Hold CEAT; target of Rs 1174: Prabhudas Lilladher

Prabhudas Lilladher's research report on CEAT

CEAT’s 3QFY22 consol. revenue came missed our estimates at Rs 24.1B (9% YoY/ -1% QoQ, PLe 26.5B) led by volume decline of 5.5% YoY/ 3% QoQ, while realizations grew ~2% sequentially. Margins came substantially lower at 5.5% (--920bp YoY/ -340bp QoQ) led by gross margin compression. RM inflation is expected to continue in 4Q, partly offset by price hikes (+2% expected in 4Q). Post the price hikes of 2% in 4Q we expect the under recovery of RM cost to the tune of 4%. Company is strategically shifting the focus to export and OHT segment from the TBR segment where company is unable to gain share and pricing power. Going ahead higher capex levels and increasing working capital requirement will lead to increasing debt levels and negative FCF, in our view.

Outlook

We cut FY23/24 consol. EPS by ~17%/9% as we built in i) Lower volumes due to the weak demand scenario ii) high RM cost and iii) high interest cost during increasing debt burden. We retain ‘HOLD’ rating on CEAT to factor in the risk of negative FCF generation amidst higher capex levels and revise TP to Rs1,174 (earlier Rs1,316) based on 15x Dec-23 consol. EPS (Unchanged).