CEAT - 1QFY2013 Result Update - Angel Broking

CEAT reported strong results for 1QFY2013 posting a net profit of Rs.26cr as against a loss of Rs.42cr in 1QFY2012 driven by a sharp improvement in the operating performance. However, on a sequential basis, the net profit declined by 38% yoy due to a 4.6% drop in volumes and an 161bp contraction in operating margins on account of higher marketing expenses. We retain our positive view on CEAT and believe that the company will continue to report a strong performance as natural rubber prices have stabilized. However a slowdown in demand remains a concern as the replacement demand has not picked up as anticipated. We maintain our Buy rating on the stock.

Strong operating performance led by decline in raw-material expenses: For 1QFY2013, CEAT registered a healthy 10.5% yoy growth (but a 2.7% qoq decline) in net sales to Rs.1,189cr driven by a 10.2% yoy (2% qoq) jump in net average realization. The volume in tonnage terms however remained flat (down 4.6% qoq) at ~51,500MT led by weak demand from the OEMs and lower than anticipated pick-up in replacement demand. The EBITDA margins came in at 9% as against a loss at the operating level in 1QFY2012 as the company benefited from a 15.6% yoy (flat qoq) decline in natural rubber prices leading to a 990bp yoy decline in raw-material cost to net sales ratio. Led by a strong operating performance, the net profit surged to Rs.26cr in 1QFY2013.

Outlook and valuation: We expect CEAT to report continuous improvement in its operating performance, led by improving utilization at the Halol plant and stable raw-material prices. Consequently, we estimate CEAT to post an EPS of Rs.41.1 in FY2014. At Rs.103, the stock is trading at attractive valuations of 2.5x FY2014E earnings. We retain our Buy rating on the stock with a target price of Rs.164, valuing the stock at 4x FY2014E earnings.

Source : Equity Bulls

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