The fortunes of the RPG group owned Ceat Ltd, as is the case with all tyre firms, are closely tied to rubber prices, given that it accounts for about two-thirds of the total cost of manufacturing a tyre.
Although rubber price (RSS Grade-4) has receded in the past few weeks, a steep rise during the March quarter took a toll on Ceat’s operating performance.
Sales figures mirrored management commentary in the analysts’ conference call that the company was yet to recover completely from the demonetisation blues that had impacted sales, especially in the after-sales market.
This segment comprises about 63% of the total sales. Therefore, Ceat’s net revenue for the quarter at Rs1,457.8 crore was only 5.5% higher than the year-ago period and fell short of Bloomberg’s average forecast.
Operating profitability, too, failed to measure up to analysts’ expectations as Ceat’s performance got wedged between low sales and a spike in costs.
So, against expectations of a 10.5% operating margin, Ceat posted 9.2%, which was a huge drop of 420 basis points (bps) from a year ago and 170 bps down from the December quarter, which was bad, too. Weak sales translated to weak operating profit that fell by 29%. One basis point is one-hundredth of a percentage point.
Further, Ceat’s net profit was also affected by a voluntary retirement scheme of Rs12.5 crore, adjusting for which the net profit fell around 28% against a year ago. On Friday, the stock fell 1.5%. Of course, it had appreciated since February when analysts felt falling rubber prices and weakening competition from Korean and Chinese tyre imports should bring good tidings for the industry.
At 16 times estimated earnings per share, which is not cheap, the stock needs to jump back into the higher profitability band. Volume growth is, therefore, key.
Alongside, if the trend of falling rubber prices continues into the next few quarters, profit margins will also get better, which will help support valuations.