Moderation in capex guidance is positive
View and Valuation
CEAT 3QFY22 results missed estimates led by weak volumes (~2% QoQ decline due to weak replacement/OE demand) and RM pressure (~4% increase in RM basket). This as a result led to record low EBITDA margins at 5.5% (-340bp QoQ). However, we expect reversal in margins to normalized level at 10-11% gradually over FY23/24 led by 1) growth in replacement/exports volume and 2) focus on market share gains in high margin segments like 2W, PCR, OHT (~60% mix over next 4-5 years). CEAT has prioritized high margin segments such as exports and OHT over TBR (being a low ROCE biz). Hence, the management has cut capex guidance by Rs2b for FY22 to Rs8b and FY23 at Rs7.5b, which should limit the increasing debt level (expect to peak by FY23).
Nearterm challenges like RM inflation pass through (need another ~5% price hike to offset the same) and increased debt level to 0.7x D/E (v/s 0.6x in 1HFY22) are key variable to watch for over FY22/23. CEAT is a play on i) healthy replacement/OE outlook going forward as supply chain normalizes, ii) timely capacity addition and iii) focus on margin lucrative segments. We have cut FY23 EPS by ~21% while have maintained FY24 EPS. We maintain 'BUY' on the stock with Price Target at Rs1,471 based on ~15x FY24 EPS. Current valuation at ~16.8x/11.7x of FY23/24 consol EPS do partly factors in above challenges.