CEAT's Q1FY20 results (Neutral) - Inline; outlook uncertain

Q1FY20 results

• Adjusted PAT disappoints: CEATs Q1FY20 Adj PAT of Rs518mn (-28% yoy) was 8% below estimates. Adjusted for accounting changes, operating performance was inline. Depreciation/interest expenses increased sharply.
• EBITDA margins inline: Revenues at Rs 17.3b (+3% yoy) met expectations. EBITDA margins at 9.5% (down 80bps yoy, up 30 bps qoq) were a tad above estimates (9.0%). However, excluding the impact of INDAS 116, the EBITDA margins cane in at 9.0%. RM expenses showed a marginal improvement on account of lower commodity costs (down 2% qoq). Other expenses (down 50 bps qoq) benefited from tighter cost control measures as well as the impact of INDAS 116. This was partially offset by higher employee cost (50 bps qoq). Consequently, reported EBITDA at 1.6bn declined by 5% yoy. Depreciation rose sharply by 24% yoy on higher capex/ accounting policy changes. Other income increased 3Xyoy on the back of sales of financial assets. The reported PAT improved on the back of a tax write back of Rs304mn. Excluding one offs adjusted PAT declined by 28% yoy – this was 8% below estimates.`

Concall highlights: (a) The TBB continues to remain weak while TBR continues to grow. Further, with CEAT’s capacity coming on stream, volume growth in the TBR space could be higher than the industry. (b)The company expects the commodity basket to be stable in the next quarter. While domestic rubber prices have increased sharply, international rubber prices are stable. (b) The company is deepening its relationships with OEMs – it is the exclusive supplier for Hyundai’s Venue.  (c)The company expects to incur a capex of Rs13-14bn (including capex of Rs2bn on the speciality tyre plant) - lower by ~2bn compared to the previous guidance (d) The debt equity showed a marginal increase to 0.57x (up from 0.54X in Q4) (e) During the quarter, OEM declined by 5% in value terms (-10% in volume), replacement demand grew 2-5% while exports grew 8%.

Key positives: Gross margin improvement

Key negatives: Higher depreciation/ interest costs

Change in estimates: Cut EBITDA estimates for FY20/FY21 by 11%/8% on cost pressures/higher competitive intensity in the 2W segment.

Valuations & view: The competitive intensity in the tyre space, particularly in the tyre space seems to be rising sharply. Coupled with concerns around slower volume growth, high capex adds to concerns and an increase in raw material prices we believe pressure in the segment to persist. With valuations at ~12x FY21 EPS (historical average 9x), we believe upsides are limited. We maintain a Neutral rating with a target price of Rs814 (11XFY21).