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CEAT Q4FY14 results update

May 2, 2014, Friday, 11:17 GMT | 06:17 EST | 14:47 IST | 17:17 SGT
Contributed by Nirmal Bang

CEAT reported broadly in line with expectations with growth in sales driven by higher volumes. EBITDA margins continued to improve on the back of stable raw material cost, lower employee cost and change in product mix. During the quarter, the company recorded an exceptional charge of Rs 10cr related to VRS for employees and provision for loss due to the fire at Bhandup facility. CEAT declared dividend of Rs 10 per share.

- Net sales increased 7.5% YoY driven by 6% volume growth. Volume growth was driven by higher sales to OEMs; however exports were lower which resulted in lower realizations. CEAT has tied up with OEMs like Bajaj Auto, Royal Enfield which led to increased sales to OEM.

- EBITDA margins improved on QoQ basis despite marginal decline in gross margins led by lower employee expenses (due to reversal of provisions. Other expenses continued to remain on the higher end with focus on branding and advertisement.

- Raw material cost continued to remain on the lower end; however the entire benefit of lower cost has not been visible in the current quarter as the company already had higher cost inventory. Moreover, barring rubber, other raw material costs witnessed increase.

- EBITDA margins stood at 11.1%; up 80 bps YoY and 40 bps QoQ.

- Sri Lankan business reported net sales of Rs 110 cr; down 2.5% QoQ led by decline in both volumes and realizations. Despite this, improved gross margins and lower operating expenses led to sharp jump in EBITDA margins from 19.6% in Q3FY14 to 29.6% in Q4FY14.

- The capex plans includes Rs 80 cr maintenance capex, 350 cr for Halol plant expansion and Rs ~15 cr for Bangladesh capacity for FY15E. Land acquisition has been completed at the Bangladesh plant.

- The current capacity utilization stands at 90-92%; while the capacity utilization at Halol plant stands at 88-90%.

- CEAT has announced foray into business of manufacturing, distribution and sale of sporting equipments purely from branding perspective.

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. Though management seems confident of maintaining double digit margins; it will be the crucial factor to watch for. 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 2W).

We have seen a sharp run up in the stock in the last one year (+270%) reducing the valuation gap between itself and peer group. A further up move from current levels will highly depend on improvement in demand scenario. At CMP, CEAT is trading at P/E of 4.62x FY15E and 4.14x FY16E EPS with an EV/EBITDA of 3.73x and 3.42x. We recommend investors to HOLD the stock for a target price of Rs 423; an upside of 11.4% from current levels.