Recommendation: Buy
CMP = Rs 119 (at the time of recommendation)
Price target: Rs 196
Key points:
- The net sales of Ceat grew by 14.8% to Rs 646.2 crore in the quarter. The original equipment sales continued to decline whereas the replacement sales grew strongly by 28.2% in Q4FY2008. The operating profit margin (OPM) declined by 180 basis points to 6.0% as a result of a higher raw material cost. Consequently, the operating profit declined by 12.3% to Rs 38.5 crore.
- For FY2008, the sales grew by 9.2% to Rs 2,329 crore and the adjusted PAT increased by 80.7% to Rs 67.7 crore. Ceat sold a small part of its Bhandup plant and realised a value of Rs 130 crore during the year. So, the reported PAT grew by 294% to Rs 147.6 crore.
- The company increased prices of tyres by 5% in April 2008 due to the rising raw material prices. It has also announced a capex of Rs 1,000 crore for setting up a radial plant and relocating the Bhandup plant. Further details of this capex including the time period and the funding pattern are yet to be finalised.
- I maintain positive view on Ceat, as the stock is trading at very cheap valuations. At the current market price of Rs 119 the stock is trading at 5.2x its FY2010 earnings of Rs 24.5 and enterprise value (EV/earnings before interest, tax, depreciation and amortisation (EBITDA) of 2.8x.
- I maintain a strong Buy recommendation on Ceat with a revised price target of Rs 196.
