Buy CEAT; target Rs 140: Nirmal Bang

Nirmal Bang research report on CEAT

"CEAT reported results significantly above expectation reflecting higher volumes and benefit of lower raw material cost.  Despite taking 1-2 percent price cut which impacted realizations marginally, volume growth continued to remain strong. EBITDA margins witnessed further improvement benefiting from lower raw material cost. Resulting from subdued demand in the domestic auto industry (particularly replacement demand) the top line performance of the tyre companies will be impacted. However, benefits in the form of lower raw material cost continue to remain. The sustainability of margins in our view is the crucial factor to watch out for in the subsequent quarters. Nevertheless, we are encouraged by the improving operating performance of CEAT led by increasing utilization at the Halol plant, reduction in debt levels, changing product mix (radial vs bias) and expanding presence (tapping new geographies). At CMP, the stock is trading at P/E of 2.58x FY14E and 2.35x FY15E earnings with an EV/EBITDA of 1.81x and 1.49x which we believe are lower as compared to peers. Our earlier target price of Rs 129 has been achieved and we have marginally revised our estimates upwards to account for the strong Q1FY14 performance. Consequently, our target price also stands revised upwards at Rs 140 and we recommend to BUY the stock indicating an upside of 26.6 percent from current levels," says Nirmal Bang research report.

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