Companies
Ceat’s tech focus could offer it an edge
Summary
The road ahead for the tyremaker is likely to be driven by the digital and technological initiatives it takes.
Ceat Ltd has room to make truck and bus radial (TBR) tyres up to 3,000 a day at its Chennai plant. There is also a scope to increase its capacity of passenger car radial tyres, which now stands at 20,000 tyres a day. But the road ahead for the tyremaker is likely to be driven by the digital and technological initiatives it takes.
Analysts who recently visited the tyremaker’s plant in Chennai have come back pleased with the relatively advanced automation and digitization levels at the plant. For perspective, the plant has a tandem mixer, which is based on new silica mixing technology. Nomura Financial Advisory and Securities (India) notes that the mixer is the first across Ceat’s plants and only second in the country. This has helped it meet international market standards.
“The company’s (digital) initiatives yield a payback period of two to three years and can be replicated across Ceat’s other plants," said analysts at Motilal Oswal Financial Services in a report on 4 March.
On the demand front, the ongoing quarter is a seasonally strong one in terms of replacement demand. Ceat notes that the demand from original equipment manufacturers in the two-wheeler segment is recovering well.
In the TBR replacement segment, Ceat expects to grow in double digit in FY25 led by market share gains even though industry demand is muted.
In the export markets, the expansion of the product portfolio in the US would provide a boost. Ceat expects exports to form more than 25% of sales over the next two to three years versus 18% now.
An increasing export contribution augurs well as the business is margin accretive. But investors would watch the margin trajectory against the backdrop of the sharp increase in costs of inputs such as rubber. Ceat expects its raw material basket to inch up by 1-1.5% sequentially in the March quarter (Q4FY24). Further impact would be reflected in Q1FY25.
Meanwhile, Ceat has not planned any greenfield expansion for the next two years. Capacity expansion would come through brownfield expansion, where the capital expenditure intensity is about 40% lower. This may help the company in improving return ratios.
In a greenfield investment, a company builds its own facilities from scratch whereas in a brownfield investment a company purchases or leases an existing facility.
For now, Ceat’s investors are sitting on handsome gains with the stock up by as much as 95% in the past one year primarily led by healthy margin performance. But further meaningful upsides may be capped. The stock trades 16 times their FY25 estimated earnings, showed Bloomberg data.
