Ceat stock under pressure as cost inflation affects margins

Shares in Apollo Tyres have jumped 56% in 2014, while CEAT Ltd is up 23% and MRF has risen 16%, outpacing a 6% gain in the main index. Photo: Mint Premium
Shares in Apollo Tyres have jumped 56% in 2014, while CEAT Ltd is up 23% and MRF has risen 16%, outpacing a 6% gain in the main index. Photo: Mint
1 min read . Updated: 07 May 2021, 10:37 AM IST Harsha Jethmalani

Investors in tyre manufacturer Ceat Ltd need to brace for a bumpy ride ahead. In the March quarter, operating margins of the company declined by 350 basis points (bps) sequentially, largely hit by elevated raw material cost. One basis point is one hundredth of a percentage point.

In a post earnings conference call, the management said, raw material cost per kg increased by 8-10% quarter-on-quarter in Q4FY21 due to sharp surge in the raw material basket. Also, inferior product mix with higher share of OEM segment added to the pressure. Going ahead, the company's management expects the impact of steep increase in raw material prices to start reflecting with a lag. OEM is short for original equipment manufacturers.

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The management added that the company has taken no price hike in April in the replacement segment. In a bid to tackle the margin pressure, the management said it will focus on cost-cutting measures, such as lower marketing spends, to partly offset the impact of raw material headwinds.

"Only part of the commodity cost impact was absorbed (3% price hike) in 4QFY21 and a steep rise in commodity costs is expected in 1QFY22, too. We see serious pressure on margins over the next few quarters as the company is finding it difficult to hike prices in 1QFY22 due to competitive pressure and demand slowdown on account of the second covid wave," analysts at Nirmal Bang Securities Ltd said in a report on 7 May.

Meanwhile, the company's volumes grew by 41% year-on-year in 4QFY21 led by strong growth across segments and a low base. However, volumes growth was flat, sequentially. According to analysts at Antique Stock Broking Ltd, the pandemic-induced lockdown remains a concern on OEM and retail demand in the near-term, even as the company's plants are operational currently.

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