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Narnolia
CEAT (Buy)
CMP: ₹1,127.95
Target: ₹1,288
CEAT has posted 15 per cent y-o-y revenue growth in 2QFY19. EBITDA margin slipped by 120 bps q-o-q to 9.1 per cent due to the mix of various factors such as; increased commodity prices, adverse product mix and escalation in operational cost.
The overall automobile industry growth scenario does not seem to be strong in FY19 and the volume growth will be in low double digits, largely driven by commercial vehicles and two wheelers segment. The raw material cost is expected to surge in 3QFY19 considering the 7 per cent q-o-q increase in domestic rubber prices and 5 per cent q-o-q rupee depreciation in the last quarter. There could be some headwinds which can impact the profitability in the near term but we expect the quantum will be limited on account of price hikes and operating leverage benefit. The management has earmarked ₹3,000 crore of capex to be spent in FY19&20 considering the capacity constraints on the PCR and TBR tyres. However, we remain positive on the growth prospects of the company on the back of declining commodity prices, improvement in product mix and strong replacement demand going ahead. As we have already factored in lower margins and increased debt level we marginally reduce our FY19 and 20 EPS estimates by 2 per cent and 1 per cent respectively.
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