Buy Ceat; target of Rs 145: SKP Securities

SKP Securities is bullish on Ceat and has recommended buy rating on the stock with a target of Rs 145 in its May 29, 2012 research report.

“CEAT Ltd. (CEAT), a flagship company of the RPG Enterprises, is among the leading tyre manufacture. CEAT’s market share is 12% of Indian tyre market, manufactures 10 million tyres every year. CEAT owns two tyre manufacturing facilities in Maharashtra (Bhandup & Nasik) and has also set up a green field radial tyre manufacturing facility at Gujarat (Halol). Company has a subsidiary in Sri Lanka which manufactures bias tyre and radial tyre.”

“Tyre industry is structurally shifting from bias to radial tyre. In India radialisation is still only16% for the truck and bus (T&B) segment compared to 65% of the global average. CEAT’s Halol radial plant is expected to ramp up production to 135 TPD by Q4FY13. This will fulfill the appetite, in the dynamically changing market scenario. CEAT launched its radial capacity plant in Q4FY11, ramped up the production to 90 TPD in Q4FY12 and targets further ramp up to 135 TPD in Q4FY13 and expected to operate at maximum capacity utilization of 145 TPD by FY14. We expect replacement demand to increase sharply which will push the margins upward, as the margins are higher in the replacement vis-a vis OEM and export segments. CEAT is also focusing to shift from the low margin commercial segment (T&B) to high margin Passenger segment (2-3 wheelers). CEAT plans to invest Rs 250 cr. toward setting up of a green field bias tyre plant in Bangladesh with an initial production capacity of 65 TPD. Capex for the new plant will be incurred in FY13 and project is expected to kick off in Q1FY13.The commissioning of the plant is expected in Q1FY15. Company targets to achieve 60% of the market share of the Bangladesh.”

“We expect CEAT to report improved EBIDTA margins on the back of softening raw material prices and increase in production at the Halol plant. At current market price of Rs 95, Stock is trading at an EV/EBIDTA of 3.5x & 3.02x for FY13E and FY14E respectively. We recommend BUY rating on the stock with a target of 145 (47%UPSIDE) at the EV/EBIDTA of 4x on FY13E earning over the period of 18 months,” says SKP Securities research report.  

Non-Institutions holding more than 90% in Indian cos

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