Ceat LTD: India - Auto Ancillaries

Ceat Ltd

September 2016
INDIA | AUTO ANCILLARIES |
We initiate coverage on Ceat with a BUY rating and TP of Rs 1,375, valuing the company at BUY
10x FY18 earnings. We expect Ceat to post a strong 30% growth in FY18 earnings as it CMP RS 930 / TARGET RS 1860
benefits from new capacities and improved mix. We believe the company is geared
towards strong structural growth, and will show sound cross‐cycle resilience in margins. COMPANY DATA
Our BUY thesis is based on: O/S SHARES (MN) : 40
(1) Tyre industry reviving, with a recovery in demand from OEMs and replacement with a MARKET CAP (RSBN) : 39
strong monsoon, better economic activity, and rural resurgence MARKET CAP (USDBN) : 0.6
52 ‐ WK HI/LO (RS) : 1318 / 731
(2) Strong R&D capabilities; about 80 new products annually
LIQUIDITY 3M (USDMN) : 8.0
(3) Strategic shift towards consumer‐facing PVs and 2W tyre business PAR VALUE (RS) : 10
(4) 35% capacity expansion and ramped up distribution
SHARE HOLDING PATTERN, %
Crafting strong brands and increasing its reach Jun 16 Mar 16 Dec 15
Since the last five years, Ceat has made a strategic shift in its strategy, and has been focusing PROMOTERS : 50.8 50.8 50.8
FII / NRI : 26.2 30.0 27.2
on high‐margin 2Ws and PVs. It has already made a strong mark in these segments with FI / MF : 5.2 4.0 6.1
current 2W/PV market share at 27%/10% vs. 11%/0% in FY10, mainly led by: (1) its focus on NON PRO : 6.1 1.3 5.0
R&D (spends on this front have increased to Rs 500mn from Rs 13mn in FY10‐16) leading to PUBLIC & OTHERS : 11.8 13.9 11.0
average 80 new products every year, (2) increasing distribution – Ceat has tripled its district
coverage and doubled its exclusive Ceat Shoppe’ (franchises), (3) heightened advertisement PRICE PERFORMANCE, %
1MTH 3MTH 1YR
and promotional activities with ad spends rising by 5x in the last five years. ABS 10.8 4.4 ‐15.8
REL TO BSE 8.8 ‐1.9 ‐27.9
Capacity expansion in the right segments
Ceat is more than doubling its PV capacities; as it faced supply bottlenecks in 2W, it is PRICE VS. SENSEX
increasing its capacity by over 45% in this segment. Our checks suggest that both these 400
segments enjoy 30‐50% higher realizations vs. the truck‐bus segment, hence better margins.
We estimate 2W and PV segments to post a strong 27% CAGR volume growth until FY18. 300

Immune to risk from Chinese imports 200
Our biggest worry on the tyre sector has been the threat from low‐cost Chinese tyre
imports, which still sell at 25‐30% discount. This risk doesn’t seem to be fading – our 100
dialogue with the largest Chinese importer suggests that the pricing situation in TBRs is so
grim now that Chinese companies are fighting with not only Indian companies, but within 0
A‐14 O‐14 A‐15 O‐15 A‐16
themselves too (this segment has 25 Chinese players, frantic to gain share). However, given CEAT BSE Sensex
that the truck‐bus segment is now only 34% of Ceat’s revenue (industry 55%), it is

reasonably insulated; Chinese players are not focused on 2W/PV segments, as these
KEY FINANCIALS
consumers demand strong brand names and quality offerings, which would be too time
intensive and tedious for them. Rs mn FY16 FY17E FY18E
Net Sales 57,141 60,151 70,844
Valuations EBIDTA 8,223 7,784 9,567
At the current price, Ceat trades at 7x our FY18 EPS, despite being reasonably immune to Net Profit 4,579 4,294 5,583
cutthroat Chinese competition. We see 12% EPS CAGR between FY16‐18 (easily achievable), EPS, Rs 112.5 105.5 137.2
as the company benefits from increased capacities in key segments and maintains healthy PER, x 8.5 9.1 7.0
EV/EBIDTA, x 5.4 5.3 4.0
ROE/ROCE (post‐tax) of 20%+. We see current valuations as lucrative and see potential
P/BV, x 1.9 1.6 1.3
rerating as consumer‐facing businesses rise and cross‐cycle margin resilience increases.
ROE, % 22.2 17.7 19.1
Initiate with a BUY and a TP of Rs 1,375, valuing the company at 10x FY18 earnings. Debt/Equity (%) 30.4 21.7 18.1
Page | 1 | SIGNAL2NOISE

CEAT LTD INITIATING COVERAGE
Ceat digressing from the industry
While the industry has been fighting tooth and nail in the truck and bus segment,
Ceat has strategically focused on shifting away from this segment – a move which
makes sense as: (1) truck‐bus segment is highly immune to threats from cheaper
imports, (2) it is a price‐sensitive segment, thereby diminishing margins and return
ratios over the longer term, and (3) cyclicality is very high in the segment.

Focused on consumer‐facing segments
Truck‐bus segment now forms only 34% of Ceat’s revenues (58% in FY11), led by its
strategic focus on increasing presence in the premium consumer‐facing segments of
PVs and 2Ws. Truck segment still forms over 55% of industry sales and competition
remains high in this segment. Our checks suggest that realisation (per kg) difference
between a CV tyre and a 2W tyre could be as high as 50%, and hence, margins would
be sturdier. This has helped the company to boost margins as well as return ratios.

Ceat revenue split Industry revenue split
Trucks and Buses 2/3 Wheeler LCV PVs Farm/speciality
Tractor 8%
100% OTR 3%
14% 12% 11%
4% 13% 15%
80%
13% 2W 12%
13% 12%
11%
60%
28% 33%
40%
CVs 55%
58%
20%
34% 30% PVs 22%
0%
FY11 1QFY17 FY18E

Replacement price premium vs. OEMs across segments Shift in margin and return profile
60% ROE EBITDA Margin (RHS)
35% 16%
50% 30% 14%
12%
40% 25%
10%
20%
30%
8%
15%
20% 6%
10%
4%
10%
5% 2%
0% 0% 0%
CVs Uvs Cars 2W 2011 2012 2013 2014 2015 2016 2017E 2018E


Inroads mainly led by R&D and delivering quality products
The company has been focused on building a superior brand image and has been
consistently investing in research and development activity – this has helped it to roll
out quality products and build sustainable brands, crucial in the consumer facing 2W
and PV segments. Ceat has upped its allocation on R&D over FY07‐16 to Rs 510mn
from Rs 17mn, which helped the company to launch an average of 80 new products
each year over the last five years – a feat it had never achieved in its four‐decade
history. Focus on research has helped Ceat to enter newer models, enter the PVs
segment in FY12, and to cater to OEMs.

R&D consistently rising
Recurring Capital Expenditure % of sales RHS
600 1.20
500 1.00
400 0.80
Rs Mn
300 0.60
200 0.40
100 0.20
0 0.00
FY07 FY08 FY09 FY10 FY11 FY12 FY13 FY14 FY15 FY16

New product development
New Products developed
120
100
80
60
40
20
0
FY12 FY13 FY14 FY15 FY16


Reach and marketing
Given its focus on building consumer brands, Ceat has channelled its efforts on
effectively communicating and building its brand awareness. It has consistently
increased its spend on advertisement and marketing activities to Rs 1,186mn (2.1% of
revenues) from Rs 200mn (0.7% of revenues) in FY10. Moreover, apart from print and
TV advertisements, it has also channelized its efforts on building a robust distribution
network through its franchise model ‘Ceat Shoppe’, which not only sells Ceat’s
products, but also adds to the experience and servicing aspect (air‐conditioned

showrooms catering to all tyre‐servicing requirements such as wheel alignment,
punctures).

Advertisement spends have increase by 5x in five years
1400 Rs Mn % of Revenues 2.50%
1200
2.00%
1000
1.50%
800
600
1.00%
400
0.50%
200
0 0.00%
2010 2011 2012 2013 2014 2015 2016

Ceat Shoppes now form ~10% of domestic revenues
700 Number of Ceat Shoppes Districts Covered
600
500
400
300
200
100
0
FY12 FY16


OEM penetration to improve its brand strength
In its quest to make a strong aftermarket brand in the PVs and 2W segment, the
company started focusing on the OEM segment – this helped it to increase its brand
image/recall and also helped in launching superior quality products. Moreover, its
internal estimates suggest that there is 30% customer stickiness towards the tyre
brand that comes fitted with the vehicle. Ceat is present across large OEMs with the
addition of Honda 2Ws as its latest client (last year). OEM segment contribution to
revenue has risen to 23% from lows of 13% in FY10 – a staggering 25% CAGR.

Ceat has made inroads across major OEMs

OEM segment revenue has grown at a staggering 25% CAGR
16,000 OEM Revenues OEM % of Revenue 25%
14,000
20%
12,000
10,000 15%
8,000
6,000 10%
4,000
5%
2,000
‐ 0%
2010 2011 2012 2013 2014 2015 2016


Market share – then and now
The right products and investments in brand awareness, distribution, and promotion
have led to a substantial market share gain in the consumer 2W and PVs segment. Its
share of the PVs segment is now ~10% from nothing in FY11, and its share in 2W has
tripled in the same period. With lower competitive pressures and better realisation,
we expect this strategy to bear fruit going ahead.

Substantial market share gains in strategic segments Contribution to revenues
30%
2011 2016 PVs segment 2W segment
30%
25%
25%
20%
20%
15%
15%
10% 10%
5% 5%
0% 0%
Cars UVs 2Ws FY10 FY12 FY14 FY16

Ceat has a dominating 27% share in the 2W segment… … and 7% share in the passenger car segment…
Others 16%
MRF 20%
MRF 35%
TVS Srichakra
22% Others 53%
Bridgestone
20%
Ceat 7%
CEAT 27%


…while its share in the UV segment has risen to 15% from non‐existent
MRF 20%
Others 45%
Bridgestone 20%
Ceat 15%

Capacities in the right segments
Given the focus on meaningfully increasing PV segment and 2W segment businesses,
the company has significantly increased capacities. Its PV capacities are slated to rise
by 2.3x and 2Ws by 1.4x through its new capacities in Halol and Nagpur (already
commissioned and estimated to be fully ramped up by 1QFY18).

New assets to boost topline and earnings
Current
450 FY18 peak
400
350
300
MTPD
250
200
150
100
50
0
PVs 2Ws OHT/ Others TBR TBB


Details of capacities
Total Capacities MTPD MTPY Status
Bias only Bhandup 250 87,500 80% Utilization
Nashik (Total) 200 70,000 80% Utilization
Nashik (TBB) 90 31,500
Nashik (Farm) 30 10,500
Nashik (PVs radial) 12 4,200
Nashik (OHT and Speciality) 68 23,800
Radial only Halol phase 1 (Total) 150 52,500
Halol P1 (TBR) 80 28,000
Halol P1 (PVs) 70 24,500
New Halol phase 2 (Total) 120 42,000 50MTPD already commissioned. Aims to achieve 120MTPD production by 1QFY18.
Halol phase 2 (PVs) 110 38,500
Halol phase 2 (TBR) 10 3,500
New Nagpur (Total)
Nagpur (All 2Ws) 120 42,000 20MTPD already commissioned. Aims to achieve 120MTPD production by 1QFY18.
OHT ‐ Ambernath 100 35,000 Initially will commission 40MTPD by FY18
Others Sri‐Lanka 60 21,000
Outsourced (mainly 2W, tubes) 300 90,000
Total post expansion 1,300
Current Capacities 960
% Increase 35%

Truck and bus‐bias segment to remain sluggish
The truck and bus bias segment, which used to form 61% of Ceat’s revenues, has
shrunk to 34% recently, mainly as: (1) the company is focusing on consumer
segments, and (2) increased preference towards radial tyres. Ceat has seen a 3%
compounded decline in revenues in FY13‐16, a trend we expect to continue. It has a
total capacity of 340MTPD, with facilities in Bandup (Mumbai) and Nashik.
Management aims to shift production facilities (as this segment shrinks) to Nasik
from Bhandup, thereby freeing 23 acres of prime land that is valued at over US$
150mn at current rates.

T&B segment revenues to remain sluggish… …while TBB is a fading segment where Ceat still holds fort
Truck and Bus Revenues % yoy
35,000 8% MRF 24%
6%
30,000
4%
25,000 Others 42%
2%
20,000 0%
Rs Mn
15,000 ‐2%
‐4%
10,000
‐6% Apollo 21%
5,000
‐8%
0 ‐10%
2013 2014 2015 2016 2017E 2018E Ceat 13%


Exports – sluggishness to fade
Exports now contribute 13% of revenues, down from a peak of 22% in FY13 – a sharp
decline as the global market was flooded with Chinese players, which led to market‐
share losses that were incited further by radialisation in its key export markets.
However, exports are likely to improve as additional capacities in the radial segment
would lead to reviving exports to a certain extent.

Exports under pressure Export split by country
12,000 Exports Revenue % of Revenue 25% Others 12%

Middle East
10,000 29%
20%
South
8,000
America
15% 17%
Rs Mn
6,000
10%
4,000
5%
2,000
Africa 18%
South East
‐ 0% Asia 24%
2011 2012 2013 2014 2015 2016

Srilanka JV
The company has a 50:50 joint venture with Kelani Holdings having a manufacturing
capacity of 61MTPD. Ceat holds a dominating 50% market share in the country, as it
is the only company that has manufacturing capabilities – making it the most price‐
competitive player. Given low competitive pressures, it has been able to improve
margins by retaining RM benefits, despite weak market conditions.

Sri Lanka revenues under pressure, but margins continue to expand
Srilanka Revenues EBITDA Margin
2,500 30%
2,450
25%
2,400
2,350
20%
2,300
2,250 15%
2,200
10%
2,150
2,100
5%
2,050
2,000 0%
2012 2013 2014 2015 2016


Volumes growth to be robust
Ceat has seen a 6% CAGR in consolidated volumes in FY16‐18, and we estimate it to
post a strong 12% CAGR in volumes in FY16‐18 as the company’s strategy bears fruit.
We estimate PV segment to post the highest volume CAGR at 30% followed by 2W
segment at 25% (where our checks suggest that dealers are stock out and where
demand outstrips supply).

Volume growth
Trucks and Buses 2/3 Wheeler LCV PVs Farm Speciality
400,000
350,000
300,000
250,000
MT
200,000
150,000
100,000
50,000
‐
2010 2011 2012 2013 2014 2015 2016 2017E 2018E


Valuations
At the current price, Ceat trades at 7x our FY18 EPS, despite being relatively insulated
from cutthroat Chinese competition. We see it easily achieving a 12% EPS CAGR, as it
benefits from increased capacities in the key segments and maintains healthy
ROE/ROCE (post‐tax) of 20%+. We see current valuations as lucrative, and see
potential rerating as its consumer‐facing businesses rise and cross‐cycle margin
resilience increases. Initiate with a BUY rating and a TP of Rs 1,375, valuing the
company at 10x FY18 earnings.

One‐year forward band charts
1800 12x
P/E band 1600 (Rs) P/BV band
(Rs) 2x
1600
1400
1400 9x
1200 1.5x
1200
1000
1000 6x
800 1x
800
600
600
3x
0.5x
400 400
200 200
0 0

EV/EBITDA band 60000 EV/Sales band
90000 (Rs mn) 0.8x
(Rs mn)
80000 8x
50000
70000 0.6x
6x
60000 40000
50000
30000 0.4x
4x
40000
30000 20000
0.2x
2x
20000
10000
10000
0 0

Mkt cap/sales band
60000 0.8x
(Rs mn)
50000
0.6x
40000
0.4x
30000
20000
0.2x
10000


Company snapshot
Ceat is the fourth largest tyre manufacturer in India with a presence across segments
and its own manufacturing capacity of 660MTPD and outsourced capacity of
60MTPD. It has a very strong brand name in the 2W segment with a 27% market
share, and has been consistently increasing its share in the PV segment. The company
is in the process of expanding capacities by 35% in the focussed consumer‐facing
segments. It has a 50% JV partnership with Kelani Holdings in Sri‐Lanka where it
dominates with a 50% marketshare.

Ceat’s revenue has seen 14% CAGR over FY10‐15 Its margin profile has improved consistently
Truck and Bus 2/3 Wheeler
EBITDA EBITDA Margin (RHS)
LCV Passenger Cars and UV's 12,000 16%
Farm Speciality
90,000 14%
10,000
80,000
12%
70,000 8,000
10%
60,000
INR Mn
INR Mn
50,000 6,000 8%
40,000 6%
4,000
30,000
4%
20,000
2,000
10,000 2%
‐ 0 0%
2010 2011 2012 2013 2014 2015 2016 2017E 2018E 2010 2011 2012 2013 2014 2015 2016 2017E 2018E

Return ratios are robust FCF to improve as capex cycle is over
ROE ROCE (post tax)
35% 25% 6,000 FCF Debt‐Equity Ratio 2.5
5,000
30%
20% 4,000 2.0
25% 3,000
15% 2,000
20% 1.5
INR Mn
1,000
15% 0
10% 1.0
‐1,000
10%
‐2,000
5% 0.5
5% ‐3,000
‐4,000
0% 0% ‐5,000 0.0
2011 2012 2013 2014 2015 2016 2017E 2018E 2010 2011 2012 2013 2014 2015 2016 2017E 2018E

Key risks
(1) Volatile rubber prices (2) weak demand outlook (3) growing Chinese imports

SWOT analysis
Strengths Weaknesses
• Robust brand name in PVs and 2W segments • Presence in TBB segment, which is shrinking
• R&D capabilities and fast roll out of new • Smaller player in a competitive market
products
• Exposure to emerging market Sri Lanka
Opportunities Threats
• Consistently increasing presence in PVs • Increasing competition from Chinese imports
• Exports of radial tyres, where it is lagging • Raw material volatility
Source: Company, PhillipCapital India Research

Financials

Income Statement Cash Flow
Y/E Mar, Rs mn FY15 FY16 FY17e FY18e Y/E Mar, Rs mn FY15 FY16 FY17e FY18e
Net sales 57,521 57,141 60,151 70,844 Pre‐tax profit 4,777 6,539 6,130 7,979
Growth, % 4 ‐1 5 18 Depreciation 934 1,075 1,217 1,305
Other income 0 0 0 0 Chg in working capital 2,968 ‐903 1,867 ‐837
Total income 57,521 57,141 60,151 70,844 Total tax paid ‐1,475 ‐1,661 ‐1,855 ‐2,414
Raw material expenses ‐35,333 ‐31,689 ‐34,351 ‐40,024 Other operating activities ‐4,880 3,487 766 644
Employee expenses ‐3,789 ‐4,088 ‐4,060 ‐4,959 Cash flow from operating activities 2,324 8,537 8,125 6,677
Other Operating expenses ‐11,595 ‐13,141 ‐13,955 ‐16,294 Other investing activities 495 ‐24 0 0
EBITDA (Core) 6,804 8,223 7,784 9,567 Cash flow from investing activities ‐2,533 ‐7,080 ‐4,000 ‐2,500
Growth, % 3.4 20.9 (5.3) 22.9 Free cash flow ‐209 1,457 4,125 4,177
Margin, % 11.8 14.4 12.9 13.5 Debt raised/(repaid) ‐704 1,400 ‐1,000 0
Depreciation ‐934 ‐1,075 ‐1,217 ‐1,305 Other financing activities ‐1,237 ‐4,299 ‐1,377 ‐1,295
EBIT 5,870 7,148 6,568 8,262 Cash flow from financing activities ‐1,940 ‐2,899 ‐2,377 ‐1,295
Growth, % 2.7 21.8 (8.1) 25.8 Net chg in cash ‐2,150 ‐1,442 1,749 2,882
Margin, % 10.2 12.5 10.9 11.7
Interest paid ‐1,319 ‐907 ‐766 ‐644
Other Non‐Operating Income 226 299 328 361 Valuation Ratios
Non‐recurring Items 0 0 0 0
FY15 FY16 FY17e FY18e
Pre‐tax profit 4,777 6,539 6,130 7,979
Per Share data
Tax provided ‐1,577 ‐1,978 ‐1,855 ‐2,414
EPS (INR) 79.4 112.5 105.5 137.2
Profit after tax 3,201 4,561 4,275 5,565
Growth, % 14.9 41.6 (6.2) 30.0
Others (Minorities, Associates) 33 18 18 18
Book NAV/share (INR) 413.3 507.3 597.3 718.0
Net Profit 3,233 4,579 4,294 5,583
CEPS (INR) 102.4 138.9 135.4 169.2
Growth, % 14.9 41.6 (6.2) 30.0
CFPS (INR) 179.9 123.8 172.7 139.4
Net Profit (adjusted) 3,233 4,579 4,294 5,583
Return ratios
Unadj. shares (m) 41 41 41 41
Return on assets (%) 12.7 14.2 12.2 13.5
Wtd avg shares (m) 41 41 41 41
Return on equity (%) 19.2 22.2 17.7 19.1
Return on capital employed (%) 19.5 21.3 17.4 18.9
Turnover ratios
Balance Sheet Asset turnover (x) 2.9 2.6 2.3 2.6
Y/E Mar, Rs mn FY15 FY16 FY17e FY18e Sales/Total assets (x) 1.6 1.5 1.5 1.5
Cash & bank 1,236 1,073 2,821 5,703 Sales/Net FA (x) 3.3 2.7 2.4 2.6
Debtors 7,050 6,188 7,335 8,639 Working capital/Sales (x) 0.0 0.0 0.0 0.0
Inventory 6,801 6,621 4,041 4,709 Receivable days 44.7 39.5 44.5 44.5
Loans & advances 824 1,478 1,478 1,478 Inventory days 43.2 42.3 24.5 24.3
Total current assets 15,912 15,359 15,676 20,529 Payable days 87.2 48.0 47.9 47.7
Investments 3,124 403 403 403 Working capital days 9.2 13.7 1.6 5.7
Gross fixed assets 24,183 30,395 34,395 36,895 Liquidity ratios
Less: Depreciation ‐8,590 ‐9,412 ‐10,628 ‐11,933 Current ratio (x) 1.2 1.3 1.2 1.5
Add: Capital WIP 2,290 3,043 3,043 3,043 Quick ratio (x) 0.7 0.7 0.9 1.2
Net fixed assets 17,883 24,026 26,810 28,005 Interest cover (x) 4.5 7.9 8.6 12.8
Non‐current assets 1,305 1,593 1,593 1,593 Total debt/Equity (%) 37.2 30.4 21.7 18.1
Total assets 36,975 39,814 42,915 48,963 Net debt/Equity (%) 29.9 25.2 10.1 (1.4)
Current liabilities 13,228 12,148 12,584 13,718 Valuation
Total current liabilities 13,228 12,148 12,584 13,718 PER (x) 12.0 8.5 9.1 7.0
Non‐current liabilities 6,598 6,698 5,698 5,698 PEG (x) ‐ y‐o‐y growth 0.8 0.2 (1.5) 0.2
Total liabilities 19,826 18,847 18,282 19,416 Price/Book (x) 2.3 1.9 1.6 1.3
Paid‐up capital 405 405 405 405 EV/Net sales (x) 0.8 0.8 0.7 0.5
Reserves & surplus 16,418 20,241 23,906 28,820 EV/EBITDA (x) 6.5 5.4 5.3 4.0
Shareholders’ equity 17,149 20,968 24,633 29,546 EV/EBIT (x) 7.5 6.2 6.3 4.7
Total equity & liabilities 36,975 39,814 42,915 48,963


Ceat LTD: India - Auto Ancillaries

Uploaded by

Copyright:

Available Formats

Ceat LTD: India - Auto Ancillaries

Uploaded by

Document Information

Original Description:

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

Ceat LTD: India - Auto Ancillaries

Uploaded by

Copyright:

Available Formats

50% 30% 14%

1400 Rs Mn % of Revenues 2.50%

700 Number of Ceat Shoppes Districts Covered

16,000 OEM Revenues OEM % of Revenue 25%

12,000 Exports Revenue % of Revenue 25% Others 12%

You might also like