Q2FY24 Review: CEAT: Margins to come off starting Q3

18 Oct 2023 , 01:51 PM

CEAT’s Q2 Ebitda came in 12% above analysts of IIFL Capital Services estimate, due to higher margins. Input cost benefit was more than expected. CEAT displayed better pricing discipline in PCR and T&B, compared to peers. CEAT’s Q2 margins (~15%) are higher than long-term average (~11%). As highlighted in analysts of IIFL Capital Services recent report, prices of Crude and natural rubber (international) have risen sharply; this will hurt margins starting Q3FY24. Mgmt expects RM basket to be up 4% QoQ in Q3. Analysts of IIFL Capital Services expect revenue growth to be moderate at 7-8% in FY24/FY25 vs avg. of 22% in FY22/FY23. If margins come off, EPS may see YoY decline in FY25. Analysts of IIFL Capital Services have upgraded FY24 EPS by 14% (as they account for Q2 beat) but maintain FY25/FY26 EPS, building in margins closer to their view on normalised profitability. Retain ADD, with TP of Rs2,280. 

Q2 Ebitda beat by 12% on lower input costs:

Q2 revenue grew 6% YoY (7% volume; -1% pricing) and came in line with analysts of IIFL Capital Services estimate. Gross margin (GM) expanded 230bps QoQ to 43.3%, due to lower input costs and price hike. Ebitda margin improved 180bps QoQ to 14.9% (150bps beat). Absolute Ebitda came in 12% above their expectations. 

CEAT displaying better pricing discipline vs peers: 

In Q2, CEAT increased prices of PCR (passenger car) tyres by 2%. This was higher than peers. CEAT did not play ball when peers such as MRF and Apollo cut prices in the truck & bus (T&B) segment. Mgmt mentioned that competitive intensity (measured by price cuts / discounts) is increasing. Hence, it may not be easy to increase prices in Q3 to offset the rise in input costs. Yet, mgmt is hopeful of price hikes in PCR where customers are less price-conscious compared to T&B. w

Margins have peaked; set to come off in Q3: 

Domestic tyre-makers have been in an EPS-upgrade cycle, driven by fall in input costs and rise in margins. Prices of crude and natural rubber (international) have risen substantially; this will hurt margins, starting Q3FY24. Mgmt expects RM costs to be up 4% QoQ in Q3, ending a five-quarter streak of margin improvement. Historically, above-normal margins in the tyre sector have reverted back to mean or lower, due to rise in commodity prices and/or price-cuts by tyre-makers. Analysts of IIFL Capital Services FY25/FY26 estimates build margins closer to their view on normalised profitability.