Prabhudas Lilladher has given Hold recommendation for CEAT with a target price of Rs. 1344 in its research report issued on Oct 27, 2021
Prabhudas Lilladher’s research report on CEAT
CEAT’s 2QFY22 consol. revenue came ahead of our estimates at Rs 24.5B (24% YoY/ 29% QoQ, PLe 22.5B) led by volume growth of 9% YoY/ 23% QoQ, while realizations grew ~5% sequentially. Margins came lower at 9.0% (-580bp YoY/ 27bp QoQ) led by gross margin compression. RM inflation is expected to continue in 3Q, partly offset by price hikes (+3-3.5% impact on margins in 3Q). We expect full pass through of commodity cost inflation only by next year. Furthermore, weak OEM production due to chip shortage to impact volume growth in 2H. Going ahead higher capex levels and increasing working capital requirement will lead to increasing debt levels and negative FCF, in our view. CEAT has approved the plan to raise ~Rs 5bn through NCD issue. We cut FY22/23 consol. EPS by ~17%/3% as we built in i) high RM cost ii) impact of chip shortage on PV and 2W OEM demand and iii) high interest cost during increasing debt burden.
We retain ‘HOLD’ rating on CEAT to factor in the risk of negative FCF generation amidst higher capex levels and revise TP to Rs1,344 (earlier Rs1,461) based on 15x Jun-23 consol. EPS (Unchanged).