Ceat Improved trajectory, but valuations appear fair; Hold :: Anand Rathi

Ceat
Improved trajectory, but valuations appear fair; Hold
Key takeaways
Robust trajectory to continue in 3Q. We expect sales tonnage to have
improved 10.4% yoy to ~58,500 tons. We expect revenue to have grown
10.7% yoy, to `13.3bn (flat yoy realisations). For 2QFY14, we expect the
EBITDA margin to be 13%, up 450bps yoy (10bps higher qoq). Ahead,
higher input costs can act as a dampener. Our EBITDA growth expectation is
70% yoy to `1.7bn. On the lower profit base, we expect standalone profit in
3Q to grow ~3x, to `758m.
Re-rating faster than expected. The re-rating in Ceat’s valuations has been
rapid, and much faster than expected. While a decent trajectory is likely to be
persisted with in terms of financial performance in 4Q as well, a further rerating appears unlikely. Fresh capex plans are also on the anvil.
Our take. In 1HFY14, Ceat benefited from lower prices of rubber. However,
demand is yet to pick up significantly. The post-monsoon period may see
improved offtake in replacement. The company’s strategy of pursuing an
asset-light model is bearing fruit, as evidenced by the success of its twowheeler tyres. The profitable segments - exports, passenger vehicles and
overseas areas - now constitute a greater share of the mix. This explains the
improvement in margin profile. The upcoming Bangladesh plant may provide
opportunities similar to those provided by Sri Lanka earlier.
However, the valuations are no longer as inexpensive post the run-up in the
stock price. Hence we downgrade to Hold. At the ruling price, the stock
trades at 4x FY15e EPS. Risks. Downside: Spike in rubber prices, late
recovery in truck-tyre replacement demand, high leverage and price wars.
Upside: further re-rating of the tyre industry, decline in rubber prices.

Investment Focus Buy - CEAT: Buy :: Business Line,

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Softened natural rubber prices and the pick-up in replacement demand for tyres have helped CEAT script a turnaround in the fourth quarter of 2011-12. Compared with the loss of Rs 12 crore in January-March 2011, the company has posted profits of Rs 41.5 crore. Net sales grew by 24 per cent year-on-year to Rs 1,215 crore. The stabilisation in raw material costs, improving replacement market sales and ramp-up of production at Halol will benefit the company. Investors with a perspective of a year or more can buy the stock. At Rs 98, it trades at a price to earnings ratio of only 3.3 times its estimated earnings for FY-3.

From a peak of Rs 240 a kg last year, rubber prices have stabilised at around Rs 190 a kg in recent months. This easing has favoured the company. Operating margins have moved up from about 2 per cent a year ago to 10.6 per cent now. Margin expansion has also been aided by an uptick in replacement market sales and improved realisations on exports (due to a depreciated rupee).

REPLACEMENT MARKET

Tyre-makers typically derive at least half their revenues from the replacement market. This segment also endows them with greater pricing power than in direct sales to auto manufacturers. Considering that tyres are replaced every 2-3 years, the robust passenger car and commercial vehicle (CV) sales in 2009-10 and 2010-11 implies that replacement demand will continue to be strong. CEAT is eyeing a greater share of business from two/three-wheeler tyres too. While MRF, TVS and Falcon are currently the big players in this segment, CEAT has increased its market share from 11 per cent to 14 per cent in FY12. It aims to take it further to 18 per cent in FY13.

RADIAL TYRES

In addition, the company will benefit from the fast improving radialisation levels in CV tyres. From about 14 per cent two years ago, radialisation in CVs stands at 20-25 per cent currently. With fast improving highway infrastructure and the ban on overloading of vehicles, this level is expected to go up further. Radial tyres offer better fuel efficiency, have longer life and turn out cheaper in the long run. The company is ramping up production at its Halol plant, which manufactures truck, bus and passenger car radials.

Investment Focus - CEAT: Buy :: Business Line,

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 Softened natural rubber prices and the pick-up in replacement demand for tyres have helped CEAT script a turnaround in the fourth quarter of 2011-12. Compared with the loss of Rs 12 crore in January-March 2011, the company has posted profits of Rs 41.5 crore. Net sales grew by 24 per cent year-on-year to Rs 1,215 crore. The stabilisation in raw material costs, improving replacement market sales and ramp-up of production at Halol will benefit the company. Investors with a perspective of a year or more can buy the stock. At Rs 98, it trades at a price to earnings ratio of only 3.3 times its estimated earnings for FY-3.

From a peak of Rs 240 a kg last year, rubber prices have stabilised at around Rs 190 a kg in recent months. This easing has favoured the company. Operating margins have moved up from about 2 per cent a year ago to 10.6 per cent now. Margin expansion has also been aided by an uptick in replacement market sales and improved realisations on exports (due to a depreciated rupee).

REPLACEMENT MARKET

Tyre-makers typically derive at least half their revenues from the replacement market. This segment also endows them with greater pricing power than in direct sales to auto manufacturers. Considering that tyres are replaced every 2-3 years, the robust passenger car and commercial vehicle (CV) sales in 2009-10 and 2010-11 implies that replacement demand will continue to be strong. CEAT is eyeing a greater share of business from two/three-wheeler tyres too. While MRF, TVS and Falcon are currently the big players in this segment, CEAT has increased its market share from 11 per cent to 14 per cent in FY12. It aims to take it further to 18 per cent in FY13.

RADIAL TYRES

In addition, the company will benefit from the fast improving radialisation levels in CV tyres. From about 14 per cent two years ago, radialisation in CVs stands at 20-25 per cent currently. With fast improving highway infrastructure and the ban on overloading of vehicles, this level is expected to go up further. Radial tyres offer better fuel efficiency, have longer life and turn out cheaper in the long run. The company is ramping up production at its Halol plant, which manufactures truck, bus and passenger car radials.

Angel Broking - CEAT - RU4QFY2012 - Result Updates

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CEAT - RU4QFY2012

Buy CEAT : 2QFY2012 Result Update: Angel Broking,

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CEAT reported strong operating performance for 2QFY2012; however, the
company’s bottom line was severely impacted due to high interest and
depreciation expense because of commissioning of the new facility at Halol.
The company returned back to profitability in 2QFY2012, after reporting losses at
the operating as well as bottom-line front in 1QFY2012. We broadly maintain
our estimates and retain our Buy rating on the stock.
Continuous ramp-up at the Halol plant improves operating performance: During
2QFY2012, the company’s net sales grew strongly by 32.7% yoy (3.7% qoq) to
`1,118cr on account of availability of additional capacity at the Halol plant and
average price hike of ~10% in 1QFY2012. OEM and exports sales registered
impressive growth of 57% and 90% yoy, respectively, while replacement sales
grew by 14% yoy. Top-line growth also benefited from a 21.4% yoy increase in
other operating income. Operating margin improved by 27bp yoy to 5.5%,
largely due to ramp-up at the Halol facility and price increases carried out in
1QFY2012. While raw-material cost as a percentage of sales increased by 223bp
yoy, the decline in staff cost and other expenditure as a percentage of sales (by
129bp and 132bp yoy, respectively) helped CEAT to maintain its margins. Net
profit, however, fell sharply by 63.3% yoy to `6cr due to significant rise in
depreciation (114.4% yoy) and interest (170.4% yoy) expense.
Outlook and valuation: We expect CEAT to report continuous improvement in its
operating performance, led by improving utilization at the Halol plant and a
gradual decline in raw-material prices. Consequently, we estimate CEAT to post
an EPS of `20.8 in FY2013E. We maintain our Buy recommendation on the stock
with a target price of `104.

Angel Broking, Ceat hikes tyre prices by 2–2.5%

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Ceat hikes tyre prices by 2–2.5%
Ceat has raised the prices of its products by 2–2.5% across categories last week to offset
the impact of rubber prices, which have increased by 10.3% till date in CY2011 and
30.4% since June 2010. The recent price hike comes on the back of price hikes in May
2011 by an average 3–4%. While rubber prices have cooled off from their highest levels
and have currently stabilised at ~`210/kg levels, major tyre producers have hiked prices
in the last one month as they earlier resisted from passing on the entire cost increases to
consumers. The recent increases in tyre prices will help Ceat protect its margins going
forward. We maintain our Buy rating on the stock with a target price of `135. At `109,
Ceat is trading at attractive valuations of 3.6x and 0.5x FY2013E P/E and P/B, respectively.

Angel Broking- Buy CEAT -Target Rs. 163. 3QFY2011 Result Update

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 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.

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.

CEAT – 2QFY2011 Result Update: Performance Highlights: Angel Broking

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CEAT – 2QFY2011 Result Update:Performance Highlights



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%; OPM at 5.2% marginally below expectation: Ceat clocked
turnover of `843cr (`719cr) for 2QFY2011, an increase of 17.1% yoy.
Top-line growth was aided by ~54.4% yoy growth in OE revenues and ~21.6%
yoy growth in replacement revenues. Total volumes during the quarter increased
8% yoy to 19lakh units (17.6lakh units in 2QFY2010). Operating profit at `44cr
(`107cr) dipped on yoy and qoq basis primarily due to the spurt in rubber prices
leading to substantial 1,677bp yoy increase in raw material cost at 69.2%
(52.4%) of sales in 2QFY2011. Net profit at `15cr (`61cr), registered a decline of
75.2% yoy.
Outlook and Valuation: 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.

Angel Broking: Ceat - 2QFY2011 review

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Ceat
Ceat reported turnover of `843cr (`719cr) for 2QFY2011, up 17.1% yoy. The company’s
top line has been recovering following the uptick in OE volumes; however, during
1HFY2011 and 2QFY2011, capacity constraints restricted top-line growth. The company
posted operating profit of `43.9cr (`106.6cr) 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 came in at `15.3cr (`61.5cr) for the
quarter. Higher input costs and increased interest and depreciation impacted the bottom
line, which fell by 75% yoy while increasing 10% qoq. In view of the apparent structural
shift that the tyre industry is going through, the stock is available at attractive valuations.
We retain our Buy rating on the stock with a Target Price of `205.