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Recommendations India

CEAT Q3FY14 results update

February 14, 2014, Friday, 07:24 GMT | 02:24 EST | 11:54 IST | 14:24 SGT
Contributed by Nirmal Bang

Results below expectation owing to decline in margins

- CEAT reported results were below expectation primarily reflecting lower EBITDA margins as stable rubber cost was offset by higher cost of other raw materials.

- Net sales increased 15.1% YoY driven by 16% volume growth. Volume growth was driven by higher sales to OEMs which was partially offset by decline in realizations.

- EBITDA margins witnessed decline on QoQ basis led by decline in gross margins and higher other expenses (higher advertisement expenses).

- Raw material other than natural rubber witnessed approx 5-10% increase on sequential basis. Moreover, impact of increased import duty on rubber also resulted in slight increase in rubber prices.

- EBITDA margins stood at 11.4%; up 260 bps YoY and down 200 bps QoQ.

- Currently, CEAT imports around 25% of raw material. The company maintains inventory of around one month for international rubber and 10-15 days for domestic rubber.

- Sri Lankan business reported net sales of Rs 113 cr; down 7.0% QoQ led by decline in both volumes and realizations. EBITDA margins stood at 19.6% (decline of 340 bps QoQ and increase of 250 bps YoY).

- The capex plans of the company includes Rs 80 cr maintenance capex, 350 cr for Halol plant expansion and Rs ~100-120 cr for Bangladesh capacity for FY15E. The Bangladesh plant work has been delayed by 3 m.

- The current capacity utilization stands at 88-90%; while the capacity utilization at Halol plant stands at 80-82%.

The overall domestic auto industry is going through a slowdown with subdued demand. A meaningful improvement in the industry would only be driven by picking up of replacement cycle. Sustainability of margins is the crucial factor to watch out for in the subsequent quarters. Though rubber prices have declined, the cost of other raw materials has increased which can have an impact on the overall margins. Moreover, the imposition of rubber duty can lead to increase the prices of domestic rubber from current levels.

Nevertheless, CEAT is well positioned to grab the growing market opportunities by leveraging on its key strengths – diverse product portfolio, increased network, operational efficiency, focus on exports and high margins yielding segment (Passenger cars, Utility vehicles and two wheelers). We have seen a sharp run up in the stock in the last one year (+210%) reducing the valuation gap between itself and peer group. A further up move from current levels will depend on improvement in demand scenario.

At CMP, CEAT is trading at P/E of 3.9x FY14E and 4.2x FY15E EPS with an EV/EBITDA of 2.83x and 3.04x. We have revised our estimates upwards to account for the strong 9MFY14 performance and our target price also stands revised upwards at Rs 338. We recommend investors to HOLD the stock indicating further upside of 14.2% from current levels.