Accumulate Ceat; target of Rs 126: Prabhudas Lilladher

Prabhudas Lilladher is bullish on Ceat and has recommended accumulate rating on the stock with a target of Rs 126 in its November 5, 2012 research report.

“CEAT reported 6.0% YoY growth in its top-line at Rs11.7bn (PLe: Rs11.8bn), mainly led by 5.1% YoY increase in average realisations/kg. Volumes declined by ~1.0% QoQ on account of slowdown in exports as well as replacement segment (together accounting for 78% of revenues). EBITDA margin declined by 210bps QoQ to 6.7% mainly due to 110bps QoQ increase in other expenses (due to increased ad spend and higher power costs) and 80bps QoQ increase in employee expenses (incentives and bonus for full year). The benefit of lower raw material cost (reduction of 380bps YoY ) was partially negated by a 220bps YoY increase in other expenses. As a result, EBITDA margin improved by only 130bps YoY to 6.7%. EBITDA grew by 31.8% at Rs782m lower than our estimate of Rs1bn (Rs1.0bn in Q1FY13). Due to flat interest expenses YoY, PAT increased 4x to Rs157m (PLe – Rs193m).”

“Led by 7.6% YoY improvement in volumes and an increase of 5.6% in average realisations/kg, the top-line for Sri Lankan JV (~51% holding by Ceat) grew by 13.6% YoY to Rs1bn (Q1FY13 – Rs929m). Due to higher export realisations and lower raw material costs, EBITDA margins improved by 630bps YoY and 260bps QoQ to 17.5%. As a result, consolidated top-line increased by 6.0% YoY to Rs12.2bn, with EBITDA margins at 7.2% and PAT at Rs178m. In our assessment, Sri Lankan operations is likely to report a 11.2% YoY growth in top-line in FY13E with an EBITDA margin of 16.0%, thereby, translating into a PAT of Rs388m, an increase of 45.0% YoY.”

“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 positive stance on the company with a TP of Rs126 based on 0.5x P/BV multiple on FY14E basis. However, on account of 14.5% potential upside from the current levels we downgrade the stock to ‘accumulate’ from ‘buy’ earlier,” says Prabhudas Lilladher research report.

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