Prabhudas Lilladher recommended Hold rating on CEAT with a target price of Rs 1100 in its research report dated May 08, 2019.
Prabhudas Lilladher's research report on CEAT
We downgrade CEAT from 'Accumulate' to 'Hold' owing to concerns regarding volume growth as well as margins. CEAT's Q4FY19 consolidated operating margins stood at 9.2%, down by 250bps YoY / up by 100bps QoQ- missed our expectations of 10.5%. Volumes for the quarter have also seen a YoY dip both in OEM and replacement segments, while exports saw a decent growth over Q4FY19. To add to the woes of lower production volumes from OEMs, replacement demand witnessed a weakness and growth concerns for the tyre industry in the medium term continued to prevail. Given CEAT's upcoming new capacities for the TBR, PCR and 2W segments over the current fiscal (TBR capacity commissioned in Jan'19) along with anticipated rise in raw material costs (with crude prices and international rubber prices moving up, domestic rubber production to slowdown), margins too are expected to remain under pressure over FY20/21E.
Outlook
Hence we taper our margin expectations for FY20/21E by 50/40bps at 9.3/9.6% respectively and downgrade to 'Hold' with a target price of Rs1,100 based on 15x Mar'21E consolidated EPS. The stock is currently trading at 15.4x FY20E & 14.4x FY21E consol EPS.
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