Markets
Ceat’s on the right track, but risk to margins is rising
Summary
- Nomura analysts believe the tyremaker’s strategy of exploring several growth avenues is a step in the right direction, but there are worries about how profit margins will shape up from here.
Ceat Ltd laid out its medium-term plans at its annual investor conference on Friday. Analysts returned pleased even as margin pressure is rising. The tyremaker’s shares gained nearly 3% on Monday, even as the benchmark Nifty 50 index fell marginally.
As part of its ‘FY26 vision’, the company is looking to maintain its leadership in the higher-margin two-wheeler segment, where it has a 33% share of the replacement market. It has a 16% share of the passenger-vehicle replacement market, which puts it in third place, though it aims to climb to second by the end of FY25 and take the top spot in the next two to three years. It’s also looking to increase the share of export revenue from a little under 20% to more than 25% over the medium term.
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The company will focus on bite-size capital expenditure (capex) and maintaining a double-digit return on capital employed. Previously, Ceat had undertaken multiple capex programmes simultaneously, which made it harder to manage cash flows and debt.
Its capex guidance is ₹1,000 crore for FY25 and ₹1,100 crore for FY26, and the company does not feel the need for greenfield capex in the next couple of years. Potential revenue at the company’s current capacity is ₹15,000 crore. Its consolidated revenue in FY24 was ₹11,944 crore.
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Nomura analysts believe Ceat’s strategy of exploring several growth avenues — gaining domestic market share, expanding in the off-highway segment where margins are better, and making a stronger export push with new products (radial tyres for passenger cars, trucks, and buses) and geographies (the US) — is a step in the right direction.
Potential headwinds
So far, so good. But there are worries about how profit margins will shape up from here. Ceat’s raw-material basket price is expected to rise 3-4% sequentially in the June quarter (Q1 FY25). The price of rubber, a key raw material, has also been climbing recently, and if the trend persists, it could hurt the margin in Q2 FY25. Rubber prices are currently around ₹193 a kg, compared to an average of about ₹150 a kg in Q4 FY24.
Note that FY24 was a strong year for the company’s margins as it benefitted immensely from the drop in input costs. Consolidated Ebitda grew by a whopping 70% year-on-year to ₹1,652 crore FY24, while the Ebitda margin jumped to 13.8% in FY24 from 8.6% in FY23. The balance sheet improved as well, with debt falling to ₹1,629 crore as of March-end, down 22% from a year ago.
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Capturing these margin tailwinds, Ceat’s stock price has climbed 30% over the past year. But margin headwinds could cap significant upside from here on. Investors should watch out for potential price hikes.
