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Ceat 3QFY2013 performance highlights and results update

Contributed by Angel Broking

Ceat reported better-than-expected performance in 3QFY2013 driven by sharp improvement in operating margins, largely due to the receding cost pressures. The top-line growth on a sequential basis was however modest on account of the demand slowdown in the automotive industry. During the quarter, Ceat recorded an exceptional expense of Rs.14cr related to the VRS scheme announced for the employees at the Bhandup plant. Around 188 employees opted for the VRS scheme during the quarter. We retain our positive view on Ceat and believe that the company will continue to report a strong performance led by steady ramp-up at the Halol plant and stable raw-material pricing environment. However slowdown in OEM demand remains a concern. Nevertheless, due to attractive valuations we maintain our Buy rating on the stock.

Strong performance for 3QFY2013: For 3QFY2013, the standalone top-line posted an in-line growth of 2.4% qoq to Rs.1,202cr driven by 3.9% growth in volumes to ~53,000MT. On a yoy basis though, the top-line grew by a strong 13% led by volume growth of 15.2%. The yoy growth appears strong due to low base of 3QFY2012 which was impacted by a 23-day strike at the Nashik plant. The net average realization, however, was down by 1% yoy (1.2% qoq) primarily due to unfavorable product-mix (larger share of OEMs in the volume mix). On the operating front, EBITDA margins surged substantially by 180bp qoq (227bp yoy) to 8.5% against our expectations of 7.9%, as raw-material cost as a percentage of sales witnessed a decline of 210bp qoq (470bp yoy) led by correction in natural rubber prices. However on a yoy basis, employee cost (due to onetime gratuity payment of Rs.6.5cr) and other expenditure as a percentage of sales increased by 100bp and 140bp respectively. Led by strong operating performance, the adjusted net profit jumped 82.2% qoq to Rs.31cr.

Outlook and valuation: At Rs.103, the stock is trading at an attractive valuation of 2.5x FY2014E earnings. We retain our Buy rating on the stock with a target price of Rs.163, valuing the stock at 4x FY2014E earnings.