Buy Ceat Ltd - Sushil Finance

During Q4 FY11, Ceat Ltd reported 26.6% y-o-y growth in Revenues however it incurred Net loss due to sustained rise in price of Natural rubber which is the key input material. We attended the conference call held by the Management of the Company to discuss Q4 FY11 financial performance and outlook. Key takeaways of the results and telecon are:

Standalone Analysis

• During Q4 FY11, its Standalone Net sales grew 26.6% y-o-y to Rs.9,782.8 mn while EBITDA declined by 63.5% y-o-y to Rs.145.8 mn.
• EBITDA margins declined sharply to 1.5% as compared to 5.2% in Q4 FY10 mainly due to sharp rise in price of Raw Materials which rose to 78.9% as percentage of sales in Q4 FY11 as compared to 72.2% in Q4 FY10.
• Ceat incurred a Net loss of Rs.118.6 mn as against Net Profit of Rs.153.3 mn achieved during Q4 FY10. The increased operating expenses and doubling of interest expenses due to increased Debt dented net profit growth significantly.
• During FY11, Ceat's Net sales grew 23.6% y-o-y to Rs.34,589.3 mn while EBITDA declined 53.7% y-o-y to Rs.1,409.0 mn. EBITDA margins declined sharply to 4.1% during FY11 as against 10.8% in FY10. Depreciation expense grew 27.1% y-o-y to Rs.341.7 mn. Its PBT (incld. other income) declined by 82.8% y-o-y to Rs.410.6 mn. Its PAT (after adjusting for extraordinary items) declined 81.3% y-o-y to Rs.301.0 mn.

Consolidated Analysis

• During FY11, Ceat's Consolidated Net sales grew 26.4% y-o-y to Rs.36,023.9 mn while EBITDA declined 50.9% y-o-y to Rs.1,527.4 mn.
• EBITDA margins declined sharply to 4.2% during FY11 as against 10.9% in FY10. Ceat's depreciation expense grew 30.7% y-o-y to Rs.359.4 mn.
• Its PBT (incl other income) declined by 79.7% y-o-y to Rs.496.8 mn. Its PAT (after adjusting for extraordinary items) declined 78.9% y-o-y to Rs.342.8 mn.

OUTLOOK & VALUATION

Ceat Ltd is part of the RPG group and is the fourth largest tyre manufacturer in India. It has facilities in Bhandup and Nashik and recently set up Radial Tyre Greenfield facility in Halol, Gujarat. With huge growth expected in Auto sector, the OEM's and the replacement market are expected to grow significantly during the next few years. During the last few quarters, Ceat has been impacted due to rising costs of Natural rubber which is a key input material for manufacturing of tyres.

In FY11, Ceat's Consolidated Revenues increased 26.4% YoY and APAT declined by 78.9% YoY. We have reduced our bottomline estimates marginally and we believe improving product mix and expected fall in rubber prices during 2H FY12 would improve margins significantly. We expect its Revenues and APAT to grow by 17.3% & 181.1% respectively in FY12E; and by 16.3% & 30.0% respectively in FY13E. We initiated coverage on Ceat Ltd and recommended investors to ACCUMULATE the stock at levels of Rs.112 for initial target price of Rs.141. At CMP of Rs.95, we change our rating from ACCUMULATE to BUY for initial target price of Rs.141.(3.9x FY13E EPS).

Source : Equity Bulls

Keywords