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Recommendations India

Ceat 3QFY2014 performance highlights and results update

February 18, 2014, Tuesday, 05:37 GMT | 00:37 EST | 10:07 IST | 12:37 SGT
Contributed by Angel Broking


For 3QFY2014, Ceat reported a lower-than-expected bottom-line performance due to sequential decline in EBITDA margins led by raw-material cost pressures and higher advertisement expenses. The top-line grew stronger than expected by 8.2% qoq to Rs.1,386cr, which surprised us positively, given that the demand environment remains challenging. We revise our revenue estimates upwards by 2-3% for FY2014E/15E to factor in the strong 3QFY2014 volume performance. Nevertheless, our earnings estimates are revised downwards marginally to account for the raw-material cost pressures witnessed during the quarter. Ceat continues to witness strong traction in its focus segments like, passenger cars, utility vehicles and two-wheelers, which, according to the Management, fetches higher margins. We expect Ceat to report a strong performance going ahead on the back of new OEM partnerships, focus on exports and expected stability in raw-material prices. After a stellar stock price performance over the last six months (returns in excess of~150%), we recommend an Accumulate rating on the stock.

Mixed results for 3QFY2014: The top-line grew stronger than expected by 8.2% qoq (15.1% yoy) to Rs.1,386cr. The top-line growth was driven by a strong volume growth of 8.8% qoq (16% yoy) led by OEM partnerships, traction in replacement segment and strong exports performance. EBITDA margins declined 178bp qoq to 11.1%, lower than our expectations of 12.5%, largely due to raw-material cost pressures and higher advertisement expenditure. Consequently, the operating profit declined 6.7% qoq to Rs.154cr. Led by lower-than-expected operating performance and higher tax-rate, the net profit stood at Rs.61cr, slightly lower than our expectation of Rs.65cr. During the quarter, working capital requirement declined by Rs.100cr due to lower raw-material and finished goods inventory.

Outlook and valuation: We retain our positive view on Ceat and believe that the company will continue to benefit from the strong traction in the two-wheeler and passenger vehicle tyres and expected stability in commodity prices. At the CMP, the stock is trading at 3.6x FY2015E earnings. We recommend an Accumulate rating on the stock with a target price of Rs.324, valuing the stock at 4x FY2015E earnings.