Buy Ceat; target of Rs 1206: Karvy

Karvy's research report on CeatOver the years, the company has decreased its share of revenue from CV (Commercial Vehicle) segment from 60% in FY10 to 40% in FY15 by increasing share of revenue from 2/3 wheeler, PC and UV segments. The company continues to focus on these segments going forward on the back of higher growth, good realizations and strong brand preference by the consumers. To tap the higher growth from these segments, the company has taken sizable capex plan of around Rs.10700 Mn at its Halol and Nagpur facilities which are expected to be commercialized in the coming quartersand gradually ramp up in the next 15-18 months. At the lower levels of current raw material commodity prices which are likely to continue and on the back of expected single digit growth in topline and at current operating profit margins, the RoE and RoCE are likely to be at the levels of 17.1% and 22.4% in FY17E because of high capex and are expected to reach 16.9% and 22.6% in FY18E respectively. We initiate coverage on CEAT tyres and assign EV/EBITDA multiple of 6.0x to FY18E EBITDA and give “BUY” rating with an upside potential of 20%.

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