Ceat eyes export and electric vehicle markets
1 min read . Updated: 01 Mar 2023, 01:10 PM IST
PremiumThe key benefits of Ceat’s improving brand franchise and distribution reach should be visible in FY24 as its utilisation rises while scale-up brings down fixed costs, analysts said
Ceat Ltd aims to expand its presence in the exports business and also explore emerging verticals such as electric vehicles (EV). The company intends to pursue the same through its research and development capabilities, which it showcased to analysts during their visit to Ceat’s plant in Halol, Gujarat.
The plant is highly automated and has a capacity of 20,000 passenger car radial (PCR) tyres and 4,500 truck and bus radial tyres every day.
As of now, in the EV segment, Ceat supplies to companies such as Tata Motors Ltd and Citroen India. In the international segment, it aims to clock revenue of ₹3500 crore by FY26 versus ₹1870 crore in FY22. This is likely to be driven by new product launches in the US and EU markets and expansion of off highway tyre products.
Coming to its core areas, two-wheeler demand continues to be weak. Subdued demand in exports markets has prompted two-wheeler makers to take production cuts, which does not augur well. But the commercial vehicle segment is on a strong footing. Also, the demand in the passenger vehicle segment continues to remain healthy.
However, Ceat faces pressure at the Ebitda (earnings before interest, tax, depreciation and amortization) level given lower scale of operations.
“The key benefits of CEAT’s improving brand franchise and distribution reach should be visible in FY24E as its utilisation rises while scale-up brings down fixed costs. Accordingly, Ebitda margins would benefit in due course," said analysts at Nuvama Research in a report on 28 February.
In the near term though, a higher share of original equipment manufacturers in PCR tyres could cap margin in our view, they added.
However, softening commodity costs come as a relief. In fact, this aided in the 170 basis points sequential expansion in the December quarter Ebitda margin. One basis point is 0.01%.
“While volume growth momentum is likely to remain subdued, commodity tailwinds and declining capex intensity should drive return on equity to ~12-13% over FY24-25F," said analysts at Nomura Financial Advisory and Securities (India) in a report on 28 February. Ceat’s capital expenditure in FY24 is expected to be lower than the estimated figure of Rs900 crore in FY23.
To be sure, shares of Ceat are down by 29% from their 52-week highs of Rs1981 apiece seen in December. A rebound in original and replacement demand, especially for two-wheelers, would lead to better operating leverage, which would aid investor sentiments.