Ceat: Company’s earnings may improve

Higher sales, lower material costs and increased capacity at its new plant helped tyre maker CEAT to post a healthy result for the quarter ending march 2012. However, on a full year basis, due to higher interest costs, its profits for FY12 were lower by 33% to Rs 18 crore.

The prices of rubber had seen a spurt in 2011. However, prices softened in 2012 as surplus production is expected this year in major rubber producing countries. The price of RSS4 rubber, is currently trading at Rs 194 per kg down 19% from the peak price in April 2011. As a result, CEAT’s earnings had been subdued in the first three quarters of FY12. In the march 2012 quarter as rubber prices reduced, CEAT was able to post a better performance.

In the coming quarters, the company’s earnings are expected to improve from the current levels. According to the Society of Indian Automobile Manufacturers, auto sales are expected to grow by 10% in FY13. With an increase in capacity, CEAT is likely to gain from this demand. In FY13, the company is intending to ramp up capacity at its Halol (Gujarat) plant to 135 tons daily from the current production of 90 tons. In addition, rubber prices are expected to remain close to current prices.

In the last three months, its stock has gained by 21% on the back of softening of rubber prices. It is currently trading at a P/E of 20. the present stock price factors the future improvement in earnings.