Accumulate CEAT; target of Rs 1451: Prabhudas Lilladher

Prabhudas Lilladher's research report on CEAT

We attended CEATs annual Investor day, where the management discussed their medium to long-term business strategy and outlook, with key highlights being increased focus on the CV (TBR) segment and leveraging their brand further in the 2W/PV segments. However, the management did caution against increasing pressure on margins over the next few quarters.  n Segment-wise growth Outlook: On account of the sustained surge in CV demand in addition to the increasing radialisation trend in the CV segment and CEAT's new TBR capacity coming in by Q3FY19, management expects the TBR segment to be a key growth driver over FY20. The company expects the PV industry to grow at 9% over the next 2-3 years. However, given the current tyre industry capacity utilisation in the PV segment at 80-85%, price hike in the segment has become difficult across players. As for the 2W segment, the management has acknowledged that competition has intensified but CEAT has been able to maintain its prices at a premium to the market leader. OTH / specialty segment tyres have been received well in the European markets and capacity for the same will be enhanced soon.

Outlook

Given the uncertainty regarding crude as well as rubber prices going ahead coupled with expected ramp up of new capacities and adverse market mix, we remain cautious on the stock and resultantly reduce our EBITDA margins expectation by 70/ 100 bps for FY19/20 and arrive at a revised target price of Rs1,451, based on 15x Mar'20E consolidated EPS. The stock currently trades at 16.4x/13.9x FY19/20E EPS.

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