Mumbai: RPG-group owned tyre manufacturer Ceat Ltd has not been immune to the damages emanating from the slowdown in the domestic auto industry. Yet, it managed a decent performance for the June quarter.
Ebitda (earnings before interest, tax, depreciation and amortisation) margin at 9.6% was about 70 basis points (bps) lower year-on-year (yoy), but better than the market estimate of 8.5%. Gains were largely the result of cost cutting, especially discretionary operational expenses. Meanwhile, softer raw material following a decline in rubber prices also helped partially offset the pain on account of poor operating leverage.
Like its peers, Ceat too suffered contraction in demand from original equipment manufacturers. “Demand contraction is visible across segments be it farm segment, industrial or retail. Orders from OEMs are down by nearly 8-10%," said Anant Goenka, managing director of the company.
The firm’s sales mix with 70% accruing from the replacement market turned out favourable, while largely steady exports during the quarter aided revenue growth that rose 2% year-on-year.
Yet, all these haven’t been enough to bring cheer to the investors.
Continued downturn in the auto industry has been weighing on investor sentiment. As was feared, auto sales numbers for July failed to bring any relief.
India’s automobile industry sank deeper into an abyss in July with sales at some of the top passenger vehicle makers plunging to their worst in about two decades.
This cannot bode well for tyre manufacturers, including Ceat. The impact of a prolonged demand slowdown in the auto industry has started trickling down to the replacement market.
Shares of Ceat have declined 44% over the past year, in tandem with its peers such as Apollo Tyres Ltd and JK Tyres and Industries Ltd. Still, the current market price of ₹803 apiece discounts the estimated FY20 earnings by about 11 times.
The management of Ceat believes that the quarters ahead will get better as the worst in terms of revenue and profitability is behind.
However, its ongoing ₹3,000 crore expansion project will dent profitability, and given the headwinds in the auto sector, it is hard to tell if earnings will measure up in the near term.