Cholamandalam Securities

Ceat (Outperformer)

CMP: ₹1,097.7

Target: ₹1,245

CEAT, part of the RPG group, is one among the top four tyre manufacturers in India. With a total manufacturing capacity of 810 tonne a day and manufacturing plants situated in Nashik, Bhandup (Mumbai) and Halol, Gujarat, the company manufactures tyres for truck and bus, passenger vehicles, LCV and farm and specialty.

In fourth quarter of FY16, revenues de-grew 1 per cent YoY to ₹1,460 crore, led by de-growth in realisation about 9 per cent. However, volumes grew 8 per cent YoY. Gross margins expanded 352 bps YoY to 44.8 per cent due to benign raw material prices; EBITDA grew 5 per cent YoY to ₹195 crore. EBITDA margins improved 80 bps YoY to 13.4 per cent.

Company has changed its focus from highly competitive truck & bus segment to passenger vehicle and 2-wheeler segment, which is reflected in current fiscal. The company’s key strategy is to focus on specialty segment in international markets.

Strong focus on capacity addition, reduction in Truck & Bus share in revenues and decent margin expansion are positives. Stock is currently trading at 8.9X FY18E and we rate the stock as outperformer, arriving at target price of ₹1,245 by assigning PE of 10X FY18E.

Risks: Rubber & crude prices can negatively impact margins.

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