Analysts now say CEAT, a smallcap tyre manufacturer, appears to be getting bruised badly from the jolts. They say rising raw material costs, declining demand and lower cash flow generation will likely hurt the stock’s prospects in the coming year.
Siddhartha Bera, an analyst at Nomura, said the company’s March quarter numbers were below expectations. “There are growth and margins headwinds ahead,” he said, adding that strong commodity cost pressure and additional capex would impact the firm’s free cash flow generation, swelling its debt burden.
CEAT reported a nearly three-fold increase in standalone net profit at Rs 141.84 crore. Revenue from operations rose 46 per cent to Rs 2,279.03 crore. However, the Ebitda of Rs 260 crore was 6 per cent below consensus’ estimates.
The Ebitda margin at 11.4 per cent against consensus expectations of 12.4 per cent also disappointed and was led by higher other expenses at 22.6 per cent of sales, even as commodity cost pressure went up sharply.
Analysts say margins will continue to be under pressure, as these problems are likely to compound going forward.
Bera has downgraded the stock to ‘reduce’ and cut price target to Rs 1,207, signalling a 10 per cent downside from current levels.
Lockdowns in pockets of the country have created new challenges for the company. The outlook for H1FY22 remains a concern on demand slowdown due to Covid surge and stoppage of vehicle production, said Nishant Vass of
.
“Profitability is likely to remain in check on rising input costs (e.g. crude derivatives). Announcement of fresh capex of Rs 1,210 crore towards capacity expansion for truck and bus radial tyres is likely to curtail free cashflow (FCF) generation. A sharper-than-expected deterioration in FCF is a key downside risk,” Vass warned.
The company’s expansion plan seems justified, taking into account the fact that the commercial vehicle segment was its key growth driver during the March quarter.
Thus, many also see it as a growth rebound story, though, it is uncertain when that will take off.
“The near-term demand outlook is uncertain. But expect a strong growth in both original equipment and replacement segments due to a low base,” said Deep Shah of Prabhudas Lilladher.
Bera said as lockdown restrictions ease, demand should recover. However, for the replacement industry, growth is likely to be 5-6 per cent for PV and 2W over FY22-24,, which can contribute 44 per cent of CEAT’s FY21 revenue. Thus, some analysts prefer its competitors like
, which has larger global exposure, and that will help them tide over the domestic slowdown.
Prabhudas has cut the price target for the stock to Rs 1,472 from Rs 1,667 while ICICI Securities has trimmed it to Rs 1,663 from Rs 1,741.
On Wednesday, the stock traded 1 per cent higher at Rs 1,291 on BSE in a down market.
