CEAT's Q1FY22 performance was in-line with consensus expectations; PAT declined (down 86% QoQ) mainly due to gross margin compression (down 315 bps QoQ). The volume decline (covid induced) was led by OEM's (down 30% QoQ) while replacement segment performance was also downbeat (down 20% QoQ). Quantum of price hikes have been improving steadily (Q1FY22 ~4%, Jul'21~1.5%) which bodes well for margin recovery in H2FY22. Outlook for H2FY22 remains mixed due to worries on continued cost pressures and modest demand recovery. CEAT's capex intensity is likely to peak in FY22, we expect FCF generation to improve in FY23E (~Rs3bn/~5% FCF yield). Maintain ADD.
Key highlights of the quarter:
- Volumes in Q1 were down 19-20% QoQ with replacement/OEM demand down 20%/30%. Exports grew mid-single digit on a QoQ basis. Share of replacement, OEM and exports stood at 55%, 25% and 20%, respectively. Revenue mix for Q4 stood at truck/bus: 35%, 2W: 25%, PCR: 15%.
- RM cost was up 12% QoQ and is likely to increase another 3-4% in Q2FY22. The company has undertaken ~4-6% price increase across segments with 6% in TBB and 4-4.5% in TBR. CEAT is expected to take another 2-3% price hike by the end of July and would need another ~4-5% in Aug-Sept'21 to reach 10-12% normalized EBITDA margins. On a segmental basis price increases in scooters have been most challenging.
- Demand saw good uptick post the opening of lockdowns in May with PC and 2W segments witnessing stronger rebound while CVs witnessing gradual recovery. H2FY22 is expected to follow similar trajectory of H2FY21.
- Management continues its focus on achieving above industry growth driven by faster growth in high growth compact SUV segment in PVs led by the new capacity coming on stream at Halol plant.
- Company is able to enter into new OEMs on EV models with entry in Olectra EV bus and Okaya EV scooter.
- Consolidated debt was up by ~Rs3.7bn due to higher project capex of Rs1.8bn and ~Rs0.4 spend on long-term cost and energy-saving initiatives. Capex for FY22 is likely at Rs10bn in project capex and Rs1.5-1.75bn in maintenance capex. Management expects debt levels to rise further due the capex spends.
- System inventory was higher by Rs1.8bn over Q4FY21 (2/3rd in finished goods and 1/3rd in RM inventory). Gross margin decline was curtailed at 38.7% (down 315 bps QoQ) due to better fixed-cost absorption on account of strong cost control measures as other expenses fell (by 198bps QoQ).
We like CEAT's plan to drive growth via market share gains (product innovations, new customer additions) while improving its margin trajectory; however, rise in capex intensity and lower industry pricing power is likely to curtail FCF generation, increase leverage (FY23E: ~Rs22bn). We tweak our earnings for FY22E/ FY23E by -6.4/-2.8%, respectively on the back of easing input cost pressures. The stock remains attractive at ~5% FCF yield on FY23E basis. We value CEAT on SoTP basis with an unchanged target multiple for India business at 14x FY23E EPS of Rs108. We maintain our ADD rating on the stock with a revised target price of Rs1,487 (earlier: Rs1,540).
Key downside risk: Sharper deterioration of FCF profile due to rise in capex.
Key upside risk: Strong reduction in commodity prices leading to a positive surprise on margins.
Shares of CEAT LTD. was last trading in BSE at Rs. 1372.5 as compared to the previous close of Rs. 1366.6. The total number of shares traded during the day was 16062 in over 1910 trades.
The stock hit an intraday high of Rs. 1384.95 and intraday low of 1366.6. The net turnover during the day was Rs. 22084400.