CEAT LTD - Multibagger by India Infoline Picks

CEAT LTD - Multibagger by India Infoline Picks

CEAT, a diversified tyre major, is ramping up its production facilities to benefit from the uptrend in tyre offtake. It has planned to modernize its existing facilities and double its Off The Road (OTR) capacity, which will boost volumes in FY08 and FY09. The proposed sale of land at its Bhandup facility and relocating out of Mumbai is expected to boost its capex plans and increase margins. CEAT is planning to invest in a CV radial tyre facility over the next two years. It is expected to invest over Rs 500 crore in the next 2-3 years to ramp up its capacities. It plans to increase truck & bus radial sales from 600-700 tyres per month to 4,000-5,000 by June 2008 through its existing arrangement with Pirelli and outsourcing from China. We recommend a BUY with a target of Rs 230, implying upside of 31%.

Company Background

CEAT is present in commercial vehicles (CV), passenger car radials, two-wheeler, tractor, OTR and others segments. Its popular brands include LUG and RIB in T&B and LCV segments, SAMRAAT in Tractor, ENDURA in PV segment and SECURA in two-wheeler segment. It has a total capacity of 385 tons per day (tpd) at two plants in Maharashtra. It sources two-wheeler tyres from private players.

Shareholding pattern

As on 30th June 2007	Holding (%)	No. of shares (in Lakhs)
Promoters	43.2	197.1
Non-promoter
Corporate Holding	5.8	26.3
Institutions	24.6	112.3
Foreign	8.7	39.0
Public & Others	17.7	81.0

Fall in raw material costs boosts EBIDTA margin:

Tyre business is raw material intensive. Natural rubber prices were on a downward trend for the past 6 months and are expected to continue to slide in the coming quarters. In Q1FY08, fall in natural rubber prices and stable crude-based raw material prices boosted EBIDTA margin by 550 bps to 9.2%. Apart from this, CEAT's hedging policy for raw materials has shown good results in the past few quarters. Benchmark rubber price is hovering around Rs 88 per kg at present with year to date average at Rs 85 per kg. Average natural rubber price for CEAT in FY07 stood at Rs 97 per kg.

Tyre demand robust with buoyancy in replacement market

Tyre demand growth, including exports, for June 2007 quarter in the country stood at 6.4% with strong replacement market (RM) demand. RM demand increased by 10.4%, compensating flat growth in original equipment manufacturers (OEM) demand. Exports continued to show strong growth at 8.7%. With the Indian economy growing at over 9%, tyre demand is expected to remain strong.

Financials (Rs.Crores)

	FY06	FY07	FY08E	FY09E
Revenues	1,747	2,131	2,289	2,448
yoy growth (%)	-	22.0	7.4	7.0
EBIDTA	69	116	192	212
EBIDTA margin (%)	3.9	5.4	8.4	8.7
PAT	1	24	92	90
Pre-exceptional PAT	1	24	76	90
yoy growth (%)	-	4,535.8	218.3	18.2
EPS (Rs)	0.1	5.3	16.7	19.8
P/E (x)	-	35.0	11.0	9.3
EV/EBIDTA (x)	12.0	8.7	5.4	4.6
ROE (%)	0.1	6.4	16.4	16.3
ROCE (%)	8.2	10.4	14.7	15.3

Source: Company, India Infoline Research

Attractive valuations

The buoyancy in automobile sector and stability in raw material prices with a negative bias is expected to benefit CEAT. The company has planned to de-merge its investment portfolio into a separate company. Per share value of investment at current prices stands at Rs 98. We have valued CEAT at 10x of its FY09E EPS of Rs19.8 and assigned Rs 32 for its investment portfolio. Our sum of parts value for CEAT comes to Rs 230. We recommend BUY.