CEAT - Volume growth, mix helps sustain margins - ICICI Securities

CEAT's Q3FY21 performance was a beat as EBIDTA margin came in at 14.7% (close to 19 qtr. high of 14.8%) on back of strong volume growth (~26% up YoY) and favourable mix (higher replacement share). Margin improvement was driven by: i) strong growth in replacement segment (up~35%) vis-à-vis OEM (up~15%), and ii) rising capacity utilisation across radial/bias segments. Demand outlook as per management remains positive as momentum on replacement side remains strong even as OEM production witnesses some softness (e.g. 2Ws); however, profitability is likely to remain in check due to rising input costs (RM basket prices likely to rise 10% QoQ). CEAT has undertaken cumulative price increases of ~3% (between Dec'20/ Jan'21), however it needs another ~3% to cover for rise in costs. Key risk: Rise in competitive intensity limiting pricing power. We maintain BUY.

Key highlights of earnings call:

- CEAT reported 26% YoY growth driven by strong volume growth on replacement side and faster recovery in M&HCV segment. Import restrictions on tires has contributed increase in addressable market by ~5% for domestic players.

- OE and export segments witnessed 15%+ YoY growth while replacement segment witnessed 35% YoY growth. Off-highway tire segment grew 42% YoY.

- Revenue mix in Q3 stood at: M&HCVs: 35-40%, 2W: 30%, PV: 15%. For trucks: TBB: TBR stood at 60:40. TBR segment grew 45%, while TBB grew 30% YoY.

- CEAT gained ~2% market share across most segments with ~3-5% gain in PV segment in H1FY21.

- The RM basket costs rose 1.5% QoQ in Q3 and were countered by 3% price hike taken in Dec'20 to maintain healthy margin. RM costs are expected to rise another 10% from Q3 to Q4 (natural rubber from Rs130/kg to 160/kg) and would warrant another 3% price hike in Q4.

- Debt stood at ~Rs15.6bn vis-à-vis ~Rs19.3bn in FY20 (Rs3.7bn reduction) largely due to reduction in working capital reduction (Rs3bn in 9MFY21).

- CEAT's long term capex of Rs40bn of which Rs22-23bn has been spent in past few years; for FY21, project capex of Rs5bn is planned of which Rs2.5bn is spend in 9MFY21 and balance would be spent in Q4FY21. Maintenance capex for FY21 is expected to be Rs1.5bn. For FY22, ~Rs7bn is planned for project capex for Chennai plant and expansion of TBR capacity.

- Channel inventory remains low channel (<1 month), CEAT plans to increase finished goods inventory to ~Rs0.5-1bn.

- CEAT expects to maintain A&P expenses at ~2.5% of revenues (similar to FY20).

Valuation

As we enter CY21, we like the growth rebound story; however, err on the side of caution on consistent delivery of high margin levels, and believe margins to trend down as the mix normalises. Commodity price inflation of natural rubber (up ~19% QoQ) also remains a key risk. We value CEAT on SoTP basis and maintain our standalone business multiple at 15x Dec'22E EPS of Rs115 and ascribe value of Sri Lanka business at Rs22 per share. We maintain our BUY rating on the stock with an unchanged target price of Rs1,741.

Shares of CEAT LTD. was last trading in BSE at Rs.1311 as compared to the previous close of Rs. 1271.65. The total number of shares traded during the day was 119022 in over 6236 trades.

The stock hit an intraday high of Rs. 1352.4 and intraday low of 1290. The net turnover during the day was Rs. 157026709.

Source : Equity Bulls

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