Ceat - Q1FY2014 Result Review - Angel Broking

Ceat reported extremely strong results for 1QFY2014 which were better than our expectations driven by significant expansion (up 115bp sequentially to 11.8%) in operating margins.

For 1QFY2014, standalone top-line reported a better-than-expected growth of 7.8% yoy to Rs. 1,280cr despite the sluggish demand environment in the domestic markets. The top-line was driven by a strong volume growth of 10.7% led by a volume growth of 28.2% yoy in the OEM segment on the back of the new partnerships with Royal Enfield, Volvo-Eicher and Bajaj Auto. Export volumes too registered a strong growth of 10.7% yoy; however, replacement segment grew modestly by 5.2% yoy during the quarter. Net average realization declined by 2.7% yoy on account of adverse product-mix (higher OEM share) and also due to price cuts undertaken during the quarter. Operating profit, however, surged 43.5% yoy (8.2% qoq) to Rs. 151cr driven by 293bp yoy expansion in operating margins led by 12.5% yoy decline in natural rubber prices. The raw-material expense as a percentage of sales fell 570bp yoy (187bp qoq) during the quarter. Nevertheless, other expenditure witnessed a sharp jump of 27.5% yoy (5.7% qoq), probably due to increased marketing spends, which arrested further margin expansion in our view. Led by strong operating performance, net profit increased 126.8% yoy to Rs. 58cr ahead of our expectation of Rs. 38cr. On a sequential though, it declined by 4.1% primarily due to higher tax outgo. Tax rate stood at 33.1% as against 22.4% sequentially.

We retain our positive view on Ceat and believe that the company will continue to benefit from the softening of commodity prices. However a slowdown in demand remains a concern as the replacement demand has not picked up as anticipated. Nonetheless, at Rs. 118, the stock is trading at attractive valuations of 2.4x FY2015E earnings. We maintain our Buy rating on the stock with a target price of Rs. 170.

Source : Equity Bulls

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