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CEAT Q3FY13 performance highlights and results update

Contributed by Angel Broking

CEAT reported results above expectation resulting from improvement in volumes and benefit of lower raw material cost. Although volumes witnessed an increase, the average realization was lower due to the change in product mix (shift from replacement to OEM) and marginal increase in discounts. EBITDA margins witnessed an improvement on expected lines resulting from the benefit of lower raw material cost which was partially offset by increase in employee expenses and other expenses (brand building and advertisement). CEAT reported one-time VRS payment to nearly ~180-190 employees of Rs 13.66 cr at the Bhandup plant. Adjusted consolidated PAT increased from Rs 12.34 cr in Q2FY13 to Rs 31.86 cr in Q3FY13.

Resulting from subdued demand in the domestic auto industry (particularly replacement demand) the top line performance of most of the tyre companies has been impacted. Following the steep fall in natural rubber prices, the margins witnessed an improvement which is likely to continue in Q4FY13E as rubber prices tend to remain lower. Though management has indicated improvement in margins we believe that slowdown may force tyre manufactures to reduce prices and if the slowdown continues in Q1FY14 as well then we may see some margin pressure coming up in FY14E. We remain cautiously optimistic on the overall performance of the company considering the slowdown in the auto industry.

Nevertheless, improving operating performance led by improving utilization at the Halol plant, changing product mix (radial vs bias), expanding presence (tapping new geographies) and attractive valuations continue to be the key positive for the company.

At CMP, the stock is trading at P/E of 3.6x FY13E and 3.2x FY14E earnings with an EV/EBITDA of 3.58x and 3.27x which we believe are lower as compared to peers. We continue to maintain our HOLD rating on the stock with a target price of Rs 122 indicating upside of 18.7% from current levels.

- On standalone basis, net sales increased by 14.0% YoY and 2.6% QoQ to Rs 1,194.6 cr in Q3FY13. Volumes in tonnage terms witnessed an improvement of 4.1% QoQ and 15.4% YoY to 53,000 units.

- Sri lankan business reported net sales of Rs 101.7 cr down 5% QoQ and 8% YoY led by some decline in volumes. EBITDA margins improved by 350bps YoY to 17.1% vs 17.0% in Q2FY13 and 13.6% in Q3FY12.

- Consolidated net sales increased 13.3% YoY to Rs 1,239 cr; Consolidated EBITDA margin stood at 8.9% with adjusted PAT of Rs 31.9 cr in Q2FY13.

- The debt to equity ratio is down from 2.0x in Q3FY12 and 1.9x in Q2FY13 to 1.7x in Q3FY13.

- CEAT witnessed flattish growth in the replacement market and does not expect a meaningful recovery in the next 6 months.