CEAT delivered a highly subdued performance in 3QFY22, with EBITDA margin coming in at 5.6% (-919bps YoY/-343bps QoQ) vs. our estimate of 8.9% due to lower-than-expected sales and sharp commodity cost inflation. EBITDA decreased by 59% YoY (-39% QoQ) to Rs1.3bn (40% lower than our estimate), owing to higher RM/Sales. Its volume declined by 6% YoY (-2% QoQ) due to: (1) lower OEM demand and (2) lower volume in the replacement market (CV and OTH segment). CEAT's consolidated revenue rose by 9% YoY (-2% QoQ) to Rs24.1bn, due to price hikes, despite volume decline. CEAT reported a net loss of Rs200mn and an adj net loss of Rs158mn as against adj net profit of Rs1.4bn in 3QFY21 and Rs423mn in 2QFY22. Looking ahead, the management has guided for a higher input cost and limited ability to pass on the sharp cost escalation. Volume would see a sequential improvement, while the margin pressure would continue. We believe the higher capex and debt would result into higher depreciation and interest outgo, impacting its profitability, going forward. This coupled with margin pressure would drag its return ratios over FY21-FY24E. Thus, we maintain our SELL rating on the stock, with a revised Target Price of Rs1,070 (vs. Rs1,200 earlier).
Margin Pressure, Higher Depreciation & Interest Cost to Impact Profitability
CEAT's consolidated revenue rose by 9% YoY (-2% QoQ) to Rs24.1bn, while its standalone revenue also rose by 9% YoY. Despite the reveneu growth, margins contracted due to the higher raw material cost. We expect revenue growth in low single-digit for 4QFY22E, amid the current uncertainty on OEM production and weaker replacement demand. We expect double-digit growth in FY23E, on account of the new capacity and likely demand revival from current low level. Moreover, the management has lowered its capex guidance to Rs8bn from Rs10bn for FY22 and Rs7-7.5bn for FY23. This indicates slower demand pick up ahead. Capex seems to be a bit aggressive as against the lower operating cash flow. Thus, we expect its debt to increase by ~Rs8bn over FY21-FY24E. This would impact its profitability, going forward.
Outlook & Valuation
We expect CEAT's consolidated revenue to grow in double-digit in FY22E, mainly due to regular price hikes. We expect a decent volume traction in FY23-FY24 on the back of production ease for OEMs and likely revival in replacement demand. Considering the lower OEM production, decline in OTH volumes, higher input cost and limited pricing power, we decrease our EBITDA and EPS estimates by 16%/75% and 11%/28% for FY22E/FY23E, respectively, while expecting normalised business environment in FY24 we broadly maintain our estimates for FY24E. However, capex-led high depreciation, lower utilization with the new capacity, high interest cost due to a higher debt and lower margins would impact the company's profitability over the next 2-3 years. We expect margin pressure and high debt to impact its return ratios, and RoE would fall to 9.8% from 14.6% over FY21-FY24E. In view of the high debt and low profitability, we maintain our SELL rating on CEAT with a revised 1-year Target Price of Rs1,070, valuing the stock a revised P/E multiple of 12.5x (earlier 14x).
Link to the report
Shares of CEAT Limited was last trading in BSE at Rs. 1110.75 as compared to the previous close of Rs. 1140.70. The total number of shares traded during the day was 13701 in over 2564 trades.
The stock hit an intraday high of Rs. 1144.15 and intraday low of 1106.80. The net turnover during the day was Rs. 15297814.00.