BUY Ceat - Latest strategy: agri-radial tyres for export: AnandRathi Institutional Research

Ceat - Latest strategy: agri-radial tyres for export; Buy with a target price of Rs 1370.

We continue to favour Ceat for its timely strategic move. After successfully venturing into two-wheeler tyres, and pricing them at a premium to MRF's two-wheeler tyres, Ceat now plans to venture into radial off-highway tyres (OHT). A new radial plant will be ready and functional by end-FY17. OHT is a much-higher-margin business (20-25%) and mostly exported. With the company's ability to generate brand awareness, we believe this could be the next big thing for it. We recommend the stock as one of our top picks in the tyre pack.

OHT – a new strategy. From effective brand-building to acquiring a leading share in two-wheeler tyres, Ceat has displayed its ability to move ahead of the curve. It now plans to enter the OHT market especially in agri-radials for export to Europe and the US. While others are trying to capture a share of the higher-margin domestic two-wheeler tyre arena, Ceat has decided to set up a new radial plant for export.

Higher growth anticipated. Ceat's decision to focus on the passenger-vehicle and two-wheeler sub-segments has had a good run. Its focus now on OHT and its brand-building ability would enhance growth through more exports. Management said that, globally, ~80% of agri-tyres are radial. This would be a completely new product from the company and should add to its earnings.

Margin-accretive segment. Radial OHT is a high-margin business. This is evident from the fact that Balkrishna Industries, which gets ~88% of its revenue from exports, commands an EBIDTA margin of 20-25%.

Valuation. At present, we have not factored in growth from OHT into the company's FY18 earnings. We expect Ceat to outpace industry growth. The stock has come down significantly from its recent peaks and now trades at 5.9x FY18e. We value it at 9.5x FY18e EPS and arrive at a price target of Rs. 1,370. Hence, we maintain a Buy.

Shares of CEAT LTD. was last trading in BSE at Rs.861.55 as compared to the previous close of Rs. 845.4. The total number of shares traded during the day was 184549 in over 6385 trades.

The stock hit an intraday high of Rs. 871 and intraday low of 838.05. The net turnover during the day was Rs. 159159742.

Source : Equity Bulls

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