MOSL: CEAT (Buy)-Strong volume growth, but adverse mix/cost inflation restrict margins
CEAT: Strong volume growth, but adverse mix/cost inflation restrict margins
(CEAT IN, Mkt Cap USD1.1b, CMP INR1596, TP INR1845, 16% Upside, Buy)
- Operating leverage dilutes impact of RM cost inflation: 4QFY18 consol. revenue grew ~14% YoY (+6% QoQ) to INR16.7b (est. of INR16.5b), driven by 11% YoY volume growth. Gross margin shrunk 210bp QoQ (+250bp YoY) to 39.7% (est. of 38.5%), led by crude-related RM cost inflation (100bp impact) and an adverse mix (100bp impact) due to higher OEM sales. However, the impact was diluted by operating leverage, resulting in a stable EBITDA margin on a QoQ basis at 11.8% (+280bp YoY). Adj. PAT grew 16% YoY to INR929m, below our estimate of INR964m, due to a higher tax rate.
- For FY18, CEAT's revenue grew ~8% to INR62.3b, driven by ~3% volume growth. EBITDA declined ~7% to INR6.1b, with the margin contracting 150bp to 9.9%. Adj. PAT declined ~31% YoY to INR2.5b.
- Other highlights: Revenue contribution from the strategic focus areas rose to 48% in FY18 (46% in FY17). Net debt reduced by INR846m to INR7.4b as on 31st March 2018, with the net D/E ratio marginally down to 0.3x.
- Earnings call highlights: a) Witnessed robust growth in the OEM segment in 4Q, with OEM and exports outpacing replacement demand. b) Expect further RM cost inflation of 1.2-1.5% QoQ in 1Q/2QFY19 at the current level of crude prices. c) Took a price increase of ~0.5% in Apr-18; company is confident about passing on cost inflation, given the conducive demand environment. d) De-bottlenecking of PCR capacity in the next 1-2 months; new capacities to come up in TBR by 3QFY19, in PCR by 2HFY20 and in OTR by 1HFY20. e) Phasing out capex - INR15b-17b for FY19 and INR8b for FY20.
CEAT Limited is engaged in manufacturing and sale of automotive tires, tubes and flaps. The Company manufactures radials for a range of vehicles. It offers products for light commercial vehicles (LCVs), motorcycles, scooters, cars, farm vehicles and trailers, off the road (OTR)/specialty vehicles and trucks, among others. It has capacity to produce approximately 95,000 tires per day. The CEAT Bike tires include CEAT Zoom, CEAT Zoom Tubeless, F67, F85, Milaze, Secura Sport and Secura Zoom, among others. Its scooter tire range includes Gripp and Zoom D. Its car tire range includes BT, Czar AT, Czar HT, Rhino and Rhino TQ. It offers Buland and Buland Mile XL RIB for LCVs. It offers Anmol SL and Buland Mile XL for autos. Its tire range for farm and agriculture vehicle includes Aayushmaan Front, Aayushmaan Rear, Samraat Front and Samraat Super Front. It has developed OTR or specialty tires for mining, quarrying, rock excavation, construction and port applications.
Motilal Oswal Financial Services Ltd. is a reputed name in Financial Services and Online Trading with group companies providing services such as Private Wealth Management, Retail Broking and Distribution, Institutional Broking, Asset Management, Investment Banking, Private Equity, Commodity Broking, Currency Broking, Principal Strategies & Home Finance.
Motilal Oswal Securities is a group company of Motilal Oswal Financial Service Limited which started as a stock trading company and has blossomed into well diversified firm offering a range of financial products and services. Motilal Oswal has built a reputation as the source for best stock trading company and this has taken a wealth of experience, knowledge and expertise, constantly working in tandem, over the years.
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