Softened natural rubber prices and the pick-up in replacement demand for tyres have helped CEAT script a turnaround in the fourth quarter of 2011-12. Compared with the loss of Rs 12 crore in January-March 2011, the company has posted profits of Rs 41.5 crore. Net sales grew by 24 per cent year-on-year to Rs 1,215 crore. The stabilisation in raw material costs, improving replacement market sales and ramp-up of production at Halol will benefit the company. Investors with a perspective of a year or more can buy the stock. At Rs 98, it trades at a price to earnings ratio of only 3.3 times its estimated earnings for FY-3.

From a peak of Rs 240 a kg last year, rubber prices have stabilised at around Rs 190 a kg in recent months. This easing has favoured the company. Operating margins have moved up from about 2 per cent a year ago to 10.6 per cent now. Margin expansion has also been aided by an uptick in replacement market sales and improved realisations on exports (due to a depreciated rupee).

Replacement market

Tyre-makers typically derive at least half their revenues from the replacement market. This segment also endows them with greater pricing power than in direct sales to auto manufacturers. Considering that tyres are replaced every 2-3 years, the robust passenger car and commercial vehicle (CV) sales in 2009-10 and 2010-11 implies that replacement demand will continue to be strong. CEAT is eyeing a greater share of business from two/three-wheeler tyres too. While MRF, TVS and Falcon are currently the big players in this segment, CEAT has increased its market share from 11 per cent to 14 per cent in FY12. It aims to take it further to 18 per cent in FY13.

Radial tyres

In addition, the company will benefit from the fast improving radialisation levels in CV tyres. From about 14 per cent two years ago, radialisation in CVs stands at 20-25 per cent currently. With fast improving highway infrastructure and the ban on overloading of vehicles, this level is expected to go up further. Radial tyres offer better fuel efficiency, have longer life and turn out cheaper in the long run. The company is ramping up production at its Halol plant, which manufactures truck, bus and passenger car radials.

(This article was published on May 12, 2012)
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