MOSL: CEAT (Buy)-High-cost inventory, destocking impact perf-Pressure likely to ease

​CEAT: High-cost inventory, destocking impact perf; Pressure likely to ease

(CEAT IN, Mkt Cap USD1.2b, CMP INR1734, TP INR2029, 17% Upside, Buy)

• Revenue in line; significant miss on EBITDA and PAT: CEAT reported overall revenue of INR16,286m (est. of INR15,474m) in 1QFY18, as against INR16,462m in 1QFY17, marking a decline of 1.1%. EBITDA stood at INR547m (est. of INR1,486m) v/s INR1,854m in 1QFY17, with the margin at 3.4% (est. 9.6%) v/s 11.3% in 1QFY17 on account of a significant rise in raw material cost (up to 59% of net sales v/s est. of 51.5% and 50.8% in 1QFY17). Consequently, adj. PAT for 1QFY18 stood at INR11m (est. of INR679m) v/s INR1,039m in 1QFY17, marking a decline of 99%.
• RM basket to soften in 2QFY18: 1QFY18 witnessed a sharp rise in raw material cost (+820bp YoY and 260bp QoQ). Price of natural rubber increased 30% YoY, while that of synthetic rubber rose 50% YoY. This, along with realization disappointment due to competitive pressure, exerted immense burden on margin. However, average raw material prices have already come down by ~10% in 2QFY18 and should soften further, bringing margins back on track.
• Continued focus on passenger segment: While commercial segment volumes declined ~5%, passenger segment witnessed growth of less than 5% in volumes. However, we expect passenger volumes to grow further on account of continued initiatives and platform roll-outs (viz., launch of puncture-less tires and Innova range to provide best mileage).