Ceat may face margin risk along the way

The upshot is that Ebitda more than doubled (up 125%) year-on-year to ₹456 crore. In comparison, revenue growth was muted at 5.5% to ₹3,053 crore. Q2 volume growth of 7% was aided by strong demand from original equipment manufacturers for festive inventory. The Ceat stock surged by 4.4% on Tuesday after its earnings beat consensus estimates. In a rub-off effect, shares of peers such as Apollo Tyres Ltd and JK Tyres & Industries Ltd rose by over 2% each. Perhaps, investors expect Apollo and JK will also put up a strong margin show in Q2.

Moving forward, Ceat is closely watching the monsoon’s impact on rural demand. Exports in some tyre categories are facing a headwind in Europe, which is grappling with recessionary trends. On the other hand, markets in Asia and Africa are doing relatively better. The management hopes for a gradual volume recovery ahead.

To be sure, Ceat’s commentary on input cost outlook is cautious. In Q2, Ceat’s average prices of raw materials fell 2.5-3% compared to the previous quarter. However, this could be the bottom, Ceat said. If the current trend in crude prices continues, then raw material prices could see a 3-4% sequential rise in Q3. Further, in the last two months, the prices of international rubber have shot up; also, the rupee’s depreciation against the dollar could have an adverse impact on Ceat’s raw material basket, the management added. The company made selective price hikes in Q2. Further pricing action would depend on the movement in raw material prices.

For now, investors are seeking solace in the positives. Apart from the benefits of softer raw material costs, healthy cash generation, prudent capital expenditure and comfortable debt are aiding sentiment. So far in 2023, Ceat shares have rallied by nearly 34%. The road ahead largely depends on how Ceat navigates potential margin pressure.

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Updated: 17 Oct 2023, 11:54 PM IST