CEAT - Tight cost control supports performance - ICICI Securities

CEAT's Q1FY21 operating performance was in line with consensus estimates as EBITDA margins came in at 9.3% (other expenses declined 494bps YoY). Admirably, CEAT hasn't yet squeezed employee costs (up 573 bps), possibly the high replacement (~58%) share of business is providing management growth/profitability comfort. On the balance sheet side, cash outflows have been restricted, gross debt remains stable QoQ at ~Rs20bn. Demand outlook for FY22 remains modest due to weakness in M&HCV demand (both in OEM, replacement segments), however, profitability is likely to remain healthy due to better mix and cost control. CEAT's capex cycle is largely behind us with FCF generation (Rs2.5bn) to start from FY22. Current valuations remain inexpensive as stock trades at ~7.2% FCF yield on FY22E basis. We maintain our BUY rating. Conference call on July 30, Thursday, at 16:00 hours IST. Number: +91 22 6280 1144.

- Key highlights of the quarter: Revenues declined ~37% YoY at ~Rs10.6bn from the loss of sales during first half of the quarter and lack of economic activity in M&HCV segment. Gross margins improved by 66bps YoY to 39.2bps. Employee costs remained sticky, up 573bps, even as other expenses fell 494bps as the company maintained tight cost control on discretionary spends and marketing costs. Debt stood at Rs19.98bn vis-à-vis Rs19.29bn in FY20 reflecting strong cashflow management. Company reported an exceptional loss of Rs15mn due to fire at the manufacturing facility. VRS expenses stood at Rs1.8mn for the quarter. CEAT report PAT loss of Rs146mn as interest costs rose by 228bps.

- Relatively better performance expected: 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 (~37%) which have witnessed best recovery across categories; b) new product innovations continues to drive market share gains in existing OEMs (e.g. Maruti Suzuki) ; and c) new customers additions (e.g. Kia, MG). In the CV segment, improvement in utilisation is a key monitorable as new TBR capacities ramp-up as industry could gain a respite due to curtailed imports.

- Maintain BUY: As we enter FY21, aftermarket growth is likely to taper down as a derivative impact of the sharp OEM slowdown in FY20. We tweak our earnings estimates (-1.8%/1.0% for FY21E/FY22E). We value CEAT on SoTP basis, upgrade our standalone multiple to 15x (earlier: 14x) FY22E EPS and reduce the ascribed unchanged value of SL/specialty business at Rs44 per share. We maintain BUY rating with a revised target price of Rs995 (earlier: Rs923).

Shares of CEAT LTD. was last trading in BSE at Rs.866.5 as compared to the previous close of Rs. 877.15. The total number of shares traded during the day was 15755 in over 954 trades.

The stock hit an intraday high of Rs. 889.05 and intraday low of 865.25. The net turnover during the day was Rs. 13844530.

Source : Equity Bulls

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