EUR 120.00 For Business Accounts Only

MOSL: CEAT (Buy)-In-line; lower RM drives margins; new capacity restricts PAT

(CEAT IN, Mkt Cap USD0.6b, CMP INR1014, TP INR1250, 23% Upside, Buy)

Strong EBITDA growth offset by new TBR plant costs
** CEAT's 3QFY20 operating performance was expectedly good, driven by benefit of rubber prices. However, overheads and interest/depreciation of the new TBR plant resulted in flat profit growth. While full cost of the new plants will reflect in 1HFY21, benefit of the new capacities will be seen in the P&L only in 2HFY21.

** We maintain our estimate, which implies ~12%/21%/31% revenue/EBITDA/EPS CAGR over FY20-22E. Maintain Buy rating.

Reasonable replacement market growth, lower RM drives performance
** CEAT's revenues/EBITDA/PAT grew ~2%/29%/0% YoY in 3QFY20.

** Revenues were driven by ~2% YoY (+3.6% QoQ) volume growth. While OEM volumes declined ~8% YoY, replacement and exports grew ~8%. 2Ws and PCR saw single-digit volume growth, but CV tyres were flat.

** Gross margins improved ~190bp QoQ (+140bp YoY), driven largely by RM cost benefit (140bp QoQ) as well as small contribution from the mix change.

** However, impact of the new TBR plants' overheads restricted EBITDA margin improvement to ~30bp QoQ (+220bp YoY) to ~10.4% (v/s est 10.7%)

** EBITDA grew ~29% YoY (+8% QoQ) to ~INR1.83b (v/s est. ~INR1.87b). However, higher depreciation and interest of the new TBR plant resulted in flat PAT of ~INR529m (v/s est. ~INR536m).

** Despite capex of ~INR2.7b in 3QFY20, consolidated gross debt increased just ~INR0.5b QoQ to INR18.9b, supported by reduction in working capital.