Buy Ceat, target Rs 1,455: Elara Capital

Elara Capital has a buy call on Ceat with a target price of Rs 1,455.

The current market price of Ceat is Rs 1,136.20.

Time period given by the brokerage is one year when Ceat price can reach the defined target.


View of the brokerage on the company
Revenue above est led by 12.4 Rs YoY growth in volumes: Ceat standalone EBIDTA declined 14 Rs YoY to Rs 1.6bn (13 Rs below our estimates). Reported EBITDA margin declined 130bp QoQ (170bp below our estimates). While RM/ kg has increased 2.5 Rs QoQ according to management, reported gross margins are largely flattish owing to increase in finished goods inventory. Adjusted for that gross margins would have declined 1.2 Rs QoQ. Company gave a onetime bonus to its employees during the quarter of Rs 100mn. Other expenses were elevated in the quarter (up 22 Rs YoY) owing to higher ad-spends in the quarter. Standalone revenues grew 14 Rs YoY to Rs 17.2bn (3 Rs above our estimates) led by 12.4 Rs YoY volume growth. PAT declined 10 Rs YoY to Rs 753mn (6 Rs below our est).

Management expects RM price increase of about 5 Rs QoQ in Q3FY19: Management expects to see increase in RM prices in Q3FY19 of about 5 Rs over Q2. Management guided for total capex of Rs 35bn for FY19-21E. FY19E capex of Rs 13-15 bn (v earlier guidance of Rs 15-17bn) out of which they have spent about Rs 4.4bn of capex in YTDFY19, Capex guidance for FY20 at Rs 15-17bn. Company took a price hike of about 4 Rs in 2W segment in October’18 & about -2 Rs price increase in TBR. Cumulative price hike of about 5 Rs taken across all categories in YTDFY19.

Valuation (recommend Buy with a new TP of Rs 1,455): We are impressed with the volume growth momentum of 15 Rs in 1HFY19. While the PV+2W revenue growth in 1HFY19 has been healthy at 20 Rs YoY; truck revenue growth too has bounced back in 1H (35 Rs YoY). Price increases of about 4 Rs/ 2 Rs in October 2018 in 2W/trucks would aid in alleviating some of the RM pressures led by increase in crude linked derivates. We reduce our FY19-20E EPS by about 12 Rs to factor in lower margins due to increase in crude based raw materials as well as higher other expenses and hence resultant debt increase due to elevated capex. We recommend Buy (from Accumulate earlier) with a new target price of Rs 1,455 on 13x (from 14x earlier) weighted avg FY20-21E P/E as we roll forward.