Ceat Ltd (CEAT IN) Competitive scenario easing?

INSTITUTIONAL EQUITY RESEARCH Ceat Ltd (CEAT IN) Competitive scenario easing? INDIA AUTOMOBILES Company Update Ceat has underperformed its peers CYTD with the stock falling by more than 25% mainly because MRF became aggressive in Ceat s bread and butter two wheeler segment, which led to restricted price hikes and volume growth. Our industry checks suggest that the competitive scenario in the 2W segment is easing. MRF, which had become aggressive in the 2W replacement segment since November 2017, has scaled back its strategy and has stopped aggressive channel filing after its retail sales failed to pick up with equal strength. Checks indicate that Ceat had taken a 1% price hike in the 2W segment in July, and MRF followed suit in August. The industry expects both players to take another 2W price hike in September. Kerala floods have resulted in production losses for MRF and Apollo, which has created a supply deficit in the channel, benefiting Ceat and JKTY. With the recent rise in domestic natural rubber prices, players have increased off take from Thailand rubber companies by 15 20%; 1 2% price hike is likely in PCR and MHCV segments in the coming week. MRF scaling back its aggression MRF had become aggressive in Ceat s bread butter two wheeler segment since November 2017. Unlike its past strategy of controlled supply and creating artificial supply deficit, it started bombarding its dealers with excess supply of two wheeler tyres in order to restrict both price hikes and Ceat s consistent market share gains (Ceat at c.30% vs. MRF c.36%). Our checks suggest that MRF has scaled back this aggression since June 2018 as its retail sales failed to pick up equally. This led to stronger growth for Ceat in the 2W replacement, which has averaged over 900,000/month since June vs. 775,000 before that. Ceat has also gained leadership in the scooters replacement segment, pipping MRF at c.300,000 units of monthly sales. Recently, it hiked prices by about 1%, followed soon by MRF; both players are contemplating another hike in 2Ws by mid September. Kerala floods have created supply deficit in the industry Unfortunate flooding in Kerala has meant domestic rubber prices hardening by ~5%, which has led to tyre companies increasing rubber off take from Thailand by 15 20%. The industry is looking at a 1 2% price hike in PCR and MHCV segments in the next fortnight. Kerala floods have also meant lower production from Apollo and MRF, which has created a supply deficit in the channel, benefiting Ceat and JKTY. Valuation After significant underperformance, we see Ceat outperforming if the trend of MRF scaling back its aggression in the two wheeler segment sustains. Hampered production (of competitors) due to recent floods in Kerala has helped Ceat in the near term. We see strong traction in 2HFY19, led by MRF s inability to deter CEAT, a new TBR capacity coming on stream from Q3FY19, and pricing power in the truck segment. RM price surge is the key risk to our thesis. Maintain BUY with a target of Rs 1,800, valuing the company at 14x FY20 earnings. 30 August 2018 BUY (Maintain) CMP RS 1417 TARGET RS 1800 (27%) COMPANY DATA O/S SHARES (MN) : 40 MARKET CAP (RSBN) : 58 MARKET CAP (USDBN) : 0.8 52 WK HI/LO (RS) : 2030 / 1229 LIQUIDITY 3M (USDMN) : 13.6 PAR VALUE (RS) : 10 SHARE HOLDING PATTERN, % Jun 18 Mar 18 Dec 17 PROMOTERS : 50.8 50.8 50.8 FII / NRI : 20.3 22.4 25.1 FI / MF : 11.7 11.7 10.2 NON PRO : 5.8 5.4 4.6 PUBLIC & OTHERS : 11.5 9.8 9.3 PRICE PERFORMANCE, % 1MTH 3MTH 1YR ABS 2.5 3.1 13.6 REL TO BSE 1.5 7.4 36.0 PRICE VS. SENSEX 200 150 100 50 0 A 16 O 16 A 17 O 17 A 18 CEAT BSE Sensex KEY FINANCIALS Rs mn FY18 FY19E FY20E Net Sales 62,308 71,118 81,223 EBIDTA 6,148 8,795 10,568 Net Profit 2,673 4,590 5,500 EPS, Rs 65.7 112.8 135.1 PER, x 21.6 12.6 10.5 EV/EBIDTA, x 10.5 8.5 7.7 PBV, x 2.2 2.0 1.7 ROE, % 10.3 15.5 16.1 Debt/Equity (%) 27.4 61.2 76.5 Source: Phillip Capital India Research Nitesh Sharma, CFA (+ 9122 6246 4126) nsharma@phillipcapital.in Vipul Agrawal (+ 9122 6246 4127) vagrawal@phillipcapital.in Page 1 PHILLIPCAPITAL INDIA RESEARCH

CEAT LTD COMPANY UPDATE Financials Income Statement Net sales 57,665 62,308 71,118 81,223 Growth, % 1 8 14 14 Other income 0 0 0 0 Total income 57,665 62,308 71,118 81,223 Raw material expenses 33,623 38,100 43,121 48,725 Employee expenses 4,063 4,383 4,623 5,280 Other Operating expenses 13,037 13,677 14,579 16,651 EBITDA (Core) 6,943 6,148 8,795 10,568 Growth, % (15.6) (11.5) 43.1 20.2 Margin, % 12.0 9.9 12.4 13.0 Depreciation 1,431 1,686 1,850 2,147 EBIT 5,512 4,462 6,945 8,420 Growth, % (22.9) (19.1) 55.7 21.2 Margin, % 9.6 7.2 9.8 10.4 Interest paid 817 974 1,116 1,368 Other Non Operating Income 186 295 384 481 Non recurring Items 0 0 0 0 Pre tax profit 4,881 3,783 6,213 7,532 Tax provided 1,064 1,340 1,926 2,335 Profit after tax 3,817 2,442 4,287 5,197 Others (Minorities, Associates) 303 230 303 303 Net Profit 4,120 2,673 4,590 5,500 Growth, % (10.0) (35.1) 71.7 19.8 Net Profit (adjusted) 4,120 2,673 4,590 5,500 Unadj. shares (m) 41 41 41 41 Wtd avg shares (m) 41 41 41 41 Balance Sheet Cash & bank 359 228 1,183 2,106 Debtors 6,138 7,599 8,673 9,905 Inventory 9,435 4,297 5,073 5,732 Loans & advances 1,845 1,845 1,845 1,845 Total current assets 17,777 13,968 16,774 19,588 Investments 2,375 2,375 2,375 2,375 Gross fixed assets 35,368 40,368 55,368 68,368 Less: Depreciation 10,843 12,529 14,379 16,526 Add: Capital WIP 3,263 3,263 3,263 3,263 Net fixed assets 27,788 31,102 44,252 55,104 Non current assets 1,518 1,518 1,518 1,518 Total assets 47,494 46,999 62,955 76,622 Current liabilities 13,272 12,986 14,306 15,427 Total current liabilities 13,272 12,986 14,306 15,427 Non current liabilities 9,781 7,781 18,781 26,781 Total liabilities 23,053 20,767 33,087 42,208 Paid up capital 405 405 405 405 Reserves & surplus 23,745 25,536 29,172 33,718 Shareholders equity 24,441 26,232 29,868 34,414 Total equity & liabilities 47,494 46,999 62,955 76,622 Cash Flow Pre tax profit 4,881 3,783 6,213 7,532 Depreciation 1,431 1,686 1,850 2,147 Chg in working capital 1,669 3,392 531 771 Total tax paid 667 1,340 1,926 2,335 Other operating activities 766 644 0 0 Cash flow from operating activities 4,742 8,164 5,606 6,574 Other investing activities 0 0 0 0 Cash flow from investing activities 6,000 5,000 15,000 13,000 Free cash flow 1,258 3,164 9,394 6,426 Debt raised/(repaid) 1,000 2,000 11,000 8,000 Other financing activities 1,428 1,625 1,768 2,019 Cash flow from financing activities 2,428 3,625 9,232 10,830 Net chg in cash 3,686 460 162 4,404 Valuation Ratios FY17 FY18 FY19e FY20e Per Share data EPS (INR) 101.2 65.7 112.8 135.1 Growth, % (10.0) (35.1) 71.7 19.8 Book NAV/share (INR) 593.4 637.4 726.7 838.4 CEPS (INR) 136.4 107.1 158.2 187.9 CFPS (INR) 91.3 177.5 128.3 149.7 Return ratios Return on assets (%) 10.6 7.2 9.8 9.4 Return on equity (%) 17.1 10.3 15.5 16.1 Return on capital employed (%) 15.0 10.0 13.1 11.9 Turnover ratios Asset turnover (x) 2.0 2.0 1.9 1.6 Sales/Total assets (x) 1.3 1.3 1.3 1.2 Sales/Net FA (x) 2.2 2.1 1.9 1.6 Working capital/sales (x) 0.1 0.0 0.0 0.0 Receivable days 38.9 44.5 44.5 44.5 Inventory days 59.7 25.2 26.0 25.8 Payable days 54.6 47.5 50.5 50.3 Working capital days 26.2 4.4 6.6 9.2 Liquidity ratios Current ratio (x) 1.3 1.1 1.2 1.3 Quick ratio (x) 0.6 0.7 0.8 0.9 Interest cover (x) 6.7 4.6 6.2 6.2 Total debt/equity (%) 37.7 27.4 61.2 76.5 Net debt/equity (%) 36.2 26.5 57.2 70.3 Valuation PER (x) 14.0 21.6 12.6 10.5 PEG (x) y o y growth (1.4) (0.6) 0.2 0.5 Price/Book (x) 2.4 2.2 2.0 1.7 EV/Net sales (x) 1.2 1.0 1.0 1.0 EV/EBITDA (x) 9.6 10.5 8.5 7.7 EV/EBIT (x) 12.1 14.5 10.7 9.7 Source: Company, PhillipCapital India Research Estimates Page 2 PHILLIPCAPITAL INDIA RESEARCH

Stock Price, Price Target and Rating History 2500 2000 1500 B (TP 1800) B (TP 2000) B (TP 2100) B (TP 2300) B (TP 2200) B (TP 1700) B (TP 2000) B (TP 1800) 1000 B (TP 1375) B (TP 1550) 500 0 J 16 F 16 M 16 M 16 J 16 A 16 S 16 N 16 D 16 F 17 M 17 M 17 J 17 J 17 S 17 O 17 D 17 J 18 M 18 A 18 J 18 J 18 Rating Methodology We rate stock on absolute return basis. Our target price for the stocks has an investment horizon of one year. Rating Criteria Definition BUY >= +15% Target price is equal to or more than 15% of current market price NEUTRAL 15% > to < +15% Target price is less than +15% but more than 15% SELL <= 15% Target price is less than or equal to 15%. Page 3 PHILLIPCAPITAL INDIA RESEARCH

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