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For 3QFY2011, Ceat reported a substantial 79.1% yoy fall in net profits, owing to
a sharp contraction in operating margins. While the top line reported strong
25.2% yoy growth, following robust OEM volumes, EBITDA margins continued to
get impacted by soaring raw-material costs, especially that of natural rubber.
We revise our earnings estimates marginally downwards to account for the high
rubber prices, which will substantially affect operating margins. Nonetheless, on
account of the recent fall in the stock price, valuations have turned attractive and
we recommend Buy on the stock.
Top line up 25.2%; OPM down 215bp yoy to 4.6%: Ceat reported turnover of
`895cr (`715cr) for 3QFY2011, an increase of 25.2% yoy and 6.3% qoq.
Top-line growth was aided by ~77% yoy growth in OE revenue and ~16.5% yoy
growth in replacement revenue. Total volumes during the quarter increased
by12.5% yoy and 12.2% qoq to 21.3lakh units (19lakh units in 2QFY2010).
Operating profit at `41cr (`48cr) dipped on a yoy and qoq basis primarily due to
the spurt in rubber prices, leading to a substantial 726bp yoy increase in rawmaterial
cost at 70.4% (63.2%) of sales in 3QFY2011. Hence, net profit registered
a decline of 79.1% yoy and 67.2% qoq to `5cr (`24cr).
Outlook and valuation: We believe strong demand, prevailing high capacity
utilisation levels and product price increases going ahead would help the Indian
tyre industry to arrest the sharp decline in margins. At `117, Ceat is trading at
attractive valuations of 8x FY2011E and 3.4x FY2012E earnings. Thus,
we recommend Buy with a Target Price of `163, at which levels the stock would
trade at 4.8x, 5.2x and 0.7x FY2012E EPS, EV/EBITDA and P/BV, respectively.
OPM at 4.6% : Ceat reported operating profit of `41.5cr (`48.5cr) for 3QFY2011,
a decline of 14.4% yoy and 5.5% qoq, primarily due to the spurt in rubber prices,
which resulted in a substantial 726bp yoy increase in raw-material cost at 70.4%
(63.2%) of sales in 3QFY2011. However, 70bp, 382bp and 56bp yoy reduction in
staff cost, purchase of traded goods and other expenditure, respectively, prevented
further erosion in margins. OPM for the quarter stood at 4.6% (6.8%).
Net profit dips 79.1% yoy; NPM at 0.6%: Ceat posted a 79.1% yoy and 67.2% qoq
decrease in net profit to `5cr (`24cr) during the quarter, primarily on account of
operating margin contraction. Further, higher interest and depreciation expense
during the quarter led to a decline in net profit. As a result, net profit margin
contracted by 280bp yoy to 0.6% (3.4%). However, adjusting for one-time costs
towards voluntary retirement compensation (`7.8cr), net profit was down 47% yoy.
Investment arguments
Tyre industry – Set for structural shift: Currently, manufacturing radial tyres is
far more capital intensive than cross-plys. Investment per tonne per day (tpd) is
3.2x of cross-ply at `6.1cr/tpd. On the other hand, the selling price of radial
tyres is around 20% higher than cross-ply tyres. Taking into account the
difference in capital requirements and the consequent impact on asset
turnover, interest cost and depreciation, to generate similar RoCE and RoE,
tyre companies would need to earn EBITDA margins of around 21% compared
to around 9% being earned on cross-ply tyres. Thus, higher capital
requirements will help protect margins from upward-bound input costs, as the
business model evolves bearing in mind final RoEs rather than margins. With
the sector set for a structural shift and apparent pricing flexibility, it will result
in an improvement in RoCE and RoE of tyre manufacturers going forward.
Volume growth strong: Ceat's volume growth has recovered across segments
such as T&B, passenger vehicles and OTR. Further, the company’s product mix
is skewed towards the commercial vehicle (CV) segment–T&B tyres account for
almost 61% of the total tonnage, while the light commercial vehicles (LCVs)
and passenger vehicle (PVs) segments account for 22% and 15%,
respectively)–which is set for strong recovery going forward.
Increasing focus on exports, capacity addition to fuel growth: Ceat has been
increasingly focusing on exports, especially the high-margin specialty tyres, in
a bid to offset volatility in its domestic tyre business in the long run.
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, OEM and
replacement demand would continue on overall better auto industry volume
growth. However, the recent run up in raw-material prices is expected to exert
pressure on OPMs and, hence, we revise our earnings estimates marginally
downwards. We estimate the company to report EPS of `14.6 in FY2011E and `34
in FY2012E.
At `117, Ceat is trading at 8x FY2011E and 3.4x FY2012E earnings. On account
of the recent fall in the stock price, valuations have turned attractive and we
recommend Buy on the stock with a Target Price of `163. At our target price, the
stock would trade at 4.8x, 5.2x and 0.7x FY2012E EPS, EV/EBITDA and P/BV,
respectively.
Key downside risk to our call: Rise in input costs, increasing competitive intensity
with major players diversifying globally and lower-than-anticipated growth in tyre
offtake pose downside risks to our estimates.
India Equity Research Reports, IPO and Stock News Visit http://indiaer.blogspot.com/ for complete details �� ��
CEAT – 3QFY2011 Result Update
Angel Broking recommends a Buy on CEAT with a Target Price of Rs. 163.
For 3QFY2011, Ceat reported a substantial 79.1% yoy fall in net profits, owing to
a sharp contraction in operating margins. While the top line reported strong
25.2% yoy growth, following robust OEM volumes, EBITDA margins continued to
get impacted by soaring raw-material costs, especially that of natural rubber.
We revise our earnings estimates marginally downwards to account for the high
rubber prices, which will substantially affect operating margins. Nonetheless, on
account of the recent fall in the stock price, valuations have turned attractive and
we recommend Buy on the stock.
Top line up 25.2%; OPM down 215bp yoy to 4.6%: Ceat reported turnover of
`895cr (`715cr) for 3QFY2011, an increase of 25.2% yoy and 6.3% qoq.
Top-line growth was aided by ~77% yoy growth in OE revenue and ~16.5% yoy
growth in replacement revenue. Total volumes during the quarter increased
by12.5% yoy and 12.2% qoq to 21.3lakh units (19lakh units in 2QFY2010).
Operating profit at `41cr (`48cr) dipped on a yoy and qoq basis primarily due to
the spurt in rubber prices, leading to a substantial 726bp yoy increase in rawmaterial
cost at 70.4% (63.2%) of sales in 3QFY2011. Hence, net profit registered
a decline of 79.1% yoy and 67.2% qoq to `5cr (`24cr).
Outlook and valuation: We believe strong demand, prevailing high capacity
utilisation levels and product price increases going ahead would help the Indian
tyre industry to arrest the sharp decline in margins. At `117, Ceat is trading at
attractive valuations of 8x FY2011E and 3.4x FY2012E earnings. Thus,
we recommend Buy with a Target Price of `163, at which levels the stock would
trade at 4.8x, 5.2x and 0.7x FY2012E EPS, EV/EBITDA and P/BV, respectively.
Top line up 25.2%: Ceat reported turnover of `895cr (`715cr) for 3QFY2011, up
25.2% yoy, aided by 77.5% yoy growth in OEs and about 16.5% yoy growth in
replacement sales. The domestic market, following recovery in the industrial cycle,
registered 24.2% yoy growth in 3QFY2011. Exports recorded 40.2% yoy and
24.5% qoq growth post weak performance in FY2010.
OPM at 4.6% : Ceat reported operating profit of `41.5cr (`48.5cr) for 3QFY2011,
a decline of 14.4% yoy and 5.5% qoq, primarily due to the spurt in rubber prices,
which resulted in a substantial 726bp yoy increase in raw-material cost at 70.4%
(63.2%) of sales in 3QFY2011. However, 70bp, 382bp and 56bp yoy reduction in
staff cost, purchase of traded goods and other expenditure, respectively, prevented
further erosion in margins. OPM for the quarter stood at 4.6% (6.8%).
Net profit dips 79.1% yoy; NPM at 0.6%: Ceat posted a 79.1% yoy and 67.2% qoq
decrease in net profit to `5cr (`24cr) during the quarter, primarily on account of
operating margin contraction. Further, higher interest and depreciation expense
during the quarter led to a decline in net profit. As a result, net profit margin
contracted by 280bp yoy to 0.6% (3.4%). However, adjusting for one-time costs
towards voluntary retirement compensation (`7.8cr), net profit was down 47% yoy.
Investment arguments
Tyre industry – Set for structural shift: Currently, manufacturing radial tyres is
far more capital intensive than cross-plys. Investment per tonne per day (tpd) is
3.2x of cross-ply at `6.1cr/tpd. On the other hand, the selling price of radial
tyres is around 20% higher than cross-ply tyres. Taking into account the
difference in capital requirements and the consequent impact on asset
turnover, interest cost and depreciation, to generate similar RoCE and RoE,
tyre companies would need to earn EBITDA margins of around 21% compared
to around 9% being earned on cross-ply tyres. Thus, higher capital
requirements will help protect margins from upward-bound input costs, as the
business model evolves bearing in mind final RoEs rather than margins. With
the sector set for a structural shift and apparent pricing flexibility, it will result
in an improvement in RoCE and RoE of tyre manufacturers going forward.
Volume growth strong: Ceat's volume growth has recovered across segments
such as T&B, passenger vehicles and OTR. Further, the company’s product mix
is skewed towards the commercial vehicle (CV) segment–T&B tyres account for
almost 61% of the total tonnage, while the light commercial vehicles (LCVs)
and passenger vehicle (PVs) segments account for 22% and 15%,
respectively)–which is set for strong recovery going forward.
Increasing focus on exports, capacity addition to fuel growth: Ceat has been
increasingly focusing on exports, especially the high-margin specialty tyres, in
a bid to offset volatility in its domestic tyre business in the long run.
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, OEM and
replacement demand would continue on overall better auto industry volume
growth. However, the recent run up in raw-material prices is expected to exert
pressure on OPMs and, hence, we revise our earnings estimates marginally
downwards. We estimate the company to report EPS of `14.6 in FY2011E and `34
in FY2012E.
At `117, Ceat is trading at 8x FY2011E and 3.4x FY2012E earnings. On account
of the recent fall in the stock price, valuations have turned attractive and we
recommend Buy on the stock with a Target Price of `163. At our target price, the
stock would trade at 4.8x, 5.2x and 0.7x FY2012E EPS, EV/EBITDA and P/BV,
respectively.
Key downside risk to our call: Rise in input costs, increasing competitive intensity
with major players diversifying globally and lower-than-anticipated growth in tyre
offtake pose downside risks to our estimates.
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