Reduce CEAT; target of Rs 2,389: ICICI Securities

ICICI Securities recommended accumulate rating on CEAT with a target price of Rs 2,389 in its research report dated July 20, 2024.

Broker Research

July 25, 2024 / 12:18 IST

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ICICI Securitie's research report on CEAT

Double-digit volume growth in both exports and replacement markets led 9% YoY volume growth, while OEM growth was muted in Q1FY25. CEAT expects double-digit volume growth in the replacement segment in FY25 with: 1) 2W/3W/farm segments growing steadily with rural demand picking up and prediction of favorable monsoon. 2) CV growth led by low base and with Chennai facility expected to add to volume. 3) Single-digit volume growth in PV segment. Ocean freight increase of 3–4x alongside non-availability of containers impacted the exports segment; this is likely to continue till Aug’24. Despite that, CEAT expects double-digit growth in the exports segment in FY25 and increased exports contribution to 25% in 2–3 years. It has started exports of TBR to US, and expects PCR exports to begin by Q1FY26.

Outlook

CEAT’s Q1FY25 EBITDAM stood at 12%, down 350bps QoQ vs. consensus 12.5%, led by 300bps lower GM. Raw material basket (RMB) cost was higher by 5% QoQ in Q1FY25 led by a surge in natural rubber cost; CEAT took a price hike of 2% in Jul’24 only to curb that. We believe, limited price hikes driven by competitive reasons amid the rise in RMB cost in Q1 resulted in GM slipping from the highs of Q4. In addition to the RMB inflation, EPR compliance related cost also dented margins. CEAT expects slower OEM growth in FY25 with high base vs. better growth in replacement/ exports. CEAT is aiming to increase exports mix from 19% now to 25% in 2–3 years. Retain REDUCE with DCF-based revised TP of INR 2,389 (earlier INR 2,232), implying 15x FY26E EPS. Change in TP driven by earnings rollover.

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