Ceat reported a 2.5% y-o-y growth in its topline at Rs6.7 billion. Though the volumes in tonnage terms were down by 5% for the quarter, the 7.9% growth in average realization / kg led to a growth in the topline.
Replacement segment accounted for ~78% of the revenues which augurs well for the margin profile of the company. Raw Material cost was down by 15% y-o-y at Rs89.5 /kg.
On account of lower input costs, the company reported a robust EBITDA at Rs1bn compared to a Nil EBITDA in Q1FY09, with EBITDA margins at 15.4% (compared to 7.7% in Q4FY09).
As a result, the company posted a profit of Rs602 million compared to a loss of Rs107 million in Q1FY09.
According to the management, the replacement demand was robust on account of a pick-up in the economic activity and restrictions on the imports from China.
The raw material costs are expected to rise from hereon and this quarter seems to be the peak for the company in terms of operating level performance. The current debt stands at Rs8bn with cash of Rs1.9bn as of 30th June, 2009.
Ceat is planning a capex of about Rs5 billion to be spread over the next two years. The funding for the same will be mainly through debt and internal accruals.
The stock is currently trading at 3.4x FY10E EPS of Rs37.9. Sensitivity to rubber prices is quite high in case of Ceat and with lower input costs in FY10E, profitability is likely to improve as compared to FY09.
We maintain our ACCUMULATE rating on the stock. However, the volatility in rubber prices and the high leverage on its book (1.3x) in our view could cap the valuation multiple for the stock.