CEAT - Market share ambitions remain strong - ICICI Securities

CEAT Tyres hosted its annual investor conference virtually to elucidate its long term growth plans, and strategies to achieve them.

Key takeaways from the event:

- Demand was impacted in Q1FY22 from covid 2nd wave and subsequent plant shutdowns across OEMs. Replacement segment witnessed ~20-40% decline QoQ in Apr'21/May'21. Truck segment were least impacted. June'21 has seen revival of replacement demand while OEM production continues to ramp modestly.

- CEAT has a leadership market share in 2W with aspiration to further raise the same to 30-35% market share vis-a-vis current 28-30%. CEAT's share of business with new generation electric 2W companies (e.g. Ola Electric, Tork) stands at ~50%.

- Management indicated strategic focus on PCR segment, with market share aspirations of 20% (next 5-years) from current 13-14%. In FY21, PCR segment market share grew from 10-11% to ~13-14%. Market share within OEM's in PCR is expected to reach 20% by FY23 from 15% in FY21, this could act as a catalyst to improving replacement market share.

- In the truck and bus segment, market share in TBR segment stood at ~7% while for TBB segment it is at ~13%. Management targets TBR market share to reach 13-15% in the next five years aided by new capacity additions. CEAT has benchmarked its product with peers on cost/km basis, and has found itself to be competitive. The strategy remains to keep pricing ~1-1.5% lower than peers while providing same operating metrics as peers.

- Management indicated exports will expand to EU region with PCR segment and then gradually enter with TBR segment as well. The company has entered South East Asia with Indonesia being a dominant 2W market. US and EU remain a target market for off-highway segments and other speciality products.

- Capex for FY22-23 is likely to be Rs18bn with major spends on new TBR capacity addition (3k tyres/day) along with balance capex for PCR capacity in Chennai plant and the second phase towards Nagpur plant expansion in 2W capacity. The company has expanded network touchpoints by 600-700 in FY21.

- CEAT has taken fixed cost saving initiatives and targets Rs1.5bn with 0.75bn savings realised in FY21 from employee costs, operational and power costs. Margin pressure in FY21 was due to higher manpower costs on new capacity expansions.

- Blended RM cost increased by 8-10% QoQ in Q1FY22. CEAT took cumulative price hike of ~4% in Apr'21/May'21 and is expected to take another hike at the end of Q1 to mitigate the impact. Current raw material inventory stands at ~30 days.

Valuation

We like CEAT's consistency in margins as growth rebounds; however, persisting commodity cost pressures, higher capex and lower pricing power raise concerns on margin sustenance. We revise our earnings for FY22E/ FY23E by 6.7/7.3%, respectively. We value CEAT on SoTP basis with target multiple for India business at 14x FY23E EPS and maintain ADD rating on the stock with a revised target price of Rs1,533 (earlier: Rs1,432).

Key downside risk: Sharper deterioration in FCF profile due to rise in capex.

Key upside risk: Strong reduction in commodity prices leading to positive surprise in margins.

Shares of CEAT LTD. was last trading in BSE at Rs.1364 as compared to the previous close of Rs. 1379.75. The total number of shares traded during the day was 12690 in over 1409 trades.

The stock hit an intraday high of Rs. 1390 and intraday low of 1312. The net turnover during the day was Rs. 17123597.

Source : Equity Bulls

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