CEAT Stock Research Report by ICICI Securities
Sector: Auto Ancillaries – Tyres & Rubber Products
CMP Rs. 1717, Target Rs. 1546 (10% downside potential)
Target Period: 12 Months
CEAT Stock Research Report: Strong beat in margin largely priced in valuation
CEAT’s Q4FY23 EBITDA margin at 12.8% (up ~410bps QoQ) beats consensus estimate of 10.2%, mainly driven by 560bps QoQ gross margin improvement. Margin increase was driven by a decline in raw material basket cost (RMB lower by ~9% QoQ), maintaining product pricing and operational efficiencies. With focus on radial OHT capacity expansion, 2W tyre capacity expansion, stable commodity prices, and export revenue mix enhancement, CEAT is looking forward to maintain its targeted long-term EBITDAM range of 10-12%. Additionally, controlled capex in FY24-25E, with no incremental capex towards asset intensive TBR segment, would help CEAT control its financial leverage ratio and improve capital efficiency, too. We downgrade the stock to REDUCE (from Hold) with DCF-based TP of Rs1,546 (earlier: Rs1,414), implying ~13x FY25E earnings. We believe the improvement in profitability and capital efficiency is already priced in at current valuation multiple.
Key highlights from earnings call
● Volume growth of 7% QoQ was driven by 5% replacement growth, 8% OEM growth and 15% growth in exports. PCR replacement continued to be moderate. With revenue up 5.5% QoQ for standalone business, 7% revenue growth implies effect of passing on of falling commodity prices seeping through revenue already. FY23 volume growth came in at 11%. We are building in ~10% volume growth in FY24, with scope for replacement growth to improve on a benign FY23 base amidst OEM growth normalising down. With Hallol TBR capacity operating at 80% utilisation, we believe there is enough headroom for CEAT to grow in TBR space in FY24-25E, thus, not necessitating the need for another round of TBR capex in near term.
● Gross margin improvement of 550bps QoQ was driven by ~9% reduction in raw material basket costing. With natural rubber prices being up ~5% QoQ in Q1 as against lower crude oil prices, gross margin in Q1 would be largely stable to slightly lower than current levels. Also, IPL-related marketing/ad expenses would increase in Q1FY24, which should also be a lower volume quarter, and may impact EBITDAM QoQ from the current highs of 12.8%. Directionally, with focus on radial OHT capacity expansion, 2W tyre capacity expansion and export revenue mix enhancement, CEAT is looking forward to maintain its targeted long-term EBITDAM range of 10-12%.
● Capex in FY23 was Rs8.9bn and targeted capex for FY24 is Rs7.5bn, which would include Rs5.5bn of growth capex. Growth capex would be largely dedicated towards Ambernath radial OHT capacity expansion, Chennai capacity increase and Nagpur 2W capacity ramp up. With Rs2bn of working capital reduction in FY23, CEAT was able to manage FY23 without increasing its gross debt and fund its entire capex internally. In FY24, too, CEAT is aiming to maintain its debt levels and fund the capex internally, as it is tough to expect help by reducing working capital every year.
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