Ceat Ltd - Research Report

 

Private Client Research

Rating

Buy

Sector

Tyres & Allied

Company

Ceat Ltd

Reco Price
Rs. 1251.00
Price Target (1 Year)
Rs. 1505.00
Upside
20.30%

Date

March 15, 2017
Sensex
29398.11
CNX Nifty
9084.80

Exchange

Code

NSE
CEATLTD
BSE
500878

Increase in capacity with improved product mix will lead to future growth.

Doubling of capacity in focused segments to drive market share gains:
CEAT plans to increase its capacity from 900MTPD to 1,245MTPD over FY17-18. Around 70% of this new capacity addition (230MTPD of total 345MTPD) will be in the 2W (170MTPD in FY16 to 290MTPD in FY18) and PV (84MTPD in FY16 to 194MTPD in FY18) segments, which should allow CEAT to maximize growth/profitability and resolve supply constraints in these segments. The company’s plan to venture into the OHT segment with capacity of 100MTPD is a testimony of the fact that it plans to chase high-margin businesses to achieve profitable growth. With CEAT’s recently announced capex of Rs. 2800 crores by FY22, it envisages to increase annual capacity in TBR from 110MTPD in FY18 to 310MTPD in FY22, in 2W from 290MTPD in FY18 to 430MTPD in FY22, and in passenger cars from 190MTPD in FY18 to 340MTPD in FY22. This expansion would boost the 2W/PV businesses further and help improve the market share of radial within the T&B segment.

International business to get boost from OHT (Off Highway tyre) segment:
The influx of Chinese tyres and the higher level of radialisation in the markets where CEAT exports its products have impacted its performance. Thus, the company has forayed into high-margin export-focused off-highway tyres with capacity of 100MTPD at an outlay of Rs. 600 crores, which should come on stream in FY18 in a phased manner. We believe the foray into OHT should be margin-accretive for the company. ACHL, the company’s Sri Lanka arm, is a market leader in that country with 50% share and 25% EBITDA margin, which are expected to continue growing at a stable pace.

Pact with Pirelli to drive paradigm shift in CEAT’s portfolio:
CEAT was named the exclusive pan-India distributor for Pirelli motorcycle tyres, underscoring the company’s successful distribution build-out. It was only five years ago that RPG Enterprises acquired the global rights to Pirelli for CEAT, by paying a sum of Rs. 55 crores. The Italian brand’s tyres were formerly distributed by Celite and Ralson in India. Pirelli has a range of premium tyres, and given that CEAT has no offering in this segment, this tie-up will enhance the company’s capability to offer a full basket of products and thus further improve its brand perception.

Consistent margin performance despite raw material price volatility:
CEAT manages commodity price risk via strategies like market intelligence to better forecast RM prices for efficient inventory management, addition of new vendors, and R&D efforts to develop alternate materials that lower weight without compromising on performance. With increasing contribution from its strategic focus areas (2W/PV), it is easier to retain low rubber price benefits due to brand, compared to T&B which is a very price-sensitive segment.

Product mix improvement to continue, boosting margins:
CEAT has improved its product mix in favor of the passenger segment (2W/PV) in Indian operations from 15% to 38% over FY11-16. With market share gains and doubling of capacities in both segments over FY16-19E, we expect revenue CAGR of 20%/13% for 2W/PV over FY17-19E. With the first phase of capacity expansion (Rs. 1400 crores) likely to be completed by 1HFY18, the product mix is expected to improve further (revenue share of 2W/PV likely to increase from 38% to 49% over FY16-19E), partly insulating CEAT against rubber price volatility and improving margins.

Spends on brand building and business promotion set to increase:
Along with quality and innovation, CEAT has also laid equal emphasis on effective marketing and branding of its products. Since the passenger segment is consumer-facing, we believe factors such as brand loyalty, visibility and recall go a long way in creating replacement market demand. To position its products competitively, the company develops creative ad campaigns based on extensive research/consumer insights and also invests in innovative marketing programs. In FY16, CEAT launched two new television campaigns – “Our Grip Your Stories” campaign for utility vehicle tyres and the Tubeless campaign for motorcycle tyres – and participated in key events like MTV Roadies, MTV Chase the Monsoon, India Bike Week 2016 and Mahindra Adventure. These initiatives have enhanced product recalling in the minds of end-consumers. Consolidated advertising and sales promotion expenses have increased at a 21% CAGR FY11-FY16 to Rs. 460 crores. Notably, CEAT plans to increase its marketing spend going ahead.

Stock Data

CMP (Rs)
1259.80
Face value (Rs)
10
52 Week Range (Rs)
1420.00 - 730.00
Market cap (Rs Crores)
5089.03
Price To Book Value (x)
2.19
P/E Ratio
12.83
EV/EBIDTA (x)
7.62

One Year indexed Stock Performance

Ceat LtdSensex
Ceat Ltd
Return (%)
1m
6m
12m
36m
Absolute
16.02
18.35
15.94
218.25
Sensex
4.41
3.47
19.74
34.65

Shareholders

(in %)
31-Dec
Promoter
50.76
Public
49.24
Others
0.00
Total
100

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Industry

The Rs. 50000 crores Indian tyre industry comprises 39 companies and overall 60 manufacturing plants across India. The industry is heavily concentrated, with the top four players holding 70% market share and the top 10 companies accounting for 90% of industry sales (both value and volume). During FY11-16, the industry has grown by 4% in terms of tonnage sold (to 1.7m from 1.4m tonnes). Commercial vehicles (CV) are the largest segment in terms of volumes (contribution of 55%); however, its performance has been sluggish with five‐year CAGR of just 2%. Subdued economic activity not only meant weaker OEM sales, but also lower movement of trucks and thus slower replacement demand. PV tyres have seen the strongest demand offtake with 8% CAGR, whereas 2W demand CAGR was 6%.

Profile

CEAT, a flagship company of the RPG Group, is the fourth largest tyre manufacturer in India in terms of revenue (12% market share), with manufacturing capacity of 900MT/day (95,000 tyres/day). Originally founded in Italy as Cavi Elettrici e Affini Torino SpA, CEAT established a manufacturing plant in India in 1958 and was sold to Pirelli in the 1970s. RPG Enterprises took over Pirelli’s Indian division in 1982 and also bought rights to the CEAT brand, renaming the company as CEAT Limited. Apart from automotive tyres, RPG Group has presence in infrastructure, IT, pharmaceuticals, plantations and power ancillaries.

Profit & Loss Statement:- (Consolidated)
(Rs Crores)
Particulars
Mar 15
Mar 16
Mar 17E
Mar 18E
Mar 19E
Income:-
  • Net Sales
  • Growth (%)
  • Total Expenditure
  • EBITDA
  • % Margin
  • Other Income
  • Operating Profit
  • Interest
  • PBDT
  • Depreciation
  • Profit Before Taxation & Exceptional Items
  • Exceptional Income / Expenses
  • Tax
  • Profit After Tax
  • Minority Interest
  • Consolidated Net Profit
  • Adjusted EPS
  • 5752.14
  • -
  • 5061.29
  • 690.85
  • 12.01
  • 22.59
  • 713.44
  • 142.32
  • 571.13
  • 93.43
  • 477.70
  • -6.13
  • 157.65
  • 313.92
  • 3.26
  • 317.18
  • 78.41
  • 5714.12
  • -0.66
  • 4885.19
  • 828.93
  • 14.51
  • 29.86
  • 858.79
  • 97.38
  • 761.41
  • 107.50
  • 653.91
  • -11.40
  • 197.84
  • 444.67
  • 1.82
  • 446.49
  • 110.38
  • 5778.60
  • 1.13
  • 5100.00
  • 678.60
  • 11.74
  • 19.90
  • 698.50
  • 81.60
  • 616.90
  • 134.40
  • 482.50
  • -0.90
  • 148.33
  • 333.27
  • 33.00
  • 366.27
  • 90.55
  • 6368.50
  • 10.21
  • 5586.60
  • 781.90
  • 12.28
  • 21.90
  • 803.80
  • 70.80
  • 733.00
  • 154.30
  • 578.70
  • 0.00
  • 178.24
  • 400.46
  • 35.00
  • 435.46
  • 107.65
  • 7083.80
  • 11.23
  • 6135.10
  • 948.70
  • 13.39
  • 24.00
  • 972.70
  • 36.00
  • 936.70
  • 168.30
  • 768.40
  • 0.00
  • 236.67
  • 531.73
  • 37.00
  • 568.73
  • 140.60
Source: Stockaxis Research, Company Data

Valuation

We believe the company will continue to register strong operating performance on the back of continued focus on the high-margin passenger segment We Initiate ‘BUY’ on attractive valuations with Target Price of Rs 1505 based on 10.70x FY19E EPS. The stock trades at 11.62x FY18E and 8.89x FY19E EPS.

 

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