Recommendation: Buy
CMP = Rs 170 (as of Thursday)
Price target: Rs 216
Result highlights:
- Ceat's Q2 results were ahead of our expectations on the back of a higher than expected margin. The top line grew by 8.5% led by a volume growth of 7.3% year on year (yoy). Despite a slowdown in the original equipment manufacturer (OEM) sales, which declined by about 30% yoy, the replacement sales and exports did well.
- The operating profit margin (OPM) for the quarter grew by 430 basis points to 9.4%, which is the highest in the recent times. Consequently, the operating profit jumped by 102% to Rs 54.6 crore. A lower interest cost and a higher other income led to a whopping 494% growth in the profit to Rs 25.5 crore.
- Rising rubber and crude prices are a cause for concern. Because of the import threat, the price increase could be minimal, which may lead to some sort of softness in the margins.
- At the current market price of Rs 170, the stock is trading at 8.3x its FY2008E earnings and at an enterprise value (EV)/earnings before interest, depreciation, tax and amortisation (EBIDTA) of 3.7x.
- I maintain Buy recommendation on the stock with a price target of Rs 216 with a time frame of 6 months.
