Prabhudas Lilladher has given Hold recommendation for CEAT with a target price of Rs. 1383 in its research report issued on Jul 22, 2021

Prabhudas Lilladher’s research report on CEAT

We downgrade CEAT to ‘HOLD’ from Accumulate led by i) higher capex levels ii) delayed recovery in the PV and 2W replacement demand iii) increasing debt burden and iv) negative FCF generation. CEAT’s 1QFY22 consol. revenue came ahead of our estimates at Rs 19.1B (70% YoY/ -17% QoQ, PLe 16.2B) volume growth at 67%YoY/-20%QoQ, while realizations grew ~4% sequentially. Margins came lower at 8.7% (-39bp YoY/-268bp QoQ) led by RM headwinds. As gross margins are anticipated to remain weak in Q2 due to RM inflation (+4-5% increase in Q2), we expect margins to remain weak in 2QFY22. That way, the full pass through of commodity cost inflation can be anticipated only by 4QFY22. Also, higher capex levels will further lead to increasing debt levels and negative FCF.

Outlook

We cut FY22/23 consol. EPS by 14%/7% as we built in i) high RM cost ii) weaker mix and iii) high interest cost. We revise CEAT’s price target to Rs1,383 (earlier Rs1,589), based on 15x Mar23 consol EPS (Earlier 16x Mar’23 EPS).

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