PL Stock Report - CEAT (CEAT IN) - Q1FY24 Result Update - RM benefits to stabilize - HOLD

CEAT (CEAT IN) - Himanshu Singh - Research Analyst, Prabhudas Lilladher Pvt Ltd

Rating: HOLD | CMP: Rs2,496 | TP: Rs2,430

Q1FY24 Result Update - RM benefits to stabilize

Quick Pointers:

♦ RM basket was lower by 1.5% QoQ, and helped EBITDA margin to expand.

♦ Not passed on lower RM gains to replacement buyers yet, which aided margin.

We increase our FY24/25E EPS estimates by 5%/4%, to factor in benefit of lower RM (1.5% QoQ) on EBITDA margin expansion. In 1QFY24, CEAT’s revenue grew 4.7% YoY helped by volume growth of 1.5% YoY and 3.1% growth in blended realizations. The company expects high margin replacement, exports improvement and fall in OEM mix for FY24. The LCV segment declined compared to others and management expects this momentum to continue post good rainfall. RM cost is expected to remain in narrow range and CEAT has not passed on benefits of lower RM to replacement buyers yet. Further, interest costs have increased by 80-90bps QoQ and will increase by another 30-40bp. Exports market recovery may be slow due to anticipated slowdown in Europe in FY24.

We expect near term pressures on profitability given 1) impact on export, 2) moderate growth and 3) higher interest costs. Yet correction in commodity cost coupled with cost control would aid margin expansion, in our view. The stock is trading at 18x/16x FY24/FY25, above historical levels. Maintain ‘HOLD’ with revised TP of Rs 2,430 (Rs 2,330 earlier) at 15x Mar-25E consol. EPS.

♦ CEAT’s revenue grew 4.7% YoY in line with Bloomberg consensus estimates (BBGe) and below PLe. EBITDA margins at c13.2% were above BBGe (12.1%) and slightly lower than PLe (13.5%). Other expenses jumped QoQ and had a 0.4% impact from higher A&P spends. Interest rates have increased 80-90bps QoQ (expect another 30-40bp increase) that led to higher miss on PAT on PLe but beat BBGe.

♦ Key takeaways: (1) 1QFY24 overall volumes grew c3% QoQ, exports volume grew by 11% QoQ and replacement volumes grew by 4% QoQ. CV tire sales saw a marginal drop, while OEM volume dipped 3% QoQ due to portfolio changeover. Ceat said it would be exiting small rim (12”, 13”) market, and focus will be on high margin large size rim market at OEMs. This changeover should take place in coming two months. (2) Replacement demand is stable in 2Ws and PV, while CV is slow. Demand in exports market is improving in Middle East, Africa and SAARC, while Europe is impacted on farm radial side. (3) CEAT maintained its 40%+ MS in 2W, EV and PV; has partnered with Tata and Mahindra on future projects. (4) Premium segments now contribute c28% of revenue and also improved market share in PV segment. (5) Ceat guided for capex of Rs 7.5bn for FY24 and would start Chennai plant phase 1 (45k units; with Rs. 7bn capex) given Halol plant reaching 90% utilization. (6) Commodity basket declined by c1.5% QoQ. Ceat has maintained pricing in replacement market which has helped sustain gross margin. CEAT has guided that company should see revenue growth in coming quarters, due to mix improvement and volumes. (7) Ceat has reduced cRs. 980mn of debt in 1Q.

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