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CEAT - Replacement demand drives margins - ICICI Securities

Posted On: 2020-10-27 22:34:23


CEAT's Q2FY21 performance was an all-round beat on consensus expectations. EBIDTA margins came in at 14.8% (19 qtr. high). The beat was primarily driven by a) stronger revenue traction in M&HCV (33% share in H1FY21; FY20: ~31%) and 2W (30% share in H1FY21; FY20: 31%) and b) margin improvement: i) due to mix (replacement share up to 71% from 58%, ii) lower commodity prices on crude-linked derivatives. On balance sheet side, gross debt was lowered by ~Rs1.3bn to Rs18bn. Demand outlook for FY22 remains modest due to weakness in OEM demand; however, profitability is likely to remain healthy due to better mix and cost control. Current valuations remain inexpensive as stock trades at ~9% FCF yield on FY23E basis. We maintain our BUY rating.

Conference call on Oct 28, Wednesday, at 16:00 hours IST. Number: +91 22 62801146.

- Key highlights of the quarter: Revenue grew ~17% YoY to ~Rs19.6bn due to improvement in replacement sales in Q2 despite modest pick-up in economic activity in M&HCV segment. Gross margins improved 564bps YoY to 46.6bps driven by better mix and lower commodity costs. CEAT's employee costs remained sticky (up 92bps), even as other expenses remained flat as the company likely maintained tight cost control on discretionary spends (e.g. travel costs, marketing). Debt stood at Rs18bn vis-à-vis Rs19.29bn in FY20 reflecting strong cash flow management. CEAT's standalone financials also reflected the amalgamation of Speciality tyres business (CSTL), it led to deferred tax credit of Rs2bn thereby aiding reported PAT growth (up 240% YoY) at Rs17bn.

- Relatively better placed: CEAT has likely fared better vis-à-vis domestic peers, which we believe is attributable to: a) Relatively high share of "2W & farm" segment in revenues (~39%), which have witnessed one of best recoveries on industry wide basis; b) new product innovations continue to drive market share gains in existing OEMs (e.g. Hero Motocorp, Maruti Suzuki); and c) new customer additions (e.g. Kia, MG); d) M&HCV outperformance likely due to product quality improvement and brand acceptance under a curtailed imports regime.

- Maintain BUY: As we enter H2FY21, we like the growth rebound story, however, are apprehensive on maintenance of such high margin levels, believe as the mix normalises (OEM vis-à-vis replacement), margins are likely to mean revert lower (10-12% band). Commodity price inflation of natural rubber (up ~28% MoM) also remains a key risk. We rollover to Sep'22E, tweak our earnings estimates upwards (24%/16% for FY21E/FY22E) factoring in better growth outlook. We value CEAT on SoTP basis, maintain our standalone multiple to 15x Sep'22E EPS of Rs89 and reduce the ascribed value of Sri Lanka business at Rs22 per share. We maintain our BUY rating on the stock with a revised target price of Rs1,356 (earlier: Rs995).

Shares of CEAT LTD. was last trading in BSE at Rs.1142.6 as compared to the previous close of Rs. 1127.4. The total number of shares traded during the day was 72930 in over 8262 trades.

The stock hit an intraday high of Rs. 1249 and intraday low of 1111.05. The net turnover during the day was Rs. 86371961.


Source: Equity Bulls

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