Ceat bets on exports to drive volumes
Tyre maker Ceat Ltd. is hopeful of that a recovery in exports will spur its volume growth in FY24. Despite a weak European market, the company’s management said during its Q1 FY24 earnings call, improvement in markets like the Middle East, Africa, and South Asia, alongside robust performance in the US and Latin America, offer optimism in the backdrop of likely tepid demand in the replacement markets.
“We expect 2W replacement demand to remain subdued in FY24F/25F given low OE industry volume growth (-4%/2% CAGRs for 5/10 years to FY23F). However, export recovery will drive overall volume/value growth of ~5%/6% for FY24F/25F,” said analysts at Nomura Financial Advisory and Securities (India) Pvt Ltd.
In Q1, Ceat reported a 3% overall volume growth sequentially, driven by a roughly 11% growth in exports and 4% growth in replacement volumes. Conversely, OEM volumes saw a 3% decline. Analysts at JM Financial Institutional Equities have subsequently adjusted Ceat’s volume growth estimates for FY24/25 upwards by 1% and 3%, respectively, due to expected momentum in exports.
Another important takeaway for investors was the better than expected operating performance, which was driven by easing commodity prices which in turn helped gross margin expansion. Ebitda (earnings before interest, taxes, depreciation, and amortization) margin at 13.2% in Q1Y24 was ahead of consensus estimates of 12%.
According to the management, raw material cost declined by around 1.5% sequentially during Q1. However, the company indicated that while natural and synthetic rubber prices remained benign, carbon black and crude prices have inched up recently. So, the management remains watchful of further increase in raw material cost.
In this calendar year so far, the Ceat Ltd stock has risen by 51%, massively outperforming the Nifty Auto index, which gave 23% returns. This steep run-up in the share price was largely led by easing raw material prices. However, with this steep a rally, valuations have become expensive. The stock is trading at a FY25 price-to-earnings multiple of 22 times.
“Profitability in FY2024E will sustain around current levels; however, subdued volume growth, especially in the commercial vehicle replacement segment, remains an area of concern. We believe current profitability will not be sustainable in the medium term and margin recovery is completely priced in at current market price,” said a Kotak Institutional Equities report dated 26 July.
Ganesh
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