Ceat 2qfy2013ru

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Please refer to important disclosures at the end of this report 1

EBITDA 78 62 26.3 105 (25.5)

EBITDA margin (%) 6.7 5.6 107bp 8.8 (218)bp

Source: Company, Angel Research

Ceat posted sluggish results for 2QFY2013 primarily due to contraction in

operating margins on a sequential basis led by increase in employee (wage hikes

and bonus payouts) and other expenditure (higher advertising spends). During thequarter, Ceat registered an exceptional expense of ` 14cr to account for the

change in policy of recognizing provision for warranty from actual claim basis to

expected cost basis. Further, the company also announced a VRS scheme for the

employees at the Bhandup plant and expects to incur a charge of ` 15cr related to

it in 3QFY2013. We retain our positive view on Ceat and believe that the

company will continue to report a strong performance led by gradual

ramp-up at the Halol plant and stable raw-material prices. However a slowdown

in demand remains a concern as the replacement demand has not picked up as

anticipated.

For 2QFY2013, Ceat reported a modest

growth of 6% yoy (down 1.2% qoq) in net sales to ` 1,173cr primarily due to flat

growth in volumes at 51,000MT. The volume performance was impacted onaccount of a slowdown in replacement as well as export markets, which account

for ~80% of revenues. The net average realization, however, improved 4.8% yoy

(flat qoq) due to superior product-mix. On a sequential basis, the EBITDA margin

declined by 210bp to 6.7% mainly due to 110bp qoq increase in other

expenditure (led by higher ad spends and higher power costs) and 80bp increase

in employee expenses (wage hikes and bonus for full year). On a yoy basis,

margins improved by only 107bp as benefits of lower raw-material cost (down

380bp as a percentage of sales) were negated by a 220bp increase in other

expenses as a percentage of sales. The adjusted net profit for the quarter stood at

` 17cr as against ` 26cr in 1QFY2013.

At ` 110, the stock is trading at an attractive valuation of

2.7x FY2014E earnings. We retain our Buy rating on the stock with a target price

of ` 163, valuing the stock at 4x FY2014E earnings.

% chg 24.6 27.8 11.6 12.9

% chg (83.3) (64.8) 856.6 50.5

EBITDA (%) 4.0 5.6 8.2 8.5

P/E (x) 16.9 49.9 4.1 2.7

P/BV (x) 0.6 0.6 0.5 0.4

RoE (%) 4.3 1.5 13.2 17.2

RoCE (%) 7.3 10.9 17.4 19.1

EV/Sales (x) 0.3 0.3 0.3 0.2

EV/EBITDA (x) 8.2 5.3 3.4 2.8


CMP ` 110

Target Price ` 163

Investment Period 12 Months

Stock Info

Sector

Bloomberg Code

Shareholding Pattern (%)

Promoters

MF / Banks / Indian Fls

FII / NRIs / OCBs

Indian Public / Others

Abs. (%) 3m 1yr 3yr

Sensex 9.1 6.8 16.8

CEAT 10.1 48.3 (27.9)

Net Debt ( ` cr) 951

1.6

26.5

Tyre

Avg. Daily Volume

376

0.7

125/66

82,540

10

18,763

Face Value ( ` )

BSE Sensex

Market Cap ( ` cr)

Beta

52 Week High / Low

52.9

19.0

CEAT@IN

Nifty

Reuters Code

5,704

CEAT.BO

022-3935 7800 Ext: 6844

[email protected]

Performance Highlights

2QFY2013 Result Update | Auto Ancillary

November 5, 2012

7/31/2019 Ceat 2qfy2013ru


CEAT | 2QFY2013 Result Update

November 5, 2012 2

Exhibit 1: Financial performance (Standalone)

Consumption of RM 816 814 0.2 824 (0.9) 1,640 1,666 (1.6)

(% of Sales) 69.6 73.5 69.4 69.5 76.3

Staff Costs 70 59 17.6 62 12.6 132 116 13.7

(% of Sales) 6.0 5.4 5.2 5.6 5.3

Purchase of traded goods 15 13 20.0 14 10.8 29 26 13.5

(% of Sales) 1.3 1.2 1.2 1.2 1.2

Other Expenses 194 159 22.0 182 6.2 376 319 17.9

(% of Sales) 16.5 14.3 15.4 15.9 14.6

OPM (%) 6.7 5.6 8.8 7.8 2.6

Interest 50 48 3.1 53 (6.6) 103 90 14.6

Depreciation 20 17 13.1 19 1.6 39 33 17.5

Other Income 9 12 (23.0) 5 67.5 14 15 (2.5)

Extr. Income/(Expense) (14) - - - - (14) (3) -

(% of Sales) 0.3 0.7 3.2 1.8 (2.5)

Provision for Taxation 1 3 (50.2) 12 (89.2) 14 (17) -

(% of PBT) 32.8 32.4 32.4 32.5 32.4

Adj. PATM 0.2 0.5 2.2 1.2 (1.7)

Equity capital (cr) 34.2 34.2 34.2 34.2 34.2


For 2QFY2013, standalone

net sales registered a modest growth of 6% yoy (down 1.2% qoq) to ` 1,173cr

driven largely by increase in net average realization (up 4.8% yoy). The growth in

the net average realization was led by a superior product-mix with higher share of

radial tyres in total volumes. The total volumes in tonnage terms though posted a

flat growth at 51,000MT led by weak demand in the replacement segment. Export

revenue too registered a decline of 3.7% yoy to ` 260cr due to weakness in Latin

America and European markets. While replacement sales accounted for 54% (61%

in 1QFY2013) of total volumes during the quarter; OEM and exports accounted

for 24% (19% in 1QFY2013) and 22% (20% in 1QYFY2013) respectively.

During 2QFY2013, the capacity at the Halol plant remained at 1QFY2013 levels

of 90TPD as the company is skeptical about increasing the supply amidst a

slowdown in demand. However, Ceat plans to ramp-up the capacity to 150TPD at

Halol by the end of 4QFY2013. The Halol plant contributed 15% of total volumes

during the quarter (flat qoq).

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November 5, 2012 3

Exhibit 2: Net sales driven by increase in net average realization

843895

9981,077

1,1071,064

1,222 1,187 1,173

22.125.2

27.8

38.5

31.4

18.8

22.5

10.3

6.00.0

5.0

10.0

15.0

20.0

25.0

30.0

35.040.0

45.0

0

200

400

600

800

1,000

1,200

1,400

2 Q F Y 1 1

3 Q F Y 1 1

4 Q F Y 1 1

1 Q F Y 1 2

2 Q F Y 1 2

3 Q F Y 1 2

4 Q F Y 1 2

1 Q F Y 1 3

2 Q F Y 1 3

(%)( ` cr) Net sales (LHS) Net sales growth (RHS)


On the operating front, the

EBITDA margin declined 210bp sequentially to 6.7% mainly due to 110bp qoq

increase in other expenditure (led by higher ad spends and higher power coss) and

80bp increase in employee expenses (wage hikes and bonus for full year). Hence

the operating profit declined 25.5% qoq to ` 78cr. On a yoy basis though, margins

improved by only 107bp as benefits of lower raw-material cost (down 380bp as a

percentage fo sales) were negated by a 220bp increase in other expenses as a

percentage of sales.

Exhibit 3: Average natural rubber price trend

136

78 72

98 102119

142

165177

195

225 229211 203

191 193180

0

50

100

150

200

250

2 Q

F Y 0 9

4 Q

F Y 0 9

2 Q

F Y 1 0

4 Q

F Y 1 0

2 Q

F Y 1 1

4 Q

F Y 1 1

2 Q

F Y 1 2

4 Q

F Y 1 2

2 Q

F Y 1 3

( ` /kg)


Exhibit 4: EBITDA margin contracts sequentially

5.2 3.8 1.9 (0.4)5.6 6.4

10.6 8.8 6.7

72.7 74.078.9 80.6

75.0 74.3 71.2 71.0 71.4

(10.0)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

2 Q

F Y 1 1

3 Q

F Y 1 1

4 Q

F Y 1 1

1 Q

F Y 1 2

2 Q

F Y 1 2

3 Q

F Y 1 2

4 Q

F Y 1 2

1 Q

F Y 1 3

2 Q

F Y 1 3

(%) EBITDA margin Raw material cost/sales


During the quarter, Ceat recorded an exceptional

expense of ` 14cr due to change in policy of recognizing provision for warranty

from actual claim basis to expected cost based on past trends. Adjusted for the

same, net profit witnessed a decline of 34.8% qoq to ` 17cr mainly due to margin

contraction at the operating level. On a yoy basis though, net profit surged (to

` 17cr as against ` 6cr in 2QFY2012).

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November 5, 2012 4

Exhibit 5: Adjusted net profit at ` 17cr

1511

(12)

(42)

62

4126

17

1.81.2

(1.2)

(3.9)

0.5

0.2

3.4

2.2

1.4

(5.0)

(4.0)

(3.0)

(2.0)

(1.0)

0.0

1.0

2.03.0

4.0

(50)

(40)

(30)

(20)

(10)

0

10

20

3040

50

2 Q F Y 1 1

3 Q F Y 1 1

4 Q F Y 1 1

1 Q F Y 1 2

2 Q F Y 1 2

3 Q F Y 1 2

4 Q F Y 1 2

1 Q F Y 1 3

2 Q F Y 1 3

(%)( ` cr) Net profit (LHS) Net profit margin (RHS)


Conference call – Key highlights

Ceat plans to incur a capital expenditure (capex) of ` 250cr in setting up a new

65TPD cross-ply facility in Bangladesh which is expected to commence

production from 1QFY2015. Around ` 40- ` 50cr of the planned capex towards

the new plant will be incurred in FY2013E and the remaining will be incurred

in FY2014E. The company is currently in the due diligence process of finalizing

the land.

The company intends to incur maintenance capex of

` 50cr in FY2013E.

The management is targeting to increase its presence in the higher margin

two-wheeler tyres where there is less competition. The company has managed

to increase its market share in the two-wheeler tyre segment to ~18% from

~14% in 1QFY2013.

Around 30% of the raw-material requirement of the company is currently

imported.

The company reported a 14% yoy growth (14% qoq) to ` 106cr in its Sri Lanka

operations with EBITDA margins at 17.5%. The net profit surged 95% yoy (66%

qoq) to ` 12cr. The total volumes sold during the quarter stood at ~4,250MT.Ceat enjoys ~50% market share in the replacement segment in Sri Lanka. The

current capacity stands at 60TPD and is operating at 100% utilization levels.

The company has announced a VRS scheme for employees at the Bhandup

plant. The management believes that out of the 1,800 employees at the plant,

around 180-200 are likely to opt for VRS. The impact of the same could be

around ` 15cr which would be reflected in 3QFY2013 results.

The management stated that the consolidated debt has been reduced by

` 60cr to ` 1,350cr due to working capital efficiency which has resulted in flat

interest expense during the quarter.

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November 5, 2012 5

Investment arguments

Currently, manufacturing radial tyres is

far more capital intensive than cross-plys. The investment per tpd for radial

tyres is 3.2x of cross-ply at ` 6.1cr/tpd. On the other hand, the selling price of

radial tyres is around 20% higher than cross-ply tyres. Taking into account the

difference in capital requirements and the consequent impact on asset

turnover, interest cost and depreciation to generate a similar RoCE and RoE,

tyre companies would need to earn EBITDA margins of around 21% compared

to around 9% being earned on cross-ply tyres. Thus, higher capital

requirements will help protect margins from upward-bound input costs, as the

business model evolves bearing in mind the final RoE rather than margins.

With the sector set for a structural shift and apparent pricing flexibility, it will

result in an improvement in RoCE and RoE of tyre manufacturers going

forward.

Ceat is ramping up its

radial capacity at the Halol plant to 150TPD, which is likely to be fully

operational by 4QFY2013. With the completion of the proposed expansion,

the product mix of truck: non-truck is likely to improve to 55:45 resulting in a

better product mix, thereby fetching better margins.

Ceat has been increasingly focusing on exports,

especially the high-margin specialty tyres, in a bid to offset volatility in its

domestic tyre business in the long run.

We retain our positive view on Ceat and believe that the company will continue to

report a strong performance led by gradual ramp-up at the Halol plant and stable

raw-material prices. However a slowdown in demand remains a concern as the

replacement demand has not picked up as anticipated. Consequently, we estimate

Ceat to post an EPS of ` 40.8 in FY2014E. At ` 110, the stock is trading at an

attractive valuation of 2.7x FY2014E earnings.

Any rise in input costs, increasing competitive

intensity with major players diversifying globally and lower-than-anticipated growthin replacement tyre demand pose downside risks to our estimates

7/31/2019 Ceat 2qfy2013ru



November 5, 2012 6

Exhibit 6: One-year forward P/BV band

0

50

100

150

200

250

300

A p r - 0 3

J a n - 0 4

N o v - 0 4

A u g - 0 5

J u n - 0 6

M a r - 0 7

J a n - 0 8

N o v - 0 8

A u g - 0 9

J u n - 1 0

M a r - 1 1

J a n - 1 2

N o v - 1 2

( ` ) Share Price (`) 0.2x 0.5x 0.8x 1.1x


Exhibit 7: One-year forward EV/EBITDA band

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

A p r - 0 3

J a n - 0 4

N o v - 0 4

A u g - 0 5

J u n - 0 6

M a r - 0 7

J a n - 0 8

N o v - 0 8

A u g - 0 9

J u n - 1 0

M a r - 1 1

J a n - 1 2

N o v - 1 2

( ` cr) EV (` cr) 2.0x 4.0x 6.0x 8.0x


Exhibit 8: Auto Ancillary – Recommendation summary

Apollo Tyres* Buy 85 103 21.6 6.6 5.6 4.2 3.6 20.6 20.3 36.3

JK Tyre* Buy 117 165 41.1 3.1 2.8 5.2 4.3 18.8 17.8 -

Source: Company, Angel Research; Note: *Consolidated

Company background

Ceat, a part of the RPG Group, is amongst the leading tyre manufacturers in the

country with an overall market share of ~12%. The company’s manufacturing

facilities are located in Bhandup, Nashik and Halol. The company has an overall

production capacity of 615TPD (including outsourced). The company exports to

countries across Asia, Africa, Europe and America. Exports constitute ~20% of

Ceat's total volumes. The company has recently acquired the global rights of the

Ceat brand from Italian tyre maker Pirelli - this will enable the company to expand

its global presence. Ceat also operates in Sri Lanka through a JV and has a ~50%

share in Sri Lanka's tyre market.

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November 5, 2012 7

Profit and loss statement (Standalone)

% chg 1.7 18.6 24.6 27.8 11.6 12.9

Net raw material costs 1,799 1,869 2,594 3,336 3,578 4,029

Other mfg costs 211 253 306 372 419 470

Employee expenses 159 190 212 236 269 304

Other 175 200 248 275 314 352

% chg (88.1) 1,178.1 (52.9) 81.2 61.7 17.3

(% of total op. income) 1.0 10.5 4.0 5.6 8.2 8.5

Depreciation & amortization 26 27 34 70 81 85

% chg - - (60.9) 73.0 79.8 20.5

(% of total op. income) (0.1) 9.6 3.0 4.1 6.6 7.0

Interest and other charges 84 72 100 192 214 214

Other income 49 42 28 20 25 28

% chg - - (86.1) (70.5) 1,314.7 50.5

Extraordinary items - - (5) (2) - -

Tax (21) 74 11 2 46 69

(% of PBT) 57.1 31.0 28.5 18.8 33.0 33.0

% chg - - (83.3) (64.8) 856.6 50.5

(% of total op. income) (0.7) 5.9 0.8 0.2 1.9 2.5

% chg - - (83.3) (64.8) 856.6 50.5

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November 5, 2012 8

Balance sheet statement (Standalone)

Equity share capital 34 34 34 34 34 34Reserves & surplus 454 594 615 622 711 845

Total loans 645 654 904 1,071 1,221 1,221

Deferred tax liability 16 20 24 22 22 22

Other long term liabilities - - 1 1 1 1

Long term provisions 8 8 8 8

Gross block 1,234 1,256 1,882 2,112 2,161 2,258

Less: Acc. depreciation 459 487 520 588 669 753

Capital work-in-progress 20 234 107 13 65 68

Investments 43 59 87 74 84 90

Long term loans and advances - - 22 8 8 8

Other noncurrent assets - - - - - -

Current assets 819 1,032 1,222 1,369 1,682 1,916

Cash 202 140 48 33 131 164

Loans & advances 79 109 126 143 200 225

Other 538 782 1,048 1,192 1,352 1,527

Current liabilities 507 790 1,212 1,229 1,333 1,455

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November 5, 2012 9

Cash flow statement (Standalone)

Profit before tax (37) 239 39 12 138 209

Depreciation 26 27 34 70 81 85Change in working capital 47 (260) 131 (144) (112) (79)

Others 123 343 80 156 - -

Other income (49) (42) (28) (20) (25) (28)

Direct taxes paid 21 (74) (11) (2) (46) (69)

(Inc.)/Dec. in fixed assets (36) (237) (499) (136) (100) (100)

(Inc.)/Dec. in investments (33) (16) (28) 12 (9) (6)

Other income 49 42 28 20 25 28

Issue of equity - - - - - -

Inc./(Dec.) in loans 168 9 250 167 150 0

Dividend paid (Incl. Tax) 0 0 16 8 4 6

Others (119) (93) (104) (16) - -

Inc./(Dec.) in cash 160 (61) (92) (15) 98 33

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November 5, 2012 10

Key ratios

P/E (on FDEPS) - 2.3 16.9 49.9 4.1 2.7P/CEPS 39.6 2.0 6.1 4.7 2.2 1.7

P/BV 0.8 0.6 0.6 0.6 0.5 0.4

Dividend yield (%) 0.0 3.6 1.8 0.9 0.9 1.4

EV/Sales 0.3 0.3 0.3 0.3 0.3 0.2

EV/EBITDA 33.6 2.8 8.2 5.3 3.4 2.8

EV / Total Assets 0.7 0.6 0.7 0.8 0.7 0.6

EPS (Basic) (4.7) 48.2 6.5 2.2 27.1 40.8

EPS (fully diluted) (4.6) 48.3 8.0 2.8 27.1 40.8

Cash EPS 2.8 55.0 18.0 23.4 50.8 65.5

DPS 0.0 4.0 2.0 1.0 1.0 1.5

Book Value 142.6 183.6 189.6 191.7 217.6 256.7

EBIT margin (0.1) 9.6 3.0 4.1 6.6 7.0

Tax retention ratio 0.4 0.7 0.7 0.8 0.7 0.7

Asset turnover (x) 2.5 2.8 2.7 2.9 2.9 3.1

ROIC (Post-tax) (0.1) 18.5 5.9 9.5 12.8 14.4

Cost of Debt (Post Tax) 6.4 7.7 9.2 15.8 12.5 11.7

Leverage (x) 0.8 0.8 1.0 1.3 1.4 1.2

Operating ROE (5.5) 26.8 2.7 1.2 13.1 17.7

ROCE (Pre-tax) (0.2) 21.9 7.3 10.9 17.4 19.1

Angel ROIC (Pre-tax) (0.3) 24.4 7.2 11.0 18.3 21.0

ROE (3.2) 29.6 4.3 1.5 13.2 17.2

Asset Turnover (Gross Block) 1.9 2.3 2.2 2.2 2.3 2.7

Inventory / Sales (days) 43 41 51 47 52 52

Receivables (days) 48 45 45 45 47 47

Payables (days) 78 81 102 98 93 89

WC cycle (ex-cash) (days) 22 14 3 3 12 17

Net debt to equity 0.8 0.7 1.2 1.5 1.4 1.1

Net debt to EBITDA 17.3 1.5 5.5 3.8 2.5 2.0

Interest Coverage (EBIT / Int.) (0.0) 3.7 1.0 0.9 1.5 1.8

7/31/2019 Ceat 2qfy2013ru



November 5 2012 11

Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

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Disclosure of Interest Statement CEAT

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock Yes

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to 15%) Sell (< -15%)

Note: We have not considered any Exposure below`

1 lakh for Angel, its Group companies and Directors

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Ceat 2qfy2013ru