Ceat Limited

Positively Reinforced
October 07, 2010 BUY
Automobile Sector | Company Update Price: Rs 171 Target Price: Rs289
Sr. Analyst | Piyush Parag
Associate | Jay Thakker

Stock Details
Reuters / Bloomberg CEAT.BO/CEAT.IN
Management Meet Note
Equity Capital (mn Shares ) 34 We recently met with the management of Ceat Limited (Ceat), which reinforced
Face Value (Rs) 10 our positive view on the company. We re-iterate our BUY call on the stock with
target price of Rs 289. The key takeaways of the meeting are as discussed
52 Week H/L (Rs) 195 / 124
below
Market Cap (Rsbn) 5.8
Daily Avg. Volume (mn shares) 0.7
Daily Avg. Turnover (US$ Mn) 2.2
Key Takeaways
BSE Sensex / Nifty 20,315 / 6,120
Source: Capitaline
Pricing power to stay intact in the medium term: Management believes that
the favorable phase of pricing power is likely to stay in the medium term as the
Shar e holding pattern supply-demand gap is expected to remain in favour of tyre manufacturers,
(as on 30th June ‘10) (%) despite significant capacity additions over the next three years. The new
capacity expansions are largely for T&B radials, whereas, bias tyres still
Promoters 48.5
forms~85% demand of the total T&B tyres. Ceat believes that radials would
FIs/FIIs 20.2 grow much faster than bias tyres.
Others 31.3
Source: Capitaline
Turnover expected to double in 3-4 years: Ceat management expects to
double the company’s turnover over the next 3-4 years, aided by its radial
MKSL V s Consensus E stimates expansion, strong growth expected from outsourced tyres and continued
MKSL Cons Diff (%) growth momentum in exports. We believe this is an aggressive estimate and
FY11E
expect the company to report CAGR of 17.6% FY10-13E.
Sales (Rs bn) 33.3 34.0 (2.1)
EPS (Rs) 32.8 29.3 11.9
Export focused on Middle East and African customers: Ceat expects exports
FY12E contribution to remain ~15% of total turnover going forward. The company
Sales (Rs bn) 40.2 40.5 (0.7) exports to more than 100 countries, with focus on Middle East, Africa and Latin
EPS (Rs) 49.2 43.0 14.4 America markets. The company exports truck (medium and light) tyres and
Source: Bloomberg, Mangal Keshav Research Estimates speciality tyres. With the radial expansions onstream, the export market could
be a fall back option for Ceat, if domestic radialistion happens to be at slower
pace than expected. The management has indicated domestic truck radialisation
to increase from 15% currently to 25% by FY15.

Price Performance
Radial capacity to move to 30% by FY13E: Ceat is expanding its capacity
(% ) 1M 3M 12M YTD
significantly in radials, both PCRs and TBRs. The company has budgeted
Absolute (6.0) 29.6 10.6 14.6 altogether Rs 5.3bn for its radial expansion in a Greenfield project at Halol and a
Brownfield project at Nashik plant. A significant portion of the budgeted
Rel. to Sensex (15.0) 13.3 (10.3) (1.1)
investment has already been done. The new capacity additions are on schedule
Source: Capitaline
and the commercial production would start by October/November this year.
With all the radial expansion in place, the radial capacity would go up to ~30%
of the total capacity.

Improving product mix: Ceat expects an improvement in the product mix as

production ramps up at the facility at Nashik and the new facility at Halol. The
new plant is slated to produce 70 MT/day of PCRs and 60 MT/day of TBRs. In
respect of PCRs, the expansion would be c.9x over its current PCR capacity of
just 13 MT/day.

Mangal Keshav Securities Ltd., 301A-304A, Kotia Nirman, Andheri (W), Mumbai – 400 053. 1

Radial Capacity to constitute 31% of the increased
capacity
Plans to triple outsourced tyres to 7.2mn units by
FY12
Radialisation & increase in outsourced tyres to
result in margin expansion
Radialisation & increase in outsourced tyres to
result in margin expansion
Developing Bhandup land – a valid option
Lack of TBR technology could hurt
Ceat Limited
Mangal Keshav Securities Ltd.
Focus on Radialisation
Capacity
Facility MT/day Notes
Existing
- Bhandup 245 Largely cross ply
- Nashik 165 Radial and cross ply
Total - FY10 410
Radial Capacity
Nashik 13 Existing PCRs
35 New PCR capacity; production started from July 2010
48 PCR capacity @ Nashik facility
Halol 70 PCR capacity operational by November 2010
TBR capacity; partial operation will start by November
60 2010
130 Radial Capacity @Halol facility
Total Radial Capacity 178 31% of total increased capacity
Source: Company, Mangal Keshav Research Estimates
Focus to remain on outsourced tyres: Ceat plans to triple its outsourced 2/3 -
wheeler capacity to 7.2 mn units p.a. by FY12. The margins in 2/3 wheeler
segment has improved significantly in the recent past. Ceat is the second largest
player in 2/3 wheeler market, followed by MRF, with significant 20% market
share. The management expects to increase its market share after the
commencement of outsourced capacity.
Margins to improve significantly going forward: The higher margins in
outsourced 2/3 wheeler segment, along with the higher-margin radial truck
production, would lead to higher margins for the company going forward. As per
the management, the company would be able to make double the margin in truck
radial segment as compared to that of cross ply tyre segment. However, the
differential margins would decline at PBT levels due to increase in depreciation
and interest costs.
EBITDA margins to expand after H1FY11: Ceat expects the EBITDA margin to
improve from Q3FY11 onwards due to the tyre price hikes already effected and
stability in rubber prices.
Scope to increase new capacities on surplus land: Ceat has purchased 160
acres land in Halol (Gujarat) and 50 acres land in Ambernath (Maharashtra) for
approx. Rs1bn and Rs 350mn respectively. The company can expand its capacity
to 550MT/day from the current planned 130 MT/day capacity at its Halol facility,
while the Ambernath facility can accomodate up to 500 MT/day. The Halol
facility is expected to be fully operational over the next 10 months, after which
the company might look for further expansions in the facility.
Company open to development of Bhandup land: The Ceat management has
indicated that they would be considering the option of development of the
Bhandup land besides outright sale.
Technology risks: Indian Tyre manufacturers lack the technology required for
T&B radial tyres. They have also been unable to tieup with other global players
for the required technology. JK Tyres is the only Indian player, which has foreign
collaboration with Continental Tyres for TBR’s. Hence like other players Ceat too
would have to travel though the learning curve to develop the technology
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 Mangal Keshav Securities Ltd.

required for TBR tyres. Further, Ceat also considers the entry of Michelin
(expected in FY14) as a major competition due to its superior quality and
technology in radialisation.

Reiterate BUY with target price of Rs 289 providing
an upside of 69%
Valuations: Ceat is currently trading at 3.5x & 3.8x FY12E EPS and EV/EBITDA.
We reiterate our BUY rating with potential upside of 69% from current levels.
We believe Ceat is a strong case for re-rating, because it now enjoys partial
pricing power leading to lower earnings volatility. We have assigned target
EV/EBITDA multiple of 5x on FY12E EBITDA, 10% premium to its 2-year average
EV/EBITDA multiple of 4.5x, to arrive at a target price of Rs289. At our target
price, the stock would discount FY12E EPS by 5.9x, which is at 10% premium to
5-year average P/E multiple.

Valuation – 66% upside to CMP

Rs mn Value per share

1yr Rolling Fwd Multiples’ Trend EBITDA - FY12E 3,265 95.4
Average PER (x) EV/EBIDTA (x) Target Multiple (x) 5.0
5yr 5.2 5.5 Enterprise Value 16,327 477
3yr 3.8 4.8 Net Debt 6,440 188
2yr 3.6 4.5 Equity Value 9,887 289
1yr 3.9 4.8 CMP 171
Current 4.3 4.7 Upside (%) 69
Source: Company, Mangal Keshav Research Estimates
Implied P/E - FY12E at TP 5.9
Implied P/BV - FY12E at TP 1.2
Source: Mangal Keshav Estimates

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 Mangal Keshav Securities Ltd.

Key Financials
Income statement (Rs mn) Balance Sheet (Rs mn)
(YE March 31st) FY09 FY10 FY11E FY12E FY13E (As on March 31st) FY09 FY10 FY11E FY12E FY13E
Total revenues 23,665 28,075 33,282 40,197 45,659 Cash & equivalents 2,015 1,400 767 2,605 4,713
% growth 1.6 18.6 18.5 20.8 13.6 Debtors 3,187 3,763 4,377 5,231 5,879
Cost of Sales 17,991 18,688 23,624 28,353 31,955 Inventory 2,194 4,061 5,048 6,020 6,741
SGA 5,586 6,581 7,471 8,579 9,685 Others 794 1,101 1,165 1,407 1,598
EBITDA 87 2,806 2,187 3,265 4,019 Total Current Assets 8,191 10,325 11,358 15,263 18,932
% growth (95.3) 3,107.0 (22.0) 49.3 23.1 Current Liabilities 5,069 7,910 9,871 11,813 13,312
Depreciation 256 269 355 538 669 Net Working Capital 3,122 2,415 1,486 3,449 5,620
EBIT (169) 2,537 1,832 2,727 3,349 Investments 427 585 585 585 585
Interest 697 568 657 777 758 Net Fixed Assets 7,949 10,028 13,206 13,968 13,671
Other Income 494 422 455 492 531 Total assets 11,498 13,027 15,277 18,002 19,876
EBT (372) 2,390 1,630 2,442 3,123 Other Liabilities 163 202 202 202 202
Tax (211) 780 505 757 968 Debt 6,451 6,538 7,824 9,044 8,944
Reported PAT (161) 1,610 1,125 1,685 2,155 Shareholders' equity 342 342 342 342 342
EO Items (3) (3) - - - Reserves 4,541 5,945 6,909 8,414 10,388
Adj. PAT (158) 1,614 1,125 1,685 2,155 Total networth 4,884 6,287 7,252 8,756 10,731
% growth NM NM (30.3) 49.8 27.9 Total Liabilities 11,498 13,027 15,277 18,002 19,876

Cash Flow (Rs mn) Ratios (%)

(YE March 31st) FY09 FY10 FY11E FY12E FY13E (As on March 31st) FY09 FY10 FY11E FY12E FY13E
EBT (372) 2,390 1,630 2,442 3,123 EBIDTA margin 0.4 10.0 6.6 8.1 8.8
Depreciation 310 288 355 538 669 Net profit margin (0.7) 5.7 3.4 4.2 4.7
Tax paid 211 (780) (505) (757) (968) Return on equity (3.2) 28.9 16.6 21.0 22.1
Chg in Def. Tax Liability (110) 39 - - - ROCE 1.3 16.3 11.2 13.3 14.1
Net working capital 662 92 296 (126) (62) Inventory (days) 56 60 69 70 72
Others - - - - - Payable (days) 88 101 111 113 117
Operating cash flow 700 2,030 1,776 2,097 2,762 Receivables (days) 48 45 44 43 44
Capital expenditure (358) (2,366) (3,534) (1,300) (373) Net debt to equity (%) 0.9 0.8 1.0 0.7 0.4
Investments (331) (158) - - - Valuation parameters FY09 FY10 FY11E FY12E FY13E
Investing cash flows (689) (2,525) (3,534) (1,300) (373) Dil. No. of Shares (mn) 34 34 34 34 34
Change in borrowings 1,675 87 1,286 1,220 (101) Diluted EPS (Rs) (4.6) 47.1 32.8 49.2 62.9
Issuance of equity (88) (47) - - - P/E (x) (37.0) 3.6 5.2 3.5 2.7
Dividend paid - (160) (160) (180) (180) P/BV (x) 1.2 1.0 0.9 0.7 0.6
Financing cash flow 1,588 (120) 1,125 1,040 (281) EV/ EBIDTA (x) 117.5 3.9 5.9 3.8 2.5
Net change in cash 1,599 (615) (632) 1,837 2,108 EV/Sales(x) 0.4 0.4 0.4 0.3 0.2
Closing cash balance 2,015 1,400 767 2,605 4,713 Dividend Yield (%) 0.0 2.7 2.7 3.1 3.1
Source: Company, Mangal Keshav Research Estimates

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