Ceat - 2QFY2013 Result Update - Angel Broking

Ceat posted sluggish results for 2QFY2013 primarily due to contraction in operating margins on a sequential basis led by increase in employee (wage hikes and bonus payouts) and other expenditure (higher advertising spends). During the quarter, Ceat registered an exceptional expense of Rs.14cr to account for the change in policy of recognizing provision for warranty from actual claim basis to expected cost basis. Further, the company also announced a VRS scheme for the employees at the Bhandup plant and expects to incur a charge of Rs.15cr related to it in 3QFY2013. We retain our positive view on Ceat and believe that the company will continue to report a strong performance led by gradual ramp-up at the Halol plant and stable raw-material prices. 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.

Margins contract on a sequential basis: For 2QFY2013, Ceat reported a modest growth of 6% yoy (down 1.2% qoq) in net sales to Rs.1,173cr primarily due to flat growth in volumes at 51,000MT. The volume performance was impacted on account of a slowdown in replacement as well as export markets, which account for ~80% of revenues. The net average realization, however, improved 4.8% yoy (flat qoq) due to superior product-mix. On a sequential basis, the EBITDA margin declined by 210bp to 6.7% mainly due to 110bp qoq increase in other expenditure (led by higher ad spends and higher power costs) and 80bp increase in employee expenses (wage hikes and bonus for full year). On a yoy basis, margins improved by only 107bp as benefits of lower raw-material cost (down 380bp as a percentage of sales) were negated by a 220bp increase in other expenses as a percentage of sales. The adjusted net profit for the quarter stood at Rs.17cr as against Rs.26cr in 1QFY2013.

Outlook and valuation: At Rs.110, the stock is trading at an attractive valuation of 2.7x FY2014E earnings. We retain our Buy rating on the stock with a target price of Rs.163, valuing the stock at 4x FY2014E earnings.

Source : Equity Bulls

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