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MOSL: CEAT (Buy)-Above est. led by cost control; demand remains weak

CEAT: Above est. led by cost control; demand remains weak

(CEAT IN, Mkt Cap USD0.6b, CMP INR1057, TP INR1277, 21% Upside, Buy)

 

• Realizations drive revenue growth: 4QFY19 consol. revenue grew 4% YoY (+2% QoQ) to INR17.6b (in-line). While volumes declined 3%, realization grew ~6%. EBITDA margin came in at 9.2% (v/s est. of 8.5%, +100bp QoQ), driven by cut in discretionary costs, which diluted impact of price cuts (-50bp QoQ). Higher other income restricted adj. PAT decline to 28% YoY (+27% QoQ) to INR669m (v/s est. of INR528m). For FY19, revenue/EBITDA/PAT grew ~12%/5%/-0.5%.
• Earnings call highlights: (a) Price cut of ~1% across products in the replacement segment. (b) Replacement segment remains sluggish. But, industry should grow in single-digits. CEAT hopes to outperform driven by TBR & PCR capacity addition. (c) With inflation in crude and international rubber prices, it expects some cost pressures to reflect in 2QFY20. In a weak demand environment, it sees limited scope for a price hike in the near future, and hence, margins should be under stress. (d) FY20 consol. capex guidance is at INR15-16b (~INR11b in FY19). 2W capacity should start in the next few months and PCR capacity should be commence in 3QFY20.