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Motilal Oswal remains bullish on this tyre maker that fell 44 percent in two years

Motilal Oswal remains bullish on this tyre maker that fell 44 percent in two years

Motilal Oswal remains bullish on this tyre maker that fell 44 percent in two years
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By Ankit Gohel  Jan 27, 2020 3:35:24 PM IST (Published)

Motilal Oswal expects revenue at 12 percent CAGR over FY20-22E, with EBITDA margin expansion of ~170 bps by FY22E to 12 percent and PAT CAGR of ~31 percent.

Brokerage firm Motilal Oswal expects an upside of 23 percent on tyre maker CEAT's stock and has maintained ‘Buy’ call with a target price of Rs 1,250 per share. It is notable that the stock has fallen over 44 percent in the last two years.

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Motilal Oswal expects CEAT to see faster revenue growth in FY21-22 led by initial signs of stability in OEM volumes, low base in replacement business and new capacities. This coupled with benign natural rubber prices should aid strong EPS growth, it said.
The brokerage expects revenue at 12 percent CAGR over FY20-22E, with EBITDA margin expansion of ~170 bps by FY22E to 12 percent and PAT CAGR of ~31 percent.
“CEAT has laid strong emphasis on the effective marketing and branding of its products. Since the 2W/passenger car segment is consumer-facing, we believe factors such as brand loyalty, visibility, and recall go a long way in creating replacement market demand and improving its market share, which would, in turn, benefit its margin profile,” the brokerage said.
CEAT has identified 2W, Passenger cars and OTR (truck/off-road) tyre segments as its strategic focus areas, given their ability to boost margins and lower the company’s dependence on the truck segment.
Revenue contribution from these areas of focus has increased significantly over the years, from 20 percent in FY10 to 48 percent in FY18.
“We believe that with the on-going capex plan, the contribution from focus areas could scale up to 60-65 percent over the next 4-5 years, which would also reflect positively in the company’s operating performance,” Motilal Oswal said.
CEAT Ltd. reported a marginal increase in its consolidated net profit at Rs 52.5 crore in Q3FY20 from Rs 52.25 crore in the same period a year ago.
Revenue from operations during the quarter rose to Rs 1,761.77 crore as against Rs 1,729.75 crore in the year-ago period. Revenues were driven by around 2 percent YoY volume growth.
EBITDA rose 27 percent to Rs 182.3 crore in Q3FY20 while margin expanded to 10.3 percent from 8.2 percent YoY due to fall in rubber prices.
While OEM volumes declined approximately 8 percent compared annually, replacement and exports grew 8 percent. Two-wheelers saw single-digit volume growth, but Commercial Vehicle tyres were flat.
At 2:37 pm, shares of CEAT were trading 0.63 percent lower at Rs 997.85 on the BSE.
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