>CEAT (PRABHUDAS LILLADHER)

Healthy operational performance

■ Better revenue mix augurs well for margin profile: Growth in the tyre industry always mirrors growth in the road transport sector which is expected to grow at a pace of 8-9% for the next 3-5 years. CEAT, with a market share of 13%, is a major tyre maker in India and offers wide range of tyres to all the user segments, including the heavy duty truck and bus (T&B), LCV, tractor, trailers, PCs, motorcycles and 3-wheelers. The company currently manufactures over 7m tyres every year and has a strong presence in the replacement market. The current revenue mix stands at 79:08:13 as of Q1FY10 in favour of Replacement: OE: Exports segment compared to 70:10:20 in FY09. With a shift in the product mix towards the replacement market which is a better margin product, the margin profile is expected to be better than the average 6-7% in the last 4-5 years.

■ Capacity expansion to aid volume growth: CEAT is ramping up its production facilities to benefit from the uptrend in the automobile industry. The company has a current capacity of 400 tonnes per day (TPD) in the Bias tyres. Bhandup plant has a capacity of 240 TPD, whereas Nashik plant has a capacity of 160 TPD. The company is looking at expanding its Nashik capacity by 35 TPD by April 2010. At the same time, CEAT is looking at a new Radial tyre capacity at Baroda of 145 TPD to be operational by October 2010. The capex slated for the Radial capacity is Rs500 crores spread over the next two years. The same would be funded by Rs250 crores debt and the remaining Rs250 crores will be from internal accruals.

■ Outlook & Valuation: We expect CEAT to report revenue CAGR of 13.8%, mainly led by CAGR of 10.2% volume growth in tonnage terms and 3.3% CAGR in realization for the period FY09 – FY11E. We expect CEAT to report a PBT of Rs2336m and a PAT of Rs1542m in FY10E. We expect an EPS of Rs45.0 in FY10E and Rs42.6 in FY11E which discounts the CMP of Rs152, by 3.4x FY10E and 3.6x FY11E. Given the attractive valuations, we maintain our ‘Accumulate’ rating on the stock, with a price target of Rs210.

To see full report: CEAT