Buy CEAT; target of Rs 1700: Motilal Oswal

Motilal Oswal's research report on CEAT

CEAT’s senior management team presented (click here for the presentation) their roadmap for the future at its annual investor conference. It also showcased its strategy to gain a bigger share in India, grow its exports, and investing for growth without putting undue pressure on its Balance Sheet. Demand recovery in the Replacement segment is seen in Jun’21. After five years of weak demand, it expects growth to pick-up as a base adjustment has occurred. It plans to maintain leadership in the 2W segment (at 28-30%) and expand dominance in PCR (to 20% from 13-15% currently). In T&B, it aims to increase its market share in TBR to 13-15% (from 8% currently and take it to similar levels as in the TBB segment). In PCR, its strategy to take its market share to 20% pivots on: a) ramping-up in premium sizes (over 15”), b) multiple platforms, and c) benefit of higher share with OEMs on brand visibility for replacement. In TBR tyres, its strategy to gain market share is driven by product and innovative services. CEAT’s TBR tyre performance is comparable with the best, but is priced 1-2% lower than the market leader. The ongoing capacity addition would support these aspirations on market share. It has raised prices further in Apr-May’21 (~4%) and expects another price hike in Jun’21 to offset cost pressures (8-10% QoQ increase in 1QFY22). Due to a weak 1Q and capex plans, it expects debt to rise in FY22, but the same will be well under its limit of less than 1x equity and less than 3x EBITDA.

Outlook