CEAT

With tyre makers riding on the back of a convincing revival in the automobiles industry, including the medium and heavy commercial vehicles (or the trucks and buses segment), investors can consider buying the stock of CEAT.

A strong brand presence in the aftermarket and high exposure to the trucks and buses (T&B) segment makes the scenario favourable for CEAT. Since both the segments are still in the early phase of recovery, investors can be confident of a robust sales and profits growth in the quarters to come.

Given the presence in the higher margin replacement market, CEAT may be able to pass on cost pressures such as the increasing rubber prices and the recent hike in excise duty, without having to take a deep cut in its operating margins.

Priced at Rs 146 and discounting its trailing four quarter earnings by just three times, CEAT is among the less expensive tyre manufactures.

Market presence

CEAT is a part of the RPG Group, with an annual production capacity of 7 million tyres every year. It commands 13 per cent market share in the entire tyre market and caters to a wide range of automotive segments.

The company derives over 84 per cent of its revenues from T&B, a key segment for all the tyre makers since it offers better margins. The passenger cars and OTR currently contribute to 14 per cent and 2 per cent respectively, to CEAT's revenues.

Thanks to a strong network of 34 regional offices and over 3,500 dealers, CEAT is among the leading brands in the replacement market and enjoys high brand recall in aftermarket space.

This apart, the company has approximately 100 exclusive CEAT Shoppe outlets for passenger cars and 96 exclusive CEAT HUBs for T& B. About 88 per cent of total revenues flow from the aftermarket sales.

Nascent recovery

CEAT's business revolves round high-revenue and high-margin pockets. While OEM tyre sales in the T&B segment have grown by 3 per cent in April-November 2009, demand in the replacement market has grown by 15.6 per cent in the same period. The T&B segment and aftermarket sales are still in the early recovery stages.

A stepped up allocation to state-run projects such as Jawaharlal Nehru National Urban Renewal Mission, may further boost the OEM and replacement demand in the T&B segment. Apart from domestic sales, exports contribute to 16 per cent of CEAT's total revenues.

Capacity expansion

To ease out capacity constraints and keep pace with the rapid growth in the automobiles industry, CEAT has taken up expansion plans in its existing facilities in Maharashtra (Bhandup and Nashik). But what may give the real fillip to CEAT's earnings is the ongoing Greenfield project in Halol (Gujarat).

With an investment size of Rs 700 crore and a production capacity of 145 tonnes per day, this plant will cater to the trucks, buses, LCV and passenger cars radial tyres market. The first phase of investment for Rs 500 crore has already been implemented, partly through internal accruals and debt; and Rs 200 crore will be invested in 2011- 12. The plant will become operational by October ‘10.

Financial comeback

CEAT managed 13 per cent CAGR sales growth until FY-08. This took a beating in FY-09, when the company expanded its sales by just 5 per cent and posted a net loss of Rs 16.1 crore that year.

Like other tyre makers, CEAT has also been swift to return to profits since the beginning of the current fiscal. For the nine months ended December ‘09, it registered a healthy 9 per cent growth in sales, while profits have expanded by over three-fold, when compared with the same period last year.

CEAT may be able to sustain top-line growth at the current pace, though it may see some near term moderation in the operating margins, due to sharp increase in raw material costs and partial roll-back of excise duty benefits.

Raw materials account for over 60 per cent of the total costs and its prices have risen by over 35 per cent since October ‘09.

However, its foothold in the replacement market may permit it to partially pass on the cost pressures to its customers. A positive demand situation, ramp up in production and a increase in sales volume, may be help CEAT make up for cost increases.