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

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 Rs. 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 Rs. 1.7bn. On the lower profit base, we expect standalone profit in 3Q to grow ~3x, to Rs. 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.

Source : Equity Bulls

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