Q3FY24 Review: CEAT: Margins come off, but stay above-average

29 Jan 2024 , 12:04 PM

CEAT’s Q3 results were weaker than expected (6% Ebitda miss), with lower-than-expected revenue and margins. Volume growth is stable, and is expected to stay at high single-digit. Revenue would largely mirror volumes as benefit of price hikes is in the base. Although margins came off QoQ in Q3, it stayed above-average due to the relatively benign input cost scenario. This may continue in the near term. As a result, analysts of IIFL Capital Services increase EPS estimates by 3-5%. High margins would enable tyre-makers to generate positive FCF. FCF would be relatively lower for CEAT vs Apollo/MRF, due to lower margins and higher capex. Retain ADD. 

Q3 Ebitda miss by 6%:

Q3 revenue grew 9% QoQ on 12% volume growth (low base), but missed analysts of IIFL Capital Services estimate by 4%. On a QoQ basis, revenue declined 3%. Gross margin contracted 200bp QoQ, due to slight increase in input cost basket and due to selective price cuts by CEAT in export markets. Ebitda margin contracted 85bp QoQ to 14.1% (30bps miss). Absolute Ebitda missed by 6% and PAT by 4%. 

Volume, revenue growth to stay stable at high single-digit: 

Volume growth in the OE segment is likely to moderate in FY25. On the other hand, replacement should stay steady at mid-to-high single digit. Mgmt is targeting to grow exports by 2x over three years. Current demand scenario in exports is not strong, but is expected to recover with time. Overall, analysts of IIFL Capital Services feel CEAT would be able to grow volumes at high single-digit. Given that the margins are above average, tyre-makers are not looking to raise prices; which means that revenue growth would more or less mirror the volume growth in FY24-26. 

Near-term margins to stay above-average and support FCF: 

Tyremakers increased prices in 2021 and 2022, when margins came under tremendous pressure. Since then, commodity prices, especially crude has come off substantially, and margins have moved up to above-average levels. In the near term, margins may sustain at above-average levels, given the benign input cost environment. Analysts of IIFL Capital Services FY25/FY26 estimates build margins closer to our view on normalised profitability. As a result, their EPS forecast is flat over FY24-26. High margins will enable tyre-makers, including CEAT to generate positive FCF. However, CEAT’s FCF profile would be lower than Apollo/MRF, given that its margins are lower and capex (as % of revenue) would be higher.