Buy Ceat; target of Rs 1300: Religare

Religare's research report on CeatWe initiate coverage on CEAT with BUY and a Mar’17 TP of Rs 1,300 (21% upside) set at 10x fwd P/E. CEAT is in an advantageous position as it (1) shifts focus towards the more profitable 2W and 4W tyre segments which will help it weather Chinese competition, (2) expands capacity from 740tpd to 1,020tpd by FY18, gearing 45% of domestic production to higher-margin segments, (3) ramps up distribution (now covers 460+ districts), and (4) retains healthy margins and return ratios despite high capex due to the richer product mix.We expect a revenue/PAT CAGR of 8%/19% over FY15-FY18 led by OEM and replacement demand, which will make up for muted exports. Capacity expansion with a shift in product mix should buoy volume growth and keep margins healthy at 14-15% and ROE/ROCE at 17-25% in the next two years. We initiate coverage on CEAT with a BUY rating and a Mar’17 TP of Rs 1,300 based on 10x one-year forward earnings. The stock currently trades at 9x/8x FY17E/FY18E P/E.

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