Ceat hits over 4-year high on healthy outlook; stock jumps 60% in 3 months

Shares of Ceat edged higher by 10 per cent to over four-year high of Rs 1,516.15 on the BSE in Thursday’s intra-day trade, on healthy business outlook. The stock of leading tyre company traded at its highest level since May 2018. Earlier, it had hit a record high of Rs 2,030 in January 2018.

At 12:00 pm; Ceat traded 8 per cent higher at Rs 1,497, as compared to 0.58 per cent decline in the S&P BSE Sensex. In the past three months, the stock zoomed 60 per cent, as against 14 per cent rise in the benchmark index. However, it had hit a 52-week low of Rs 890 on June 20, 2022.

The company expects the overall tyre industry to perform well due to easing of pandemic-led curbs, pent-up demand from OEMs, and replacement segment. The cool off in key raw materials prices from their highs, too, will contribute to improved margins from Q3FY23 onwards.

"For the domestic tyre industry, export sales are likely to improve, as the US and Europe continue with high tariffs on imports from China. In the aftermarket segment, the company will continue to strengthen its leadership position in two-wheeler segment. That apart, the company will strive to gain more market share in Passenger Car Radial tyres (PCR) and Truck and Bus Radial (TBR)," Ceat said in its FY22 annual report.

Meanwhile, in an investor meet on Wednesday, Ceat’s management remained cautiously optimistic on the demand scenario, as OEM led the charge, which typically accrues lower margin in nature.

That said, analysts expect that the decline in key raw material prices like natural rubber and crude will reap benefits for the company from H2FY23.

“With peak revenues in FY24E, near double digit operating margins and no meaningful debt reduction underway over FY23E-24E, the company is now trading in line with its key peers in the domestic tyre space at ~6x EV/EBITDA on FY24E,” ICICI Securities said in a note.

Besides, analysts at Motilal Oswal Financial Services remain bullish on the counter, as they expect healthy demand and commodity deflation to drive recovery from H2FY23.

“The recovery in demand and easing of commodity prices will drive a strong recovery from H2FY23. Valuations, at 40.3x/13x FY23E/FY24E consolidated EPS, do not fully capture the ramp-up of new capacities and stabilization in raw material cost. We maintain our 'Buy' rating with a target price of Rs 1,630 (based on ~13x Sep’24 EPS),” the brokerage firm said in a recent note.