Buy CEAT; target of Rs 1933: Cholamandalam Securities

Cholamandalam Securities' research report on CEAT

In 4QFY18, CEAT’s consolidated revenue grew by 13.7% YoY to INR 16.7bn, driven by robust volumes growth of 11% YoY across commercial vehicle, 2Ws, and Passenger vehicle tyre segments.  For FY18, consolidated revenue grew by 8% YoY to INR 62.3bn, driven by 3% YoY volume growth. EBITDA declined by 7% to INR 6.1bn. EBITDA margin shrunk by 150 bps YoY to 9.9%.  Adjusted PAT declined by ~31% YoY to INR 2.6n.  Consolidated EBITDA grew by 49% YoY to INR 2.0bn. EBITDA margin improved by 280bps YoY to 11.8%, led by operating leverage. Consolidated PAT grew by 17% YoY to INR 0.77bn. Management expects raw material cost to inflate by 1.2-1.5% QoQ in 1QFY19, given crude prices remain at current level of USD 65-70 per barrel. The company took a price hike of 0.5% in April 2018 to mitigate the impact of higher RM cost. CEAT’s revenue contribution from strategic focus area increased to 48% in FY18 compared to 46% in FY17. CEAT has identified 2W, Passenger cars and OTR (truck/off-road) tyre segments as its strategic focus areas, given their ability to boost margins and lower the company’s dependence on the truck segment. Net debt reduced by INR 846mn to 7.4bn on end of FY18.

Outlook

At CMP, the stock is trading at P/E of 18.7X/14.0x on FY19E/FY20E EPS, respectively. We maintain our BUY rating on CEAT with revised target price of INR 1,933 (earlier INR 1,994), assigning a P/E of 17X on FY20 EPS. Risks: Further increase in rubber & crude prices can negatively impact margins.

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