CEAT - Replacement demand drives outperformance - ICICI Securities

CEAT's Q2FY21 performance was an all-round beat on consensus expectations. EBIDTA margins came in at 14.8%. The strong margin performance was due to: a) improvement in product mix (replacement share up 30%); b) lower commodity prices on crude-linked derivatives (e.g. carbon black); and c) internal cost control. Management indicated ramping up operations to cater to OEM, replacement demand aided by import restrictions has supported volume growth. Strong operating cashflows, cost control measures and prudent capex are expected to help keep debt levels in check. Demand outlook for Q321E remains positive however management visibility for demand beyond the same remains low. Maintain BUY.

Key highlights of earnings call:

- The gross margin improvement was largely driven by: i) reduction in raw material costs (~5%), lower carbon black prices; ii) improved product mix (replacement segment grew 30% YoY) and iii) strong cost control measures.

- Management indicated likely margin pressure in Q3/Q4 as raw material costs edge higher by 2-3% QoQ (natural rubber up 28% MoM) and product mix shifts towards higher OEMs sales for the festive period.

- Income tax for Q2 was lower by Rs550mn, due to one-time impact of accumulated losses in CSTL consumed in Q2, as the company completes the merger of CSTL effective FY21. Effective tax rate for H2FY21 would trend higher to normal tax rate.

- Management indicated import restriction on tyres has aided domestic players as imports have gone down significantly. On M&HCV side, TBB segment has witness strong gains vis-à-vis TBR, CEAT's TBB capacity is operating at peak utilisations.

- Plant capacity and utilisation: In Halol plant, TBR segment currently operates at ~50% utilisation at 60k-70k units per month (total capacity 120k tyres); PCR currently operates at capacity of 20k tyres per day. In Chennai, PCR is operating at 3k-4k tyres per day on capacity of 20k tyres per day with another 10k units per day to be added in phase-2.

- CSTL business currently operates at 85-90% utilisation producing (30-35T per day) and will gradually be ramped up to 50-55T capacity in the current capex cycle.

- Company has reduced debt by Rs1.9bn to Rs18bn largely from operating cashflow management, reduction in working capital (Rs0.55bn) and delay in capex.

- Company has gained market share during the quarter (~16%) due to supply constraints in the industry and is likely to normalize at ~13-14% market share.

- CEAT plans for cost reduction of Rs1bn in utility costs, power and fuel costs, network redesign and employee costs, benefits of which will be visible in FY22E.

Valuation

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 tweak our earnings estimates downwards (12%/-2%/-3% for FY21E/FY22E/FY23E) factoring in weak growth outlook. We value CEAT on SoTP basis, maintain our standalone multiple to 15x Sep'22E EPS of Rs87 (earlier: Rs89) and maintain 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 Rs1,323 (earlier: Rs1,356).

Shares of CEAT LTD. was last trading in BSE at Rs.1105 as compared to the previous close of Rs. 1146.45. The total number of shares traded during the day was 5854 in over 812 trades.

The stock hit an intraday high of Rs. 1153.5 and intraday low of 1100.8. The net turnover during the day was Rs. 6593208.

Source : Equity Bulls

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