Ceat Tyres remains on firm ground despite tepid second quarter margins
Realization on sales at Ceat Tyres was lower on account of lower rubber price and price cuts taken on various product categories in the past few quarters
With higher auto sales and tumbling rubber prices in the past few months, one would have expected an expansion in profitability for Ceat Tyres Ltd. Instead, its operating margin contracted by about 60 basis points from the year-ago period to 13.1% in the September quarter. However, it was better than what analysts had estimated and the firm’s shares have risen around 9% since the results were announced. A basis point is 0.01%.
There are a few reasons for the margin contraction. One, the moderation in rubber prices during the quarter could reflect in the profit and loss account with a lag. That’s why analysts had forecast lower profitability as the company would have to account for the high-cost rubber inventory of the previous quarter.
Two, realization on sales was lower on account of lower rubber price and price cuts taken on various product categories in the past few quarters. Three, the share of passenger tyres (two- and four-wheelers) as a proportion of total sales has increased from 11% to 44% in the last five years. Prior to this, the company’s focus was on commercial vehicles, where revenue realized on sales would have been higher.
These factors restricted consolidated revenue growth to a marginal 5.7%, although there was a substantial rise in demand and sales volume, especially in the replacement market. Operating profit too was flat when compared to the year-ago period, although it surpassed Bloomberg’s consensus estimates.
However, the outlook for Ceat Tyres is positive thanks to demand from the passenger segment. This is visible from its capacity expansion plans too. Further, the management stated that the company is doing better on exports to the Middle East and Latin America, and has made inroads into Europe. These efforts, along with strong domestic demand, should see profitability rise from current levels, rubber prices and other costs being equal.
Ceat Tyres’ net profit was close to forecasts at Rs98 crore. With the domestic market on an upswing in the segment that it caters to, profit growth is envisaged at 10-15% for the next two years.
Nitesh Sharma, an analyst at PhillipCapital (India) Pvt. Ltd, sees the company benefitting from increased capacities in key segments.
Besides, Ceat Tyres enjoys strong return on capital employed, and in that backdrop, the stock’s valuation of about nine times the estimated earnings per share for fiscal year 2018 isn’t all that demanding.
Editor's Picks »
- PM Modi to visit Indonesia and Singapore from 29 May-2 June
- Sebi eases market access for foreign investors in IFSC
- Bank unions call for 2-day nationwide strike from 30 May over wage revision
- Petrol price hike: Rahul Gandhi dares Narendra Modi for ‘fuel challenge’
- 7 Maruti Suzuki cars among the Top 10 best selling cars in India for April