New capacity in place, CEAT more attractive to investors

ET Intelligence Group: Volume growth and a product mix capable of underpinning superior margins should drive earnings at tyre maker CEAT, the stock of which has underperformed the benchmark Sensex in the past three months.

Sales at CEAT rose 2.9 per cent to 304,353 tonnes in FY18, compared with the last five-year average of 7.94 per cent. Also, the product mix weakened in the past fiscal year. Revenue growth from sales to automakers — known as OEM sales in the technical parlance — grew 27 per cent. The OEM segment is a low-realisation business.

On the other hand, the high-margin replacement revenue rose 5 per cent, and export revenue dropped 7 per cent in the previous fiscal year. This restricted overall revenue growth to 8 per cent in FY18.


The Street is pricing in volume growth of 10 per cent in both FY19 and FY20. The commissioning of new capacity for Truck Bus Radials (TBR) at Halol-3 is scheduled from the third quarter of FY19. The new facility will be having total capacity of 210 tonnes per day, and full utilisation will be reached by 2021.

Ceat could not benefit from tailwinds in the medium and heavy commercial vehicle (MHCV) segment in FY18 amid buoyancy in the OEM and replacement volumes and a steep decline in Chinese imports. That was mainly due to capacity constraints and a weak presence in the TBR segment. Supplies from the new plant will improve the positioning of the company in the MHCV segment that contributes nearly one-third of Ceat’s revenue.

On the personal mobility segment, efforts to increase market share should translate into higher revenue growth. The company is targeting a share of 15 per cent in the next 4-5 years from 10 per cent now. It has launched fuel-efficient and longlasting tyres that claim to improve mileage by 7 per cent and run one lakh kilometres. Analysts expect revenue share of the passenger car segment to increase 15 per cent and 17 per cent, for FY19 and FY20, respectively, from 14 per cent in FY18. Also, the two- and three-wheeler markets have witnessed increased competitive intensity, with the entry of new players restricting the scope for raising prices.

Ceat is offsetting the impact by adding new customers. In the March quarter, it started making tyres for four new two-wheeler models — Bajaj Pulsar 150, Honda Livo, Honda Shine and Honda Yuga. According to Kotak Institutional Equities estimates, revenue from two and three-wheeler segments is expected to grow 12 per cent and 8 per cent, respectively, in FY19 and FY20.

A sub-optimal product mix and lower volumes resulted in operating margins shrinking to 10.2 per cent in FY18 from 11.6 per cent a year ago. However, an improved product mix and cost controls should boost margins in FY19.