CEAT Ltd Quarterly Result Update

CEAT Ltd. Q2FY24 Result Update

Sector Outlook: Positive

CEAT’s Q2FY24 results showcased impressive growth driven by various product initiatives. Their revenue grew by 5.5% compared to the previous year, thanks to increased sales volumes. CEAT’s focus on tire quality and performance has been well-received in the market, leading to adjustments in pricing, especially in the passenger vehicle segment. They achieved a significant improvement in EBITDA margins, reaching 15.1%, primarily due to lower raw material costs and changes in product mix. However, there is a potential risk of rising raw material costs in Q3FY24 due to higher crude oil prices, which might affect margins in replacement and export divisions, constituting 72% of total sales. CEAT plans to address this by enhancing price competitiveness, selective price hikes, and increasing high-margin exports.

Key Highlights from the Conference Call:

Pricing and Margins:

• In Q2FY24, the cost of raw materials decreased by 2.5% compared to the previous quarter.
• Crude oil prices have risen from $75-80 to $90-95, which is impacting the cost of materials. It’s expected that input costs will increase by 4% in Q3FY24.
• Despite CEAT offering lower prices than competitors in the Truck and Bus Radial (TBR) segment, there was a 2% price decline by competitors, resulting in a 1% relative price difference between CEAT and its competitors. Light Commercial Vehicle (LCV) tire prices increased by 1%.
• Miscellaneous costs increased by 4% QoQ due to increased production volumes. Marketing expenses decreased compared to the previous quarter when spending was high due to the Indian Premier League (IPL). Additionally, the quantity of outsourced volumes for Two-Wheeler (2W) tires increased in the second quarter, and there was an uptick in travel expenses.

Capital Expenditure (Capex):

• The company has revised its FY24 capex to Rs. 800 crores from Rs. 750 crores, including Rs. 200 crores for routine maintenance capex.
• The remaining Rs. 600 crores will be allocated to Tire Building Radial (TBR) expansion (Rs. 100 crores), Off-The-Road (OTR) expansion (Rs. 250 crores), and other debottlenecking activities.
• The capacity expansion at the Ambernath plant, increasing it from 105 TPD to 160 TPD, is focused on upstream expansion. The management believes no additional capex is required for Tire Building Bias (TBB).
• There is sufficient space in the Chennai factory for expansion in the Passenger Car Radial (PCR) and TBR segments. No greenfield expansion is required for 2W tires.
• The existing capacity has a revenue potential of Rs. 14,000 crores per annum. With the capacity addition, the company expects to generate incremental revenues of Rs. 2,000 crores at 90% utilisation.

Valuation and Outlook

• CEAT is focusing on research and development (R&D) to improve the quality of tires, especially in the Passenger Car Radial (PCR) and Truck and Bus Radial (TBR) segments. This helps them maintain competitive pricing.
• PCR and two-wheeler utilisation levels have remained stable at 80%, which means the company’s capital expenditure will stay relatively low compared to the past.
• They plan to make cautious capital investments over the next 2-3 years, with no major new projects until 2026. Most of the capital will go into the TBR and Off-Highway Tire (OHT) segments.
• CEAT has reduced its debt by about Rs 450 crores in the past three quarters, thanks to strong cash flow, better profitability, and lower capital spending.
• In the future, as sales volumes increase for original equipment manufacturers (OEMs) and replacement demand grows, they can make the most of their new production capabilities, which will improve their operating efficiency.
• CEAT’s strategic focus on specific sectors like Passenger Vehicles (PVs), Two-Wheelers (2Ws), Off-Highway Tires (OHTs), and exports (to boost profits), along with careful capital spending (to increase free cash flow), will drive long-term Return on Equity (ROE) growth.

Key Takeaways

• Overall outlook remains stable on the back of a good monsoon. The company is closely monitoring the rural recovery.
• Farm radial utilisation is optically lower at 65% because of the farm radial capacity expansion. It would go up on the back of demand in the US and LATAM.
• The company has a 40+% market share in PV EV OEMs and it is expected to go up going forward.