PL Stock Report - CEAT (CEAT IN) - Q2FY24 Result Update - Strong mix, price increase and low RM drive beat - Accumulate

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

Rating: ACCUMULATE | CMP: Rs2,195 | TP: Rs2,515

Q2FY24 Result Update – Strong mix, price increase and low RM drive beat

Quick Pointers:

§ Stable demand and mid-single digit growth in topline across segments.

§ RM basket could increase by c3% QoQ in 3QFY24E.

We increase our FY24-26E EPS estimates by 2-6%, to factor in better than expected margins driven by lower commodity costs, price hikes and better mix, partially offset by increasing RM trends 3Q onwards. In 2QFY24, CEAT’s revenue grew 5.5% YoY aided by volume growth of ~7% YoY partially offset by lower realizations. Management expects high mix of replacement and export and fall in OEM mix for FY24. Truck & Bus segment continued to outperform. Competitive intensity is increasing but the company has been able to maintain its position in market. Furthermore, RM cost is expected to increase in 3Q by 3% QoQ, but noted that it would mitigate the impact through product mix and pricing action in non-truck portfolio if needed.

We believe margins will peak out in the near term due to increase in RM price. Though demand environment has been stable, yet Ceat’s focus on export market should help volumes and margins. Also, the stock has corrected to attractive levels based on current commodity price environment, in our view. The stock is trading at 14.8x/14x FY24/FY25, below historical levels. Maintain ‘ACCUMULATE’ with revised TP of Rs 2,515 (Rs 2,450 earlier) at 15x Sep-25E consol. EPS.

§ Revenue growth 5.8% YoY in-line with Bloomberg consensus estimates (BBGe) and slightly above PLe. EBITDA margins at 14.9% were above BBGe (13.5%) and PLe (13%). RM costs were lower than expected, while other expenses and staff costs came above expectations. Other income was higher than expected and led to higher beat on PAT.

§ Key takeaways: (1) 2QFY24 overall volumes grew ~7% YoY, exports volume grew by ~10% YoY and replacement volumes grew by ~4% YoY. OEM business witnessed healthy momentum with volume growth of ~10% YoY. Export market is improving in Asia and Africa, while Europe remains impacted by recessionary trends. (2) CEATs demand continues to be stable, and it is witnessing mid-single-digit growth in topline across all three segments. Replacement demand for domestic off-highway grew by strong double digit growth followed by PC, 2Ws and truck bus volume grew in low single digits. (3) CEAT maintained its 40%+ MS in EV 2W. (4) CEAT took straight price increase of ~2% in passenger cars while competition took price drop of 1% in TBR segment, despite the fact that in a seasonally low quarter company has managed to gain traction in volumes. (5) Margins improved by ~230 bps QoQ led by drop in commodity price by ~2.5%, stable selling price QoQ and better product mix (115 bps). (6) With growing crude prices, management guided that RM prices may grow by 3-4% by Q4 over the base of Q2. (7) Capex for Q2 was Rs ~1.7bn and Rs 8bn for FY24. (8) The company has reduced its standalone debt down by ~Rs. 1bn through efficient management of cash flows and improved operating performance in 2QFY24.

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