Buy Ceat; Target Rs.216 : Sharekhan

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Best call

Research firm Sharekhan has maintained buy recommendation on Ceat with revised target price of Rs 216. At the current levels, the stock is trading at 8.4x its FY2009E earnings and at an EV/EBIDTA of 3.9x.



Result highlights

Ceat's Q1FY2008 results were in line with our expectations. The net sales have risen by 7.8% to Rs 536.4 crore, mainly driven by strong realisation growth due to price hikes and product mix changes. In line with the industry slowdown, the original equipment manufacturer (OEM ) sales declined by 11% year on year (yoy), but the effect of the same was mitigated because of strong growth in the replacement and the export markets.

The operating margins expanded 550 basis points to 9.2% during the quarter as a result of lower raw material cost, price hikes, improved product mix and other efficiencies. As a result, the operating profits grew by 166.3% to Rs 49.4 crore.

Adjusting for the impact of tax provisioning on the extraordinary gain, we estimate that the quarterly profits have grown to Rs 20.4 crore against Rs 0.2 crore same quarter last year. The quarter's results contain extraordinary items relating to refund from excise and income tax and reversal of export benefits granted in earlier years. Profit after tax (PAT) after extraordinary items have grown to Rs 30.4 crore.

Last few quarters have been pretty exciting for Ceat, as it has effected a smart turnaroud during the period and now its margins are comparable with the best in the industry. We expect this strong growth to continue, particularly driven by the replacement and the exports segment. We also expect the company to maintain its margins at these levels going forward. On the basis of strong performances by Ceat, we are raising our earnings estimate for Ceat by 6% to Rs16.9 for FY2008 and are introducing our FY2009 estimates of Rs 21.1.

The slowdown in the OEM segment is expected to continue for another couple of quarters. To counter the same, the company has already put in place strategies to concentrate more on the exports and the replacement markets.

The land sale is expected to be finalised by the third quarter of the current fiscal, while the demerger process is expected to be completed by the end of this fiscal.

At the current market price of Rs 177, the stock is trading at 8.4x its FY2009E earnings and at an enterprise value (EV)/earnings before interest depreciation and amortisation (EBIDTA) of 3.9x. We maintain our Buy recommendation on the stock with a revised price target of Rs 216.

Realisation growth fuels top line

The net sales of the company for the quarter grew by a 7.8% largely on account of realisation gains, while the growth in tonnage terms remained flat. The realisation growth was on the back of price hikes effected in the last one year and product mix changes.

Valuations and view

Considering the strong growth opportunities for the company (particularly in the in the specialty tyre segment), the smart turnaround and the improving productivity, we maintain our positive outlook on the company. The company is also raising its capacity in the off the road (OTR) segment to 45 tonnes a day from 25 tonnes a day by November 2007. The company has also announced to demerge the company into two.one to look the core business and the other, the investment portfolio. For every 100 shares held, the shareholder would get 75 shares of the core company and 25 shares of the new investment company. We believe the move is a positive one, and would lead to greater value unlocking for the shareholders. The de-merger is expected to be implemented during the current financial year. We continue to value the company on sum-of-parts basis. On the basis of strong performances rendered by Ceat in the recent times, we are raising our earnings estimate for Ceat by 6% to Rs16.9 for FY2008 and are introducing our FY2009 estimates of Rs 21.1. At the current levels, the stock is trading at 8.4x its FY2009E earnings and at an EV/EBIDTA of 3.9x. We believe the valuations are very attractive and maintain our Buy recommendation with a revised price target of Rs 216.

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