After a bumpy ride, Ceat readies for a smooth journey
2 min read . Updated: 08 Nov 2022, 11:52 PM IST
PremiumSo far in CY22, the Ceat stock has rallied by 33%, beating Nifty 500’s modest 4% returns by a huge margin
The September quarter (Q2FY23) earnings of tyre manufacturer Ceat Ltd were not particularly exciting. Given the high input costs, margins were expected to stay under pressure and that did play out. While consolidated Ebitda margin at 7% rose by 115 basis points (bps) sequentially, it contracted by 197bps year-on-year in Q2FY23. One basis point is 0.01%. Ebitda is earnings before interest, tax, depreciation, and amortization.
However, after a turbulent Q2, the management commentary points to improving margin prospects in the second half of FY23. Easing costs of key commodities such as natural rubber and crude-based derivatives, along with the ongoing spree of price hikes, would drive margins.
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In Q2, Ceat’s commodity basket rose 4% sequentially, but with softening costs it should drop by 2.5-3% in Q3, the management said in an earnings call. To offset the impact of raw material inflation, the company increased prices by about 4% overall in Q2 and around 1% so far in Q3. Ceat hiked prices by 8-9% in the two-wheeler segment in August.
That said, a further depreciation in the Indian rupee from the current levels could be a spoilsport for Ceat, partially offsetting the benefits of lower input costs, the management cautioned.
“The worst of margin pressure is likely behind Ceat because of price hikes and easing commodity costs. As a result of the lag effect and availability of high-cost inventory, the benefits will reflect gradually. In terms of margins, Q4 will be directionally positive for the company," said Mitul Shah, head of research at Reliance Securities.
Moderating input cost inflation is favourable for all tyre companies. So, apart from margin, Ceat investors need to closely track its capital expenditure plans and debt. In FY23, the company plans to incur capex of ₹900 crore.
Ceat’s consolidated net debt increased by ₹197 crore during Q2 mainly because of capex and movement in working capital.
Domestic demand continues to improve, leading to a robust growth in the original equipment manufacturer (OEM) segment, the management said.
However, the company expects international demand to be volatile because of recession fears in developed markets.
So far in CY22, the Ceat stock has rallied by 33%, massively beating Nifty 500’s modest 4% returns.
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Tyre companies have been raising prices in recent months to curb margin erosion. This aided investors’ sentiments towards the sector in general, benefitting Ceat as well.
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