Accumulate CEAT; target Rs 128: P Lilladher

Prabhudas Lilladher is bullish on CEAT and has recommended accumulate rating on the stock with a target price of Rs 128 in its February 07, 2013 research report.

"CEAT reported a 13.0% YoY growth in its top-line at Rs12.0bn (PLe: Rs11.5bn), mainly driven by ~15.2% YoY increase in volumes. On a sequential basis, Top-line grew by 2.4% mainly on account of ~3.9% volume growth. With recipe cost/kg declining by 4.4% QoQ, EBITDA/kg improved by ~25% QoQ. EBITDA margin improved by 180bps QoQ to 8.5% mainly due to 220bps QoQ improvement in gross margins. The benefit of lower raw material cost (reduction of 470bps YoY) was partially negated by a 140bps YoY increase in other expenses. As a result, EBITDA margin improvement was restricted to 230bps YoY to 8.5%. EBITDA grew by 54.5% at Rs1.0bn (PLe- Rs1.1bn). Due to flat interest expenses YoY, PAT increased 8x to Rs169m (PLe – Rs193m). The PAT could have been higher but for a Rs137m compensation towards VRS @ the Bhandup plant.

Despite a 9.2% YoY growth in volumes in Sri Lanka, the top-line for Sri Lankan JV (~51% holding by Ceat) de-grew by 8.5% YoY to Rs1.0bn (Q2FY13 – Rs1.02bn). The main reason cited by the management was higher exports (35% of top-line) which generally have lower realisations. On account of decline in domestic volumes and improvement in export revenues, the average realisation/kg declined by 16.2% YoY. As a result, EBITDA margins improved by 350bps to 17.1% resulting into 15.2% YoY increase in EBITDA. Sri Lankan JV operations’ contribution to consolidated profit stood at Rs53m as against Rs43m in the same quarter last year (~22% growth). Consolidated top-line increased by 12.4% YoY to Rs12.4bn, with EBITDA margins at 8.9% and PAT at Rs225m. EBITDA margins improved by 270bps YoY mainly led by the Sri Lankan operations.

Natural rubber prices have corrected by ~6-7% in the domestic market in last two months and are trading at a 3-year low of Rs157/kg. We expect rubber prices to remain range bound at Rs155-Rs165/kg in the medium term. Management expects improvement in margins mainly led by lower raw material cost in Q4FY13E.

Capacity expansion at Halol facility, coupled with stable rubber prices over the next couple of quarters, augurs well for the company’s prospects. We maintain our ‘Accumulate’ rating on the stock with a TP of Rs 128 based on 0.5x P/BV multiple on FY14E basis," says Prabhudas Lilladher research report.

Institutional holding more than 40% in Indian cos

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