55/36/29% rise in EPS for FY21-23e; TP up to Rs 1,491; upgraded to ‘Neutral’ rating
Ceat’s Q3FY21 revenue of Rs 22.2 bn (+26% y-y) was ahead of our and consensus estimates. Ebitda margin surprised at 14.8% led by limited commodity cost pressure (RM/sales +90 bps q-q) despite higher staff costs (+25% y-y). We see positive read-across for APTY (APTY IN) revenues as well for Q3FY21F. Strong demand in replacement (Q3 +35% y-o- y) led by truck/bus and car market share gains across categories, especially car due to import restrictions, benefitted growth.
Management expects the healthy trends to sustain as inventory levels are still below normal levels.
Our analysis of the replacement industry suggests growth is likely to normalise to single digit levels post-FY22F . Segment-wise, PV growth is likely to moderate to mid-single-digit levels over FY23-24F while Truck and Bus Radial (TBR) can record ~8-10% CAGR. 2W growth is also likely to normalise to single digit post-FY23F.
Ceat’s strong capacity addition in TBR/PCR (up ~2.3x over FY19-23F) could drive healthy 14% revenue CAGR over FY20-23F. However, a sharp jump in tyre commodity index (~16% q-q in Q3) and limited price hikes (~3% in Dec-Jan), high competitive intensity and stronger push in PV OE should normalise margins. We raise our FY21/22/23F revenue estimates by ~7%/12%/10%, Ebitda margins by 120bps to 12.8% for FY21F. Thus, we raise our EPS by 55%/36%/29% over FY21-23F due to the high financial leverage.
Valuation: TP raised to Rs 1,491–CEAT trades at ~5.8x FY23F EV/Ebitda, which we believe is not expensive. We raise our target EV/Ebitda to 7x (near the middle of the historical trading band of 6-9x; from 6x) on FY23F Ebitda to factor in the stronger near-term recovery, market share gains and improving FCF. Hence, we upgrade to Neutral rating. We prefer Balkrishna Industries (BIL IN, Buy) in the sector.