MOSL: CEAT (Buy)-Fueling growth on the back of capex-Strong focus on PCR, 2W and OHT bodes well for margins

ceat: Fueling growth on the back of capex; Strong focus on PCR, 2W and OHT bodes well for margins

(ceat IN, Mkt Cap USD0.8b, CMP INR1345, TP INR1845, 37% Upside, Buy)

We met CEAT’s MD Mr Anant Vardhan Goenka and CFO Mr Kumar Subbiah at the RPG Annual Investor Conference 2018. Key takeaways:

•  CEAT plans to invest INR35-40b over the next 3-5 years to expand its capacity. This would lead to its capacity increasing by ~50% post full ramp-up in FY21.
• Majority of this capex is directed toward its focus areas of passenger car radial tyres (PCR), 2W tyres and off-highway tyres (OHT). This would auger well for its revenue mix and margins.
• At the current pace of capacity addition, CEAT is confident of achieving ~15% revenue growth per annum over the next three years.
• With PCR capacity likely to more than double by FY21, the company is targeting a market share of 16-22% in the next 3-5 years (up from 8-10% currently).
• Despite intensifying competition in the 2Ws space (with MRF adding capacity and Maxxis setting up new capacity), CEAT expects to gain 3-5pp market share over the long term, led by its capacity addition and brand building & marketing efforts.
• In the TBR segment, CEAT intends to maintain its market share, led by capacity addition.
• The company expects some impact on margins from rising raw material prices over the next few quarters. However, it would take the necessary price actions. Price hikes would be higher in TBR compared to PCR/2W.