Ceat - Company Report -11.04.08

8/8/2019 Ceat - Company Report -11.04.08

1/17January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539April 11, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539

Angel BrokingService Truly Personalized

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Jain IrrigationInitiating Coverage

Going ToughCeat is expanding capacity by setting up a green-field plant for high-Margin Truck and Bus

(T&B) Radial tyres. The company is also improving its product mix by enhancing capacity of high-Margin Specialty tyres. It is also increasing focusing on Exports. Further, we expect value unlocking to happen as the company plans to sell its surplus land at Bhandup, Mumbai over the next two years. Over FY2007-10E, we expect Ceat's Top-line to grow at a CAGR of 8.3%, and with Margins expected to sustain at 9MFY2008 levels (8.5%), we expect the company's Bottomline to grow at CAGR of 34% in the mentioned period. Also, de-merger of its investments has reduced Ceat's capital by 25% and is expected to improve Return Ratios.At current levels, the stock is trading at attractive valuations at 3.8x FY2009E EPS of Rs27.4 and 3.5x FY2010E EPS of Rs29.4 and FY2010E EV/Sales of 0.3x and EV/EBITDA of 3.2x.We Initiate Coverage on the stock, with a Buy Recommendation and Target Price of Rs147, translating into an upside of 43% from current levels.

Capacity expansions and Re-jig of Product mix to sustain Margins: Ceat aggressively expanding capacity, and re-jigging its product mix (focus on high-Marginproducts) to sustain Margins. In line with this, the company has expanded capacity (capex ofRs50cr) of its Bhandup and Nasik plants by 30 tonnes per day(tpd) for the manufacture ofT&B bias tyres. Ceat also plans to set up a 100tpd green-field T&B Radial facility at aninvestment of Rs500cr. It proposes to focus on the high-Margin passenger car radial (PCR)and Specialty tyre segments by increasing capacity from the current 40-50tpd to 100tpdgoing ahead. These initiatives will help the company sustain overall Margins and Profitability.

Increasing focus on Exports: Ceat has a global footprint and exports to over 110countries. Going ahead, it proposes to enhance focus on exports. Over the next two years,we estimate exports' contribution to gross sales to increase from the current 18% to 22%.

De-merged investments to improve Return Ratios: Ceat's investments in the RPGgroup companies of Rs120cr, which were not yielding significant returns, have now beende-merged. As a result, Ceat's capital has reduced by 25% and its RoCE is set to improvefrom 11.9% in FY2007 to 18.7% in FY2010E, and will aid a re-rating of the stock.

Shareholding Pattern (%)

Promoters 43.2

MF / Banks / Indian FIs 28.5

FII / NRIs / OCBs 11.6

Indian Public / Others 16.7

BSE Code 500878

NSE Code CEATLTD

Reuters Code CEAT.BO

Bloomberg Code CEAT IN

BSE Sensex 15,808

Nifty 4,778

Abs. 3m 1yr 3yr

Sensex (%) (13) 20 147

Ceat (%) (43) (7) 15

Stock InfoSector Tyre

Market Cap (Rs cr) 352

Beta 0.9

52 Week High / Low 244/92

Avg Daily Volume 190618

Face Value (Rs) 10

BUYPrice Rs103

Target Price Rs147

Investment Period 12 Months

Girish Solanki

Tel: 022 - 4040 3800 Ext: 319

E-mail: [email protected]

CeaInitiating Coverage

Source: Company, Angel Research. Note: FY2008E, Adj PAT is Rs88.5cr and RoE has been adjusted for sale of land.

Key FinancialsY/E March (Rs cr) FY2007 FY2008E FY2009E FY2010E

Net Sales 2,133 2,290 2,473 2,721

% chg 22.3 7.4 8.0 10.0

Net Profit 39.3 192.5 93.9 100.6

% chg - 390.4 (51.2) 7.2 OPM (%) 6.5 8.3 8.5 8.5

EPS (Rs) 8.6 56.2 27.4 29.4

P/E (x) 12.0 1.8 3.8 3.5

P/BV (x) 1.2 0.8 0.7 0.6

Adj. RoE (%) 10.4 21.1 18.8 17.2

RoCE (%) 11.9 17.8 18.4 18.7

EV/Sales (x) 0.4 0.3 0.3 0.3

EV/EBITDA (x) 5.8 3.2 3.1 3.2


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January 30, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539April 11, 2008 For Private Circulation Only - Sebi Registration No : INB 010996539

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Business Overview

Ceat, a part of the RPG Group, is one of India's leading tyre manufacturers in the country. InFY2007, the company manufactured 7.5mn tyres and registered an annual turnover of Rs2,133cr.Ceat has strong brand equity and is well-entrenched in both the domestic and internationalmarkets. The company has a domestic presence with 36 regional offices, more than 3,500dealers, and over 100 Clearing & Forwarding agents and It is the largest tyre exporter in Indiaexporting to over 110 countries worldwide. Ceat also has long-standing business tie-ups with themajor OEMs like Tata Motors, Ashok Leyland, M&M, L&T, Eicher, Swaraj Mazda, caterpillar, BajajAuto, Piaggio, Hero Honda, and TVS Motors. .

Ceat manufactures a wide range of tyres, which cater to almost all users including heavy-dutytrucks and buses, light commercial vehicles, earthmovers, forklifts, tractors, trailers, cars,

motorcycles and scooters, specialty tyres, radials and three wheelers. It also markets tubes andflaps, which are outsourced from 13 partners. The company has also entered into anagreement with Pirelli of Italy for outsourcing Radial tyres, marketed under the brand name, CEASpider Radials . It has two manufacturing units located at Mumbai and Nasik.

Source: Company, Angel Research

Exhibit 1: Segment-wise revenue (FY2007)

In FY2007, the company manufactured 7.5mn tyres and registered an annual turnover of Rs2,133cr


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The Indian Tyre industry has an aggregate installed capacity of 90.2mn tyres. The Top-sevenplayers account for over 85% of the marketshare. As the Top-seven tyre players areoperating at above 90% utilisation level, it has allowed the players to hike the tyre prices last year,leading stability to Margins. However, due to the capacity constraints, the Top-four players havelined up expansion plans to be completed over the next few years. According to industry, thecapex requirement until FY2012 would be around Rs5,000cr. The vehicle population is expectedto rise and keep the Replacement demand buoyant. In FY2007, the Replacement segmentcontributed 57% to the overall industry Sales, OEMs 29% and Exports 14%.

Industry Overview

The Indian Tyre industry, estimated at around Rs19,000cr, accounts for around 4% of the globalTyre market. Over FY2002-07, the industry clocked a CAGR of 10.6%. However, over the next fiveyears, industry is estimated to witness a marginal slow down and register CAGR of 8-9%. This blipin growth would be on account of the likely slow down in the OEM off-take across categories.

Ceat is the fourth largest Tyre manufacturer in the country with a marketshare of 12% trailing MRF(21.9%), Apollo Tyres (21.8%) and J K Industries (17.6%).

Turnover (Rs cr) 19,000

Export (Rs cr) 2,000

Installed capacity (million nos) 90.2

Production (million nos) 74.2

Production ('000 tonnes) 1,102

Historical CAGR (FY2003-07, %)

Production of MHCV tyres (in nos) 5.9

Value of Exports 12.9

Exhibit 3: Tyre Industry Overview (FY2007)

Source: Crisi Infac, Angel Research

Source: Crisinfac, Angel Research, Note: Marketshare is based on production minus exports

Exhibit 2: Marketshare across companies (FY2007)

The Indian Tyre industry,estimated at around Rs19,000cr, accounts for around 4% of the global Tyre market

The Top-seven players account for over 85% of the industry marketshare and are operating at above 90% utilisation level

MRF21.9%

Apollo Tyres21.8%

JK Inds17.6%

Ceat11.9%

Goodyear India6.3%

Birla tyres5.5%

TVS shrichakra3.4%

Falcon2.1%

Others9.5%


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Source: Crisinfac, Angel Research

Growth drivers

Improving Road Infrastructure and higher Vehicle population to boost Tyre offtake

Investment in Road infrastructure is expected to grow at a CAGR of 11% over the next threeyears, which is expected to result in cargo transport shifting from railways to roads. As a result,commercial vehicles (CV) sales would also improve. Going ahead, India is expected to emerge asan Automobile outsourcing and manufacturing hub. Expected growth in the Automobile industrywill translate into sustainable growth of its ancillary segment, the Tyre industry, both in OEMsegment and Replacement market over the next 5-10 years. The Replacement market for tyres,

which is around 57% of the overall domestic tyre offtake, is expected to grow at a much fasterpace due to the sharp increase in vehicle population. We see this market as the key growth driverfor the tyre manufacturers.

Source: Angel Research

Exhibit 5: Tyre Industry - Gearing up for overall Healthy growth

RobustEconomicperformance

Focus on

infrastructuredevelopment

Boomin AutoIndustry

Freight movement & increased passenger traffic

Demand creation both at time of construction & Subsequently

OEM demand leads to replacement demand

Exhibit 4: Segment-wise Sales break up (FY2007)In FY2007, the Replacement segment contributed 57% to

the overall industry Sales,OEMs 29% and Exports 14%

Expected growth in the Automobile industry will translate into sustainable growth of its ancillary segment, the Tyre industry,both in OEM segment and

Replacement market over the next 5-10 years


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Over the last five years, the Indian passenger vehicles (PV) segment grew by 17.8%, whilecommercial vehicles (CV) demand grew 21.9%. The PV segment is expected to grow at 11%,

while the CV segment is expected to grow by 8%, albeit on a higher base, over FY2007-10.

Buoyant OEM segment to boost Replacement Tyre segment

The Automobile sector is expected to continue on growth path over the medium term fuelled byincreasing domestic demand and growing exports. Penetration of cars in India is among thelowest in the world, which leaves significant room for growth. Further, given the government'sthrust on infrastructure spending, the CV segment would benefit from the same in turn aidinggrowth of the Tyre industry. Average disposable income levels have also been rising and so hasthe availability of low-cost financing. All these factors are expected to keep domestic vehicledemand robust, and in turn impact the OEM tyre offtake favourably.

While the domestic Automobile industry grew at a CAGR of around 11.6% during FY2003-08, it isexpected to grow by more than 10% (on an expanded base) over the next ten years. Also, in viewof the growth rate and interest shown by the global players, the government has indicated that

Auto hubs need to be set up in various parts of the country. Thus, India is set to become a hub forthe US $1trillion global Auto-components industry.

We expect the steady demand in OEMs to create a huge base of vehicles which willconsistently drive Replacement demand - a major component of tyre offtake.

Y/E March FY2003 FY2004 FY2005 FY2006 FY2007 FY2008 CAGR (%)

Commercial Vehicles 203 277 349 391 518 546 21.9

LCV 82 108 137 170 223 253 25.4

MHCV 122 169 213 221 295 293 19.2

Passenger Vehicles 780 1031 1,228 1,319 1,578 1,766 17.8

Cars 612 821 981 1,052 1,269 1,414 18.2

UV 115 149 181 200 224 250 16.8

MPV 53 61 66 67 84 120 14.1

Two Wheelers 4,992 5,628 6,577 7,566 8,467 8,051 10.0

Motorcycles 3,771 4,357 5,242 6,197 7,098 6,544 11.7

Mopeds 362 331 352 376 393 432 3.6

Scooter 859 940 983 993 976 1,075 4.6

Total 5,975 6,936 8,154 9,275 10,562 10,363 11.6

YoY Growth (%) 16.1 17.5 13.8 13.9 (1.9)

Source: Society of Indian Automobile Manufacturers (SIAM), Angel Research

Exhibit 6: Auto sales (in '000)

The PV segment is expected to grow at 11%, while the CV

segment is expected to grow by 8% albeit on a higher base

We expect the steady demand in OEMs to create a huge base of vehicles, which will consistently drive Replacement demand - a major component of tyre offtake


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Investment Argument

Strong Tyre industry outlook

We expect tyre demand in the Replacement segment to grow at a CAGR of 8-9% over FY2007-10E, due to strong vehicle sales over the last few years especially in the CV and PV segments.Demand from OEMs is also expected to be buoyant as vehicle demand growth stabilises on ahigh base. Further, there exists a huge opportunity in the global bias and off-the-road (OTR) tyressegment. These tyres do not attract much demand from the global majors but fetch high margins.Globally there is almost full radialisation of vehicle tyres due to which these countries import biastyres from India. Also, due to different types of tyres in the OTR segment and a comparativelysmaller international market for it, manufacturing these tyres locally renders it unviable. Againstthis backdrop, we expect Ceat to meet the requirements of the export markets for bias andOTR tyres as the company has already expanded its bias tyre capacity and is also expanding itsOTR capacity.

Two years back, the tyre companies were in the red as they were unable to aggressively pricetheir products owing to low levels of capacity utilisation in the industry. However, over the last fewyears, with the improvement in capacity utilisation, the tyre companies have displayed rationalpricing ability which has provided the much needed stability to the industry. Going ahead, weexpect this trend to continue and benefit the tyre companies.

Capacity expansions and Re-jig of Product mix to stabilise Margins

Expansion of Existing facilities

Ceat has ramped up capacity of its Bhandup and Nasik plants by 30tpd for T&B bias tyres at acapex of Rs50cr. This has taken its overall capacity from 400tpd to 430tpd. Both these plants arerunning at optimum utilisation levels. Ceat also has an outsourcing production arrangement with13 outsourcing partners through which it gets additional 100-110tpd outsourced production.

Source: Angel Research

Exhibit 7: Demand Drivers in place

? CV demand to grow by 8% CAGR over FY07-10E?

?

?

PV demand to grow by 11% CAGR over FY07-10E

Tractor demand to grow by 7% CAGR over FY07-10E

2W demand to grow by 9% CAGR over FY07-10E

? Ability to cater to

international demandfor tyres in OTR segment

as well as bias tyres in

T&B segment

?

?

?

Rising truck and car population

Shrinking replacement cycle in PVsegment

Strong freight demand resulting in

increase in distance traveled per truck

OEM

Exports DemandDrivers Replacement

Over the last few years, with the improvement in capacity utilisation, the tyre companies have displayed rational pricing ability, which has provided the much needed stability to the industry

Ceat has increased capacity of its Bhandup and Nasik plants by 30tpd to 430tpd for T&B bias tyres at a capex of Rs50cr


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Over 69% of the company's revenue is generated from the T&B segments as there is hugedemand from the Replacement market and from the OEMs. Ceat also has plans to expandproduction capacity of car radials from 60,000 units to 1,00,000 units over the next 12 months.

Due to capacity constraints, Ceat outsources its production from its 13 partners locally and fromlow-cost countries like China and Vietnam. In FY2007, the outsourcing arrangement contributed20% of its revenue. With increased demand and capacity expansion taking time to come up, Ceat

is increasing its outsourcing of tyres from its partners thereby ensuring good marketshare, volumegrowth and profitability. Currently, it outsources close to 100/tpd but going ahead it plans toincrease this to 300/tpd.

Higher contribution from Specialty Tyre segment

Going forward, Ceat plans to focus on the high-margin Passenger car radial (PCR) and Specialtytyres segment by expanding capacity from the current 40-50tpd to around 100tpd. We expectCeat to clock overall volume growth of 5% and 6% in FY2009E and FY2010E, respectively. Ceathas been primarily exporting Specialty tyres since the last two years and the share of Specialtytyres in the company's overall revenues has been rising. During FY2004-07, the company'sexports (includes Specialty tyres) registered a CAGR growth of 29% and the contribution to grossSales moved up from 12.5% in FY2004 to 18% in FY2007. Going ahead, Ceat expects to doubleoutput of the high-Margin Specialty tyres, which would in turn sustain Margins and Profitability.

Specialty tyre exports is a lucrative opportunity for the Indian players as they enjoy an edge overtheir global peers on account of substantial cost advantage. Also, competition from global playersis low in this space as they do not see this business generating sufficient volumes and are hencenot actively involved in it. Nonetheless, Margins in this segment are substantially higher comparedto the cross-ply and radial tyre businesses.

Green-field capacity for T&B Radial tyres

Radial tyres offer better fuel efficiency and work out to be more cost-effective over the life of a tyre.In India, the car segment has already achieved around 95% radialisation. As of FY2007, only 3%radialisation has been achieved in the T&B segment and 12% in the LCV segment. The poorroads in India render radial tyres unviable for trucks. However, due to ban on overloading of trucksand government emphasis on improving the country's road infrastructure, we expect anaccelerated radialisation trend in the T&B space in the coming years. We expect radialisation inthe CV segment to pick up in the near future. Radialisation of MHCV tyres is expected to increaseto 8-10% by FY2012 from the current 3%. We expect increasing distribution of imported radialtyres, new domestic capacities and OEM fitment of radial tyres to be the key enablers.

Plant Existing capacity (tpd) Expansion (tpd)

Nasik 250 25Bhandup, Mumbai 150 5

Exhibit 8: Capacity Expansion


Going ahead, Ceat expects to double output of the high-Margin Specialty tyres,which would in turn sustain Margins and Profitability

Increasing distribution of imported radial tyres, new domestic capacities and OEM fitment of radial tyres to be the key enablers


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Segment 2001 2002 2003 2004 2005 2006 2007

Passenger Cars 60 70 75 85 90 90 95LCV 8 10 10 11 11 11 12

T&B 2 2 2 2 2 2 3Source: Cris Infac, Angel Research

Exhibit 9: Radialisation in India (%)

To keep pace with the expected increase in demand for radial tyres, most tyre majors includingCeat have chalked out plans to enter the growing Radial tyre market in India, which is estimatedto be about 8% of the total domestic tyre market of Rs19,000cr. Ceat's proposed 100tpd greenfieldT&B Radial tyre facility, would be further used to manufacture cars, tractors and specialty tyres,and would be set up at an investment of around Rs500cr. We have not factored the same in ourestimates as the project is still at the conceptualisation stage and benefits from the same would

only accrue post FY2010E. The company is currently scouting for land across India. Ceat plans topartly fund this project from the sale of its 31acres land bank at Bhandup, Mumbai, where thecompanies existing unit is located.

Ceat is setting up a plant to keep pace with the ever-increasing demand from the OEMs as itsexisting facilities (Bhandup and Nasik) are operating at optimum utilisation levels.

The Bhandup facility will be relocated either to Patalganga or Ambernath near Mumbai. Thecompany has already sold seven acres of vacant land in Bhandup for Rs130cr. Of this, Rs120crhas already been received as advance and the balance would be paid within the next two monthswhen the deal will be completed.Over the next 2-3 years when the new facilities near completion,

it plans to sell off the remaining 24acres also and shift to the new plant. According toRs18.6cr/acre price realised, the land valuation for 24 acres works out to Rs445cr.

Increasing focus on Exports

Ceat has a global footprint and currently exports to over 110 countries. Going ahead, it intends toincrease its focus on exports riding high on a stable and extensive network in South America,North America and Europe. Ceat's products have found high acceptance with several OEMs inEurope amidst stiff competition from other global majors.

Over the years, the company's Export basket has improved in terms of price realisations and

profitability. For 9MFY2008, Exports contribution increased to 20.2% of overall revenues from18.9% in 9MFY2007. The company registered a healthy yoy growth of 12% in Export sales in9MFY2008. Further, with the domestic automobile industry grappling with higher interest ratescenario and high base effect of last year, this negatively impacted growth in CV, and the share ofOEM sales in Ceat's revenues declined in 9MFY2008. This led to higher contribution ofReplacement Market and Export sales.

Ceat exports when the differential in realisation between the international and domestic market ishigh which positively impacts Margins.

Ceat proposes to invest Rs500cr to set up a 100tpd

greenfield T&B Radial tyre facility

According to Rs18.6cr/acre price realised, the land valuation for 24 acres works out to Rs445cr


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Exhibit 10: Higher Export contribution

Over the next two years, we estimate Exports' contribution to gross revenues to increase from thecurrent 18% to 22%. In FY2007, Ceat recorded export revenues of Rs429cr (Rs393cr in FY2006),a yoy growth of 9.2%.

Source: Company; Angel Research

Exhibit 11: Growth in Export contribution (Rs cr)

De-merged Investments to improve Return Ratios

Ceat, with the intention to re-align its business operations, has transferred its investments into aseparate company called CHI Investment. Going ahead, Ceat will focus on its core business ofmanufacture and sale of tyres. The transfer of investments to a different company has been donein the larger interest of both companies, their shareholders, creditors and employees and thegeneral public. Also, the Rs120cr investments, which were mostly in the RPG group companies,were not yielding returns. The de-merger has reduced Ceat's capital by 25% and therebyimproved Return Ratios. The restructuring will also result in enhancement of shareholders' value.The companys RoCE is set to improve from 11.9% in FY2007 to 18.7% in FY2010E, and will alsoaid a re-rating of the stock.

Over the next two years, we estimate Exports' contribution

to gross revenues to increase from the current 18% to 22%

Owing to the De-merger of Investments, Ceats RoCE is set to improve from 11.9% in FY2007 to 18.7% in FY2010E,and will also aid a re-rating of the stock


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Source: Company; Angel Research

Exhibit 12: De-merger scheme

Ceat LtdEquity:Rs45.7

Ceat Ltd (Core)Equity:Rs34.3cr

CHI InvestmentsEquity:Rs11.4cr

Financial Outlook

During FY2007-10E, we expect Ceat to report a CAGR of 8.3% in revenues, which would primarilycome from 4.4% volume growth and 9.3% growth in realisations. In the last three years, growthhas been driven largely on the back of higher realisations (partly on account of raw material costpush) and increase in production outsourcing. Further, we expect volume growth in the T&Bsegment to sustain at current levels on the back of increase in Replacements demand.

FY2007 FY2008E FY2009E FY2010E CAGR (%)

Automobile Tyres 2,156.9 2,310.4 2,498.7 2,754.6 8.5

Automotive Tubes 200.0 210.0 222.8 241.0 6.4

Automotive Flaps 33.6 38.4 41.5 44.9 10.2

Total Sales 2,390.4 2,558.9 2,763.1 3,040.5 8.3

Yoy Growth (%)

Automobile Tyres 23.3 7.1 8.1 10.2

Automotive Tubes 14.5 5.0 6.1 8.2

Automotive Flaps 19.0 14.4 8.2 8.2

Total Sales 22.5 7.0 8.0 10.0

(% of Total)

Automobile Tyres 90.2 90.3 90.4 90.6

Automotive Tubes 8.4 8.2 8.1 7.9

Automotive Flaps 1.4 1.5 1.5 1.5Source: Company, Angel Research

Exhibit 13: Revenue Profile

During FY2007-10E, we expect Ceat to report a CAGR of 8.3% in revenues, which would primarily come from 4.4% volume growth and 9.3% growth in realisations


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Margins to stabilise following focus on Exports and OTR segment

Currently, Exports and OTR tyres fetch superior margins compared to the OEM segment. Withcontribution from Export and OTR tyre increasing, going ahead we expect Margins to stabilise inFY2009E and FY2010E at 8.5% levels.

Operating Margins have a direct correlation with raw material costs, which constitute 75% ofoperating cost. During 2006-07, Ceat's raw material cost spiked as rubber prices increased sharply.The company's, average blended rubber price in FY2007 shot up by 24.1% yoy, vis-a-vis a rise of24% in the previous two years. Ceat has been continuously taking a hit on Margins as it did notpass on the increase in cost price to consumers. But, industry conditions were also not conduciveto pass on the high costs to consumers as it was facing low capacity utilisation levels.Nonetheless, since FY2006, Ceat effected price hikes post which its Margins have improved

substantially from abysmally low levels of 3.1% in FY2005 to 6.5% in FY2007 and further to 8.5%in 9MFY2008. We believe Margins peaked out in 1HFY2008 when the company registered 9%plus OPMs. Going ahead, we expect Margins to stabilise at 8.5% levels.

Inverse Correlation- OPM v/s Raw material cost

Apart from natural rubber, most of the key raw materials are petro-based. Thus, price trends anddemand-supply dynamics relating to natural rubber and crude oil have a significant bearing on thecompany's Margins.

There is a strong and inverse relationship between EBITDA Margins of any tyre company with theraw material prices, specifically rubber. Rubber accounts for around 50% of raw material costs.

We believe that margins have peaked out at current levels. However, we expect strong demandfrom the Replacement and OEM segments to continue, which we believe will not result in further


Exhibit 14: Raw materials component (FY2007)

We believe Margins peaked out in 1HFY2008 when the company registered 9% plus OPMs. Going ahead, we expect Margins to stabilise at 8.5% levels


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PAT to post strong growth

Higher realisations and softening natural rubber prices in 1HFY2008 resulted in an improvementin Margins. Further, Ceat is the only tyre company paying Octroi, which if scrapped, will have apositive impact on its Margins. However, due to lack of clarity on this issue we have not factored

the same in our estimates. We expect PAT Margins to improve from 2% in FY2007 to 3.7% inFY2010E. We expect Ceat to post a CAGR of 34% in Earnings over FY2007-10E to Rs100.6cr. Inline with Profitability, Return Ratios are expected to improve going forward.


Exhibit 16: Improving Return Ratios and stable Margins

reduction in realisations. In the last three months, the natural rubber prices have been moving upto Rs104/kg. We have assumed blended rubber prices of Rs96/kg and Rs102/kg for FY2009E

and FY2010E, respectively. Going ahead we expect the margin to stabilise as, the company willpass on the rise in raw material cost to the consumers.


Exhibit 15: OPM v/s Raw material cost

We expect Ceat to post a CAGR of 34% in Earnings over FY2007-10E to Rs100.6cr


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Concerns

Increase in Raw material prices: The Tyre sector is currently facing high cost push pressures,with the prices of rubber and carbon black ruling high. Further, considering the overall Auto de-mand, it might not be easy to pass on the same entirely to customers. Any upward movement inthe prices of these commodities could erode Margins particularly if Ceat is not able to pass on thesame as it had happened two years ago. However, chances of such a thing happening this timelooks low as the Tyre industry is running at above 90% capacity utilisation.

During 9MFY2008, Ceat benefited from the low raw material costs and strong realisation growthleading to an almost 270bp expansion in Margins. Natural rubber accounted for around 50% oftotal expenses for Ceat. During 1HFY2008, the Rubber prices were on a downturn ruling at around80-85/kg. However, prices have again started picking up and in 3QFY2008 the prices wereruling at above Rs100/kg.

We have assumed 5.5% rise in rubber prices in FY2009E from Rs91/kg as a base case, and afurther 6.8% in FY2010E. Any additional rise in Rubber prices could impact our forecast. However,in the immediate past Ceat has been able to pass on the rise in raw material prices and havemaintained their Margins. Hence, in our projections too we have factored in certain price hikes.

Auto Sector slowdown: We believe that with inflation hovering well above the government'scomfort level of 5%, chances of interest rate cuts in the near future seems unlikely. This might putsome pressure on the demand in the Auto sector as it is an interest rate sensitive sector. However,the Replacement market for tyres, which is around 57% of the overall domestic tyre offtake, isexpected to grow at a much faster pace due to the sharp increase in vehicle population. We seethis market as the key growth driver for the tyre manufacturers.

Competition to wrest away marketshare: Competition in the Tyre industry is intense ascompanies are competing on product design, performance, price, reputation, warranty terms,customer service and convenience. In India, Ceat faces competition from six key playersincluding MRF, Apollo, Goodyear, JK, Birla Tyres and Bridgestone. Other global tyremanufactures such as Michelin have also entered the Indian tyre market. Moreover, Chinaremains a key threat particularly in the Replacement market due to its cost competitiveness.However, we believe that the credit period and after-sale service are important aspects on whichthe Chinese cannot compete with the domestic players.


Exhibit 17: Sensitivity Analysis - Impact of Rubber prices on FY2010E PATFY2009 % Hike

4.5% 5.0% 5.5% 6.0% 6.5%

4.8% 117.8 114.9 112.1 109.2 106.4

5.8% 112.1 109.2 106.3 103.4 100.6FY2010 % Hike 6.8% 106.4 103.5 100.6 97.7 94.8

7.8% 100.7 97.8 94.8 91.9 89.0

8.8% 95.0 92.1 89.1 86.1 83.2


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Outlook and Valuation

Ceat along with other tyre manufacturers has hiked its tyre prices over the last year, which isindicative of a strong reversal in the pricing trend. Hence, we expect improvement in theprofitability of tyre companies to sustain. During the last three months, the stock of Ceat haswitnessed a steep decline on the bourses vis--vis its peers as well as the Sensex. While thebroader indices declined by 20%, Ceat has fallen by around 50%. However, we believe post thissharp decline the stock is trading at attractive valuations. At the CMP of Rs103, the stock istrading at 3.5x FY2010E Earnings and FY2010E EV/Sales of 0.3x, which compares favourablyversus its peers.

Moreover, considering the price Ceat was able to fetch for its seven acre land (Rs18.6cr/acre toRs130cr), it will be able to get Rs445cr for the remainng 24 acre land, which we believe will give

additional cushion to the stock . We Initiate Coverage on the stock with a Buyrecommendation and Target Price of Rs147, giving an upside of 43% from current levels.

Exhibit 18: Ceat trades at a discount to its peers (FY2010E)Parameters JK Inds MRF Apollo Tyres CeatP/E 4.2 8.2 6.0 3.5P/B 0.8 1.2 1.0 0.6EV/Sales 0.5 0.4 0.4 0.3EV/EBITA 4.0 4.3 3.0 3.2

Source: Angel Research; Industry, Note: For JK Industries and MRF valuation is as on Sep'09


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Profit & Loss Statement Rs crore

Y/E March FY2007 FY2008E FY2009E FY2010E

Net Sales 2,133 2,290 2,473 2,721% chg 22.3 7.4 8.0 10.0

Total Expenditure 1,995.3 2,100.2 2,262.3 2,490.1

EBIDTA 137.8 190.0 210.7 231.2

(%of Net Sales) 6.5 8.3 8.5 8.5

Other Income 24.4 169.4 22.6 15.6

Depreciation& Amortisation 31.1 30.5 35.5 40.1

Interest 70.3 58.8 55.5 54.2

PBT 60.9 270.1 142.2 152.4

(% of Net Sales) 2.9 11.8 5.8 5.6

Extraordinary Expense/(Inc.) (2.5) 104.0 - -Tax 21.7 77.6 48.4 51.8

(% of PBT) 35.6 28.7 34.0 34.0

PAT 39.3 192.5 93.9 100.6

% chg - 390.4 (51.2) 7.2

Ad. PAT 41.7 88.5 93.9 100.6

% chg 5,861.4 112.0 6.1 7.2


SOURCES OF FUNDS

Equity Share Capital 45.7 34.3 34.3 34.3

Reserves & Surplus 333.0 385.9 466.1 549.1

Shareholders Funds 378.6 420.2 500.3 583.3

Total Loans 492.3 452.3 427.3 417.3

Deffered Tax Liability (net) 23.3 23.3 23.3 23.3

Total Liabilities 894.2 895.7 950.9 1,023.8

APPLICATION OF FUNDS

Gross Block 1,113.0 1,174.5 1,268.2 1,432.2

Less: Acc.Depreciation 413.0 443.6 479.1 519.2

Net Block 700.0 730.9 789.1 913.1

Capital Work-in-Progress 10.1 11.7 50.7 71.6

Investments 127.8 - - -

Current Assets 581.2 771.7 759.5 730.6

Current liabilities 524.9 618.7 648.5 691.4

Net Current Assets 56.2 153.0 111.0 39.2

Total Assets 894.2 895.7 950.9 1,023.8

Balance Sheet Rs crore

Cash Flow Statement Rs crore


Profit before tax 60.9 270.1 142.2 152.4

Depreciation 31.1 30.5 35.5 40.1

(Inc)/Dec in Working Capital (12.4) 48.7 (27.9) (36.9)

Interest (Net) 68.3 56.8 53.6 52.3

Direct taxes paid 21.7 77.6 48.4 51.8

Others (6.3) 10.6 0.1 (2.6)

Cash Flow from Operations 120.0 339.1 155.2 153.5

Inc./(Dec.) in Fixed Assets 12.1 63.0 132.7 184.9

Free Cash Flow 107.9 276.1 22.5 (31.5)

(Inc)/Dec in Investments - 127.8 - -

Issue of Equity - (139.2) - -Inc./(Dec.) in loans (29.0) (40.0) (25.0) (10.0)

Dividend Paid (Incl.Tax) 9.6 11.7 13.7 13.7

Interest (Net) 68.3 56.8 53.6 52.3

Cash Flow from Financing (106.9) (247.8) (92.3) (76.0)

Inc./(Dec.) in Cash 0.9 156.1 (69.7) (107.4)

Opening Cash balances 39.6 40.6 196.7 126.9

Closing Cash balances 40.6 196.7 126.9 19.5

Key Ratios


Per Share Data(Rs)

EPS 8.6 56.2 27.4 29.4

Cash EPS 15.4 34.7 37.8 41.1

DPS 1.8 3.0 3.5 4.5

Book Value 82.9 122.6 146.0 170.3

Operating Ratio

Inventory (days) 37.9 37.4 40.1 42.8

Debtors (days) 45.0 44.6 43.7 42.9

Creditors (days) 83.8 92.9 90.4 87.7

Returns (%)

Adj RoE 10.4 21.1 18.8 17.2

RoCE 11.9 17.8 18.4 18.7

Dividend Payout 23.0 13.3 14.6 15.3

Valuation Ratio (x)

P/E 12.0 1.8 3.8 3.5

P/E (CashEPS) 6.7 3.0 2.7 2.5

P/BV 1.2 0.8 0.7 0.6

EV/Sales 0.4 0.3 0.3 0.3

EV/EBITDA 5.8 3.2 3.1 3.2

Note:FY2008E, RoE has been adjusted for sale of land


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Fund Management & Investment Advisory ( 022 - 4040 3800 / 2835 9600)

P. Phani Sekhar Fund Manager - ( PMS) [email protected]

Research Team ( 022 - 4040 3800 / 2835 9600)

Hitesh Agrawal Head - Research, Cement, Media [email protected] Kour Nangra VP-Research, Pharmaceutical [email protected] Jajoo Automobile [email protected] Shah IT, Telecom [email protected] Nagraj Oil & Gas [email protected] Burde Metals & Mining [email protected] Agrawal Banking [email protected] Solanki Mid-cap [email protected] Kanani Infrastructure, Real Estate [email protected] Shah FMCG [email protected] Agrawal Mid-cap [email protected]

Puneet Bambha PMS [email protected] Bagaria PMS [email protected] Vyas Research Associate (Pharmaceutical) [email protected] Idnany Research Associate - (PMS) [email protected]

Sandeep Wagle Chief Technical Analyst [email protected] Joshi AVP Technical Advisory Services [email protected] Sanghvi Sr. Technical Advisor [email protected] Kunte Technical Advisor [email protected] Ail Technical Analyst [email protected] Jagtap Technical Analyst [email protected]

Siddharth Bhamre Fund Manager - Derivatives & Equities [email protected]

Commodities Research TeamAmar Singh Research Head (Commodities) [email protected] P Sr. Technical Analyst [email protected] Gupta Sr. Technical Analyst [email protected] Patki Sr. Technical Analyst [email protected]

Commodities Research Team (Fundamentals)Badruddin Sr. Research Analyst (Agri) [email protected] Pote Research Analyst (Energy) [email protected]

Bharathi Shetty Research Editor [email protected] Patil Production [email protected]

DisclaimerThis document is not for public distribution and has been furnished to you solely for your information and must not be reproduced or redistributed to any other person. Persons into whosepossession this document may come are required to observe these restrictions.Opinion expressed is our current opinion as of the date appearing on this material only. While we endeavor to update on a reasonable basis the information discussed in this material, there may beregulatory, compliance, or other reasons that prevent us from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subjectto change without notice. Our pr oprietary trading and investment businesses may make investment decisions that are inconsistent with the recommendations expressed herein.The information in this document has been printed on the basis of publicly available information, internal data and other reliable sources believed to be true and are for general guidance only. Whileevery effort is made to ensure the accuracy and completeness of information contained, the company takes no guarantee and assumes no liability for any errors or omissions of the information.No one can use the information as the basis for any claim, demand or cause of action.Recipients of this material should rely on their own investigations and take their own professional advice. Each recipient of this document should make such investigations as it deems necessaryto arrive at an independent evaluation of an investment in the securities of companies referred to in this document (including the merits and risks involved), and should consult their own advisorsto determine the merits and risks of such an i nvestment. Price and value of the investments referred to in this material may go up or down. Past performance is not a guide for future performance.Certain transactions - futures, options and other derivatives as well as non-investment grade securities - involve substantial risks and are not suitable for all investors. Reports based on technicalanalysis centers on studying charts of a stock's price movement and trading volume, as opposed to focusing on a company's fundamentals and as such, may not match with a report on a company'sfundamentals.We do not undertake to advise you as to any change of our views expressed in this document. While we would endeavor to update the information herein on a reasonable basis, Angel Broking, itssubsidiaries and associated companies, their directors and employees are under no obligation to update or keep the information current. Also there may be regulatory, compliance, or otherreasons that may prevent Angel Broking and affiliates from doing so. Prospective investors and others are cautioned that any forward-looking statements are not predictions and may be subjectto change without notice.Angel Broking Limited and affiliates, including the analyst who has issued this report, may, on the date of this report, and from time to time, have long or short positions in, and buy or sell thesecurities of the companies mentioned herein or engage in any other transaction involving such securities and earn brokerage or compensation or act as advisor or have other potential conflict ofinterest with respect to company/ies mentioned herein or inconsistent with any recommendation and related information and opinions.Angel Broking Limited and affiliates may seek to provide or have engaged in providing corporate finance, investment banking or other advisory services in a merger or specific transaction to thecompanies referred to in this report, as on the date of this report or in the past.

Research & Investment Advisory: Acme Plaza, 3rd Floor A wing, M.V. Road, Opp Sangam Cinema, Andheri (E), Mumbai - 400 059

Ratings (Returns) Buy (> 15%) Accumulate (5 to 15%) Neutral (5 to -5%) Reduce (> -5%) Sell (> -15%)


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Central Support & Registered Office:G-1, Akruti Trade Centre, Road No. 7, MIDC Marol, Andheri (E), Mumbai - 400 093 Tel : 2835 8800 / 3083 7700

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New Delhi (Bhikaji Cama Place) - Sumit zBhuttanTel: (011) 41659 711/12

New Delhi (Lawrence Rd.) - Sanjeev KumarTel: (011) 3262 8699 / 8799

New Delhi (Pitampura) - Roopal AgarwalTel: (011) 4700 2380 / 84

New Delhi (Preet Vihar) -Gulshan KhuranaTel: (011) 4242 1105 - 07

Patel Nagar - Harpreet SinghTel : (011) 45030 600

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Junagadh - Nimesh RaichuraTel : (0285) 2622 483 /2622 484

Palanpur - Paresh PatelTel : (02742) 645 171 / 72

Patan - Shikha SaxenaTel: (02766) 222 306

Hyderabad (Warangal) - Santosh KumarTel: (0870) 6452 227

Ceat - Company Report -11.04.08

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