Ceat spurts ahead on demand recovery and margin expansion hopes

Stock of tyre maker was up 20% on Thursday

Topics  Ceat | Ceat Tyres | Tyre industry

The company is also focussing on gaining share, especially in key segments and export markets, with a view to improving its profitability and return ratios

Ceat led the rally in tyre stocks gaining over 20 per cent in trade on Thursday even as the broader markets ended in negative territory. Its peer, JK Tyre & Industries, was up 17.6 per cent, while market leaders MRF and Apollo Tyres were up 7.8 per cent and 6.6 per cent respectively.

The company is also focussing on gaining share, especially in key segments and export markets, with a view to improving its profitability and return ratios

Ceat led the rally in tyre stocks gaining over 20 per cent in trade on Thursday even as the broader markets ended in negative territory. Its peer, JK Tyre & Industries, was up 17.6 per cent, while market leaders MRF and Apollo Tyres were up 7.8 per cent and 6.6 per cent respectively.


Improvement in demand from auto-makers on easing chip supplies, steady replacement sales, and margin recovery hopes from Q3FY23 are the key triggers that fuelled the rally. Further, for Ceat, the quantum of capital expenditure (capex) is expected to come down going ahead and investments done so far would start yielding results.


With an incremental capex of Rs 500 crore to Rs 600 crore, the company expects its peak revenue potential to be Rs 13,000 crore, which is 40 per cent more than its FY22 revenues at just under Rs 9,400 crore.


The company is also focussing on gaining share, especially in key segments and export markets, with a view to improving its profitability and return ratios.


On the exports front, the company seeks to double revenues from Rs 1,800 crore now to about Rs 3,500 crore by FY26. The same is sought to be achieved by increasing traction in the off-highway tyres, and the premium segment of the passenger car radials.

Exports accounted for a fifth of overall revenues in FY22 for the company. However, in the near term, exports to Europe could be hit due to macro (slowdown) fears, while import quotas may restrict sales to Indonesia.


The key gains are, however, expected on the margin front, both for Ceat as well as the sector. With an increase in raw material costs by 2-3 per cent on a sequential basis and the price hikes taken, the company expects September quarter profitability levels to be similar to June quarter.


However, given the recent correction in prices of natural rubber and crude oil, margins are expected to see an upward shift by the December quarter.  Motilal Oswal Research says that every 10 per cent change over its FY22 average in natural rubber/synthetic rubber/carbon black prices results in an operating profit margin change for the sector by 160 basis points, 80 basis points and 100 basis points respectively.


Ceat, which reported operating profit margin of 5.9 per cent in Q1FY23, expects margins to improve to sustainable levels of 10-12 per cent in the medium term. On the demand front, while the improving semiconductor supply is helping boost sales to auto-makers, the replacement segment has been impacted by weak rural demand.


The company is eyeing a higher market share (18-20 per cent) in the passenger car radial segment after gaining 500 basis points market share since FY17 and ending FY22 with a share of 13 per cent. While prospects are sound, gains going ahead would be limited.


While target prices are around the Rs 1,600-mark, the sharp surge on Thursday and a close of Rs 1,661 a share means that prices have run much ahead of targets. Investors should await a meaningful correction before considering the stock.


TO READ THE FULL STORY, SUBSCRIBE NOW AT JUST 1799 A YEAR.

SUBSCRIBE TO INSIGHTS


What you get on Business Standard Premium?
  • icon Unlock 30+ premium stories daily hand-picked by our editors, across devices on browser and app.
  • icon Full access to our intuitive epaper - clip, save, share articles from any device; newspaper archives from 2006.
  • icon Curated newsletters on markets, personal finance, policy & politics, start-ups, technology, and more.
  • icon Pick your 5 favourite companies, get a daily email with all news updates on them.
  • icon 26 years of website archives.
  • icon Complete access to the E-paper.

Subscribe to Business Standard Premium

Exclusive Stories, Curated Newsletters, 26 years of Archives, E-paper, and more!

Insightful news, sharp views, newsletters, e-paper, and more! Unlock incisive commentary only on Business Standard.

Download the Business Standard App for latest Business News and Market News.

Read our full coverage on Ceat

First Published:
Business Standard is now on Telegram.

For insightful reports and views on business, markets, politics and other issues, subscribe to our official Telegram channel

Also Read
Most Read
Markets
Companies
Opinion
Latest News
Todays Paper
News you can use