Buy Ceat, target Rs 1,370: Motilal Oswal Securities
Buy Ceat at a price target of Rs 1370.
By ETMarkets.com |
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Motilal Oswal Securities has a buy call on Ceat with a target price of Rs 1,370.
The current market price of Ceat is Rs 1,080.20.
Time period given by the brokerage is one year when Ceat price can reach the defined target.
Investment rationale by the brokerage-
Price hikes drive revenue growth: Consol. revenue grew nearly 9 per cent YoY (-2 per cent QoQ) to Rs 17.1b (in-line) in 3QFY19, driven by 2 per cent YoY (-5.4 per cent QoQ) volume growth. The impact of RM cost inflation of 2.1 per cent QoQ was offset by price hike of 2-3 per cent. EBITDA declined 24 per cent YoY (-10 per cent QoQ) to Rs 1.4b (our estimate: Rs 1.6b) due to higher other expenses (+16 per cent YoY/7 per cent QoQ), impacted by adverse mix and inventory build-up. EBITDA margin contracted 80bp QoQ/360bp YoY to 8.3 per cent, below our estimate of 9.2 per cent. Adj. PAT declined nearly 37 per cent YoY to Rs 528m (our estimate: Rs 646m).
Earnings call highlights: (a) OEM growth outpaced replacement growth (slowed down in CVs and farm but expected to recover from Mar’19) in the quarter. Exports declined in double-digits. (b) RM cost is likely to gradually decline Mar’19 onward, with marginal benefit of lower RM cost in 4Q. (c) Company took price hike of 2-3 per cent in 3Q, of which nearly 1 per cent was rolled back in Jan’19. (d) Capex (ex-maintenance & OTR capex) for FY19 at Rs 11b-11.5b (deferred Rs 2b) and Rs 17-18b for FY20, but maintained at Rs 40b over FY19-22. (e) Capacity addition schedule on track, with TBR to come on board by 4QFY19, PCR & 2W by 2QFY20 and OTR by 4QFY20.
The current market price of Ceat is Rs 1,080.20.
Time period given by the brokerage is one year when Ceat price can reach the defined target.
Investment rationale by the brokerage-
Price hikes drive revenue growth: Consol. revenue grew nearly 9 per cent YoY (-2 per cent QoQ) to Rs 17.1b (in-line) in 3QFY19, driven by 2 per cent YoY (-5.4 per cent QoQ) volume growth. The impact of RM cost inflation of 2.1 per cent QoQ was offset by price hike of 2-3 per cent. EBITDA declined 24 per cent YoY (-10 per cent QoQ) to Rs 1.4b (our estimate: Rs 1.6b) due to higher other expenses (+16 per cent YoY/7 per cent QoQ), impacted by adverse mix and inventory build-up. EBITDA margin contracted 80bp QoQ/360bp YoY to 8.3 per cent, below our estimate of 9.2 per cent. Adj. PAT declined nearly 37 per cent YoY to Rs 528m (our estimate: Rs 646m).
Earnings call highlights: (a) OEM growth outpaced replacement growth (slowed down in CVs and farm but expected to recover from Mar’19) in the quarter. Exports declined in double-digits. (b) RM cost is likely to gradually decline Mar’19 onward, with marginal benefit of lower RM cost in 4Q. (c) Company took price hike of 2-3 per cent in 3Q, of which nearly 1 per cent was rolled back in Jan’19. (d) Capex (ex-maintenance & OTR capex) for FY19 at Rs 11b-11.5b (deferred Rs 2b) and Rs 17-18b for FY20, but maintained at Rs 40b over FY19-22. (e) Capacity addition schedule on track, with TBR to come on board by 4QFY19, PCR & 2W by 2QFY20 and OTR by 4QFY20.
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Valuation and view: We cut our FY19/20 earnings estimate by 8 per cent/7 per cent to factor in the weak demand environment, higher depreciation and finance cost. Ongoing capex cycle will peak out in FY20, with large part of interest and depreciation burden reflecting in FY21. Hence, valuations at 13.5x/11.4x FY20/21E consol. EPS are at subdued earnings. Maintain Buy with a target price of Rs 1,370 (14x FY21 consol. EPS).Too busy to trade in stocks? Invest in Mutual Funds with ET Money!
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