Buy Ceat; target of Rs 3800: Anand Rathi

Anand Rathi's research report on Ceat

Ceat’s takeover of Camso would expand its presence in the higher profitability OHT segment. Further, it would also strengthen its presence in construction equipment (CE) globally. It would also add OEMs and distributors (key for success). Initially, the company would expand in compact CE, but later opportunities in other industrial segments like agriculture, harvester, mining and powersport would also open by leveraging the Camso brand. In the near term, due to a muted OEM segment and transition, acquisition would not be EPS accretive; however, on a steady state, acquisition would be EPS accretive. We estimate PAT to see losses of Rs150m in FY26 and then on better margins, a slight profit of Rs236m in FY27. We like Ceat for its market-share gains in India aftermarket, led by superior products and marketing. The standalone EBITDA margin would improve, led by lower input costs and price hikes.

Outlook

We maintain a Buy rating, with a TP of Rs3,800 (earlier Rs3,700), 16x FY27e P/E for the current business and Camso at ~Rs100, 18x FY27e P/E (EPS of Rs5.8). The applied multiple for Camso’s valuation is higher than that of current stream due to better operating margins and RoCE profile. We are not overly optimistic regarding the acquisition due to the risk of slower underlying industry growth (increasing radialization), competitive pressure on the value segment and higher debt.