Accumulate CEAT; target of Rs 1255: Prabhudas Lilladher

Prabhudas Lilladher's research report on CEAT

CEAT's Q2FY19 reported consolidated operating margin at 9.1%, down 240bps YoY / 120bps QoQ, was below our expectations of 9.9%. While the rise in RM costs for Q2FY19 (crude derivatives up ~15% YoY, carbon black higher 20% YoY, natural rubber down 2% YoY) was more or less offset through price hikes and mix improvement over the quarter with gross margins dipping a mere 10bps YoY (flat QoQ), other expenses as a % of sales surged 160bps YoY on account of higher production activities as well as increased ad spend during the quarter leading to the margin disappointment.

Outlook

With a target price of Rs1,255, based on 15x Mar'20E consolidated EPS. The stock currently trades at 14.6x/13.2x FY19/20E EPS.

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