
Acquisition and capex keep Ceat on a roll despite short-term margin erosion
Summary
- Ceat is navigating short-term margin pressures through strategic acquisitions and capital expenditure. While raw material costs and competitive dynamics have eroded profitability, the integration of Michelin's Camso business and capacity expansions are expected to drive long-term gains
Ceat Ltd faced a challenging December quarter as surging raw material costs weighed on earnings. While revenue climbed 11.6% year-on-year, operating profit (Ebitda) dropped 18%, highlighting the strain on margins.
Revenue growth was fuelled by an 8% increase in volumes and improved realizations, particularly in the replacement market, which accounted for 54% of total sales for the nine-month ended December (9MFY25). Although demand has been subdued from original equipment manufacturers, Ceat expects a boost from new model approvals.
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Rising raw material costs have been a key headwind for Ceat. Prices of natural rubber have surged from around ₹150 to ₹250 per kg in 2024, stabilizing at approximately ₹190 per kg. Synthetic rubber costs followed a similar trajectory. Combined, these increases shaved 450 basis points off gross margins in the December quarter and 413 basis points over 9MFY25.
However, the Ceat management suggested during the earnings call that raw material prices have now stabilized. They also noted that recent product price hikes should improve margins in Q4. However, due to the market's competitive nature, price adjustments are gradual, typically requiring two to three quarters to restore profitability.
In the medium term, Ceat is counting on the integration of Michelin's off-highway tire (OHT) business, acquired under the Camso brand in December, to drive growth. The $225 million (approximately ₹1,900 crore) acquisition is also expected to boost Ceat's export capabilities through Camso’s established distribution network and contribute meaningfully to revenue by the second quarter of fiscal 2026.
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Camso’s premium pricing—realizing $5.5-$7 per kg versus Ceat’s $3-$4 per kg—should enhance profitability, according to a report from Motilal Oswal Financial Securities. The report projects the acquisition to be Ebitda positive immediately and accretive to earnings per share (EPS) within one to two years, delayed due to an increase in financing cost and a three-year licence fee agreement.
Despite competitive pressure, Ceat’s outlook remains strong, with most of its plants running at over 90% capacity. The company completed a truck and bus radial tyre capacity expansion in Q2FY25, whereas the expansion for passenger car radial tyres is ongoing. It has also announced a capex plan for its two-wheeler tyre plant to increase the capacity by about 30%, to be completed by the end of FY28. Total capex planned for FY25 stands at ₹1,050 crore, adding 17% to its FY24 net fixed assets.
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Ceat shares have outperformed the broader market, rising 24% over the past year compared with an 11% gain for the Nifty500 index, suggesting that investors are shrugging off the near-term margin pressure. The stock is trading at 16x FY26 estimated earnings, according to Bloomberg data. Integration gains from the Camso acquisition could serve as a key catalyst in the coming quarters.