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Analyst Corner: Maintain ‘add’ on CEAT with revised target price of ₹1,480

Adjusted PAT was down ~79% YoY to ₹363mn on account of increased fixed-cost absorption (D&A) expense (up ~44% YoY).

CEAT’s Q2FY22 efficiency was beneath consensus expectations and profitability suffered (down ~79% YoY) primarily on account of gross margin compression (down 975 bps YoY). Growth momentum continues to be led by natural development in CV and PV segments coupled with new PV order wins (e.g. Nissan Magnite, Renault Kiger, Mahindra Thar). Outlook for H2FY22 stays combined on account of worries on potential demand slowdown brought on by OEM manufacturing cuts on account of chip shortages.

However, margins are doubtless to enhance in H2 as price hikes are extra amenable whereas inputs prices have softened a bit (Bangkok rubber costs down ~23% since Q1FY22). On steadiness sheet facet, consolidated debt rose to ~₹20bn (FY21:~ ₹14.2bn). CEAT’s capex depth is prone to peak in FY22; we count on FCF era to enhance in FY23E (~₹2bn/~4% FCF yield). Maintain ADD.

Key highlights of the quarter: Revenue rose ~24% YoY to ~₹24bn led by sooner development in OEM phase (income share rose 200bps YoY in H1FY21). Gross margin declined 975bps YoY at 36.9% on account of increased uncooked supplies prices. EBITDA margin fall was curtailed to eight.9% (down 589bps YoY) on account of decrease worker prices (down 110bps YoY) and decrease different bills by 276bps on account of tighter price management and doubtlessly decrease advert spends. Adjusted PAT was down ~79% YoY to ₹363mn on account of increased fixed-cost absorption (D&A) expense (up ~44% YoY).

Focus on business main development: Management continues to focus on attaining above business development, led by a) increased share in excessive development compact SUV phase in PVs pushed by the brand new Halol capability; b) new product improvements (i.e. SecuraDrive) are prone to drive market share good points in current OEMs (e.g. Hero Motocorp, Mahindra); and c) robust capex push for FY22E-23E is prone to be ~₹18-19bn (FY21: ₹6.4bn); growth of excessive quantity TBR capability can be the important thing driver for market share good points in CV phase.

Maintain ADD: We like CEAT’s plan to drive development by way of market share good points (product improvements, new buyer additions) whereas focusing on margins; nonetheless, sustained capex depth and decrease business pricing energy are prone to curtail FCF era and enhance leverage (FY23E: ~₹22bn). RoCE enchancment is unlikely to surpass 15% in FY24E, thus curbing potential valuation growth. We minimize our earnings for FY22E/ FY23E by ~34/11%, respectively on account of steep enhance in beneath EBITDA fastened prices (e.g. depreciation bills). The stock has modest FCF yield (~4%) on FY23E foundation. We introduce FY24 and rollover to Sep’23E and we minimize target a number of for India business to 13x FY23E EPS (earlier: 14x) of ₹112. We keep our ADD ranking with a revised target price of ₹1,480 (earlier: ₹1,487).

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