CEAT: Industry-leading growth; FCF is a challenge

16 Jun 2023 , 12:07 PM

Recommendation: Add; Target price: Rs 2100

 

CEAT is delivering industry-leading growth and is moving well towards its target of further market-share gains and scale-up in exports by FY26. Margins have recovered in recent quarters but may be peaking with increase in RM basket (higher rubber, offset by lower crude). Industry’s pricing discipline has held up well. CEAT has enough capacity for 2 years of growth (FY23-25), but may need capex in FY25 for FY26 growth. This may keep FCF muted. Mgmt had earlier guided to muted FCF in FY24, due to working capital reversals. Analysts of IIFL Capital Services maintain EPS estimates and TP. Retain ADD.

CEAT delivering industry-leading growth: 

In FY20-FY23, CEAT grew revenue at 18.5% Cagr, much higher than the listed peers at 11-16%. Mgmt mentioned that CEAT has gained market share in 2W and PCR replacement segments, while also growing exports substantially over the period. Mgmt reiterated its FY26 goal of achieving leadership in 2W and PCR replacement, and growing its exports revenue 2x from Rs20bn in FY23 to Rs40bn in FY26. To meet this end, CEAT is focusing on premiumisation with the domestic segments (for example SUV segment with PVs). Mgmt claims to have a 40% market share in 2W EV OEM segment. To scale up its exports revenue, CEAT plans to increase its OHT tyre capacity from 40TPD in FY19 to more than 330TPD by FY25. CEAT is also planning to introduce/strengthen CEAT brand in US/Europe in PCR and TBR segments.

Industry’s pricing discipline intact, but margins may be peaking:

Despite weakness in end-demand in Replacement business, industry has refrained from high discounting to gain market share. RM basket would be higher by 1-2% QoQ in Q1FY24 vs Q4FY23, due to rise in natural rubber, off-set by lower crude derivatives. Higher marketing spend due to IPL sponsorship may also be a factor in Q1FY24. As a strategy, mgmt is focused on increasing revenue from premium 2W/PCR segments. Higher revenue contribution from exports would also be a margin lever.

Continued capex requirements may keep FCF muted: 

Mgmt does not expect debt reduction in FY24 due to capex and working capital normalisation (cash outflow). Mgmt. mentioned that current fixed assets have revenue-generating potential of Rs140bn vs FY23 rev of Rs113bn. Keeping in view our rev forecast of Rs137bn in FY25, there is enough capacity for 2 years of growth. However, capex for FY26 growth would be incurred in FY25. If FY25 capex is high, FCF may come under pressure.