% on a
qoq basis.
Key developments
􀂄 Ceat is ramping up production at it's newly set up radial
tyre plant at Halol, Gujarat, and expects to achieve full capacity
realisation by mid-2011. The plant has been set up with an
investment of about `600cr and has the capacity to manufacture
2QFY2011 Result Update


300,000 passenger car radial tyres (PCRs) and 40,000 truck
and bus radial tyres (TBRs) a month.
􀂄 Ceat has also increased tyre production capacity at its
Nashik plant by over 1,000 tonnes a month at an investment
of `20cr.
Outlook and Valuation
The tyre industry, during FY2010, benefited largely from the
substantial decline in raw material prices and spike in
replacement demand. Going ahead, we are positive on the
sector as the OEM off-take is expected to improve on overall
better auto industry volume growth. The recent run up in raw
material prices is however, a concern and expected to exert
pressure on OPMs in the near term. We estimate the company
to clock EPS of `21.7 in FY2011E and `39.9 in FY2012E.
We believe that strong demand, prevailing high capacity
utilisation levels and higher investment requirements, would
help the Indian tyre Industry to arrest the sharp decline in
margins despite the upward move in input costs (rubber and
carbon black). Thus, we maintain a Buy on Ceat, with a Target
Price of `200, at which level the stock would trade at 5x, 5.1x
and 0.9x FY2012E EPS, EV/EBITDA and P/BV, respectively.