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Result Update
18 February 2013

Ceat
Growth triggers in place; Buy
Key takeaways Tonnage sales improve. Ceats tonnage growth was impressive at ~15% yoy (up ~4% qoq) though it was more due to a lower base the previous year. Replacement demand was flat yoy, although up ~2% qoq. The company expects muted growth, in the range of 0-5%, in 1HCY13. Realisations during 3Q were down ~1% yoy and qoq, which was mainly attributable to a higher share of OEMs in the sales mix. Overall, income growth was 13% yoy to `12bn, on expected lines. Margin growth decent. In 2QFY13, incidence of previously unincurred costs in staff expenses and other expenses hit Ceats EBITDA margin. However, with the entire gamut of these costs not recurring, and with the qualitative improvement in Ceats earnings sustaining, (as in 2HFY12 and 1QFY13), EBITDA margin was 8.5%, up 210bps yoy and 180bps qoq, and 50bps higher than expected. EBITDA growth was 30.1% qoq and 49.9% yoy. There was an exceptional cost for VRS at the Bhandup plant, which lowered the reported profit to `169m. Adjusting for the same, profit was `261m, up 55.3% qoq. Our take. In Q2FY13, Ceat was hit by unexpected costs that it had to provide for; excluding this, performance was largely in line with expectations. In 3QFY13, although replacement demand did not pick up, Ceat benefited from lower prices of rubber. Benefits of lower rubber price would show in 2H, ` as well as in FY14. In 1H, a depreciated rupee and higher import content lowered the benefit available. Management expects profitability to revert to close to 1H levels ahead. We re-iterate Buy on Ceat with a target of `151 based upon 4x FY14e PE. Risks. Spike in rubber prices, late recovery in truck tyre replacement demand, high leverage and price wars.
Key data

Rating: Buy Target Price: `151 Share Price: `99

52-week high / low Sensex / Nifty 3-m average volume Market cap Shares outstanding

CEAT IN / CEAT.BO `125 / `82 19468/ 5887 US$0.0m `3.4bn / US$62.4m 34.2m

Shareholding pattern (%)

Dec12 Sep12

Jun12

Promoters - of which, Pledged Free Float - Foreign Institutions - Domestic Institutions - Public

52.87 nil 47.13 1.49 10.96 34.68

52.87 nil 47.13 1.58 10.98 34.57

52.54 nil 47.46 1.79 13.02 32.65

Financials (YE Mar)

FY13e

FY14e

Sales (`m) Net profit (`m) EPS (`) Growth (%) PE (x) PBV (x) RoE (%) RoCE (%) Dividend yield (%) Net gearing (%)
Source: Anand Rathi Research

48,258 990 28.9 926.0 3.4 0.5 13.4 18.6 1.5 62.6

54,322 1,321 38.6 33.5 2.6 0.4 15.3 21.1 2.0 74.9

Standalone Quarterly results (YE Mar)

3QFY12

3QFY13

% yoy

9MFY12

9MFY13

% yoy

Sales (`m) EBITDA (`m) EBITDA margin (%) Interest (`m) Depreciation (`m) Other income (`m) PBT (`m) Tax (`m) Tax rate (%) PAT (`m)
Source: Company

10,636 679 6.4 486 188 30 35 11 32.3 24

12,017 1,018 8.5 465 199 34 251 81 32.4 261

13.0 49.9 209bps -4.3 6.2 12.0 609.9 613.2 15bps 991.3

32,472 1,252 3.9 1,381 517 177 -502 -163 32.5 -318

35,640 2,869 8.1 1,491 587 158 673 218 32.5 686

9.8 129.3 420bps 7.9 13.4 -10.9 NM NM 0bps NM

Rohan Korde
+9122 6626 6733 rohankorde@rathi.com

Anand Rathi Shares and Stock Brokers Limited (hereinafter ARSSBL) is a full service brokerage and equities research firm and the views expressed therein are solely of ARSSBL and not of the companies which have been covered in the Research Report. This report is intended for the sole use of the Recipient and is to be circulated only within India and to no countries outside India. Disclosures and analyst certifications are present in Appendix. Anand Rathi Research India Equities

18 February 2013

Ceat Growth triggers in place; Buy

Quick Glance Financials and Valuations

Fig 1 Income statement (`m)
Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Fig 2 Balance sheet (`m)

Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Net revenues Revenue growth (%) - Op. expenses EBIDTA EBITDA margin (%) - Interest expenses - Depreciation + Other income - Extraordinaries - Tax Effective tax rate (%) Reported PAT Adjusted PAT PAT growth (%) FDEPS (`/share) FDEPS growth (%)

35,164 25.2 33,754 1,409 4.0 785 342 128 78 110 33.0 223 301 -81.3 8.8 -81.3

44,720 27.2 42,165 2,556 5.7 1,922 705 200 32 23 23.0 75 96 -68.0 2.8 -68.0

48,258 7.9 44,253 4,005 8.3 1,998 813 200 140 404 32.2 849 990 926.0 28.9 926.0

54,322 12.6 49,596 4,726 8.7 2,078 910 220 0 636 32.5 1,321 1,321 33.5 38.6 33.5

60,660 11.7 55,200 5,459 9.0 2,162 974 242 0 847 33.0 1,719 1,719 30.1 50.2 30.1

Share capital Reserves & surplus Net worth Total debt Def. tax liab. (net) Capital employed Net fixed assets Investments Working capital Cash Capital deployed Net Debt No. of shares (m) Net Debt/ Equity (%) WC days Book value (`/sh)

342 6,088 6,491 9,050 241 15,782 14,684 865 -247 479 15,782 7,705 34.2 225.0 31 190

342 6,185 6,563 10,722 224 17,510 15,375 745 1,056 334 17,510 9,643 34.2 281.6 44 192

342 6,983 7,361 10,622 224 18,208 15,562 1,045 1,352 249 18,208 9,329 34.2 272.4 44 215

342 8,236 8,614 10,322 224 19,161 15,652 1,345 1,951 213 19,161 8,764 34.2 255.9 44 252

342 9,869 10,248 9,822 224 20,295 15,678 1,645 2,583 389 20,295 7,788 34.2 227.4 44 299

Source: Company, Anand Rathi Research

Source: Company, Anand Rathi Research

Fig 3 Cash-flow statement (`m)

Year-end: Mar FY11 FY12 FY13e FY14e FY15e

Fig 4 Ratio analysis @ `99

Year-end: Mar FY11 FY12 FY13e FY14e FY15e

PAT + Non-cash items Cash profit - Incr./(Decr.) in WC Operating cash-flow - Capex Free cash-flow - Dividend + Equity raised + Debt raised - Investments - Misc. items Net cash-flow + Op. cash & bank bal. Cl. cash & bank bal.

223 342 565 -1,354 1,918 4,987 -3,069 68 0 2,511 280 15 -921 1,400 479

75 705 780 1,266 -486 1,395 -1,881 34 0 1,673 -120 22 -144 479 335

849 813 1,662 339 1,324 1,000 324 51 0 -100 300 -42 -85 334 249

1,321 910 2,231 641 1,591 1,000 591 68 0 -300 300 -42 -36 249 213

1,719 974 2,693 674 2,020 1,000 1,020 86 0 -500 300 -42 176 213 389

P/E (x) P/B (x) EV/EBITDA (x) RoE (%) RoCE (%) Dividend yield Dividend payout (%) Debt to equity (%) Core P/E (x) Cash P/E EV/sales Inventory days Receivables days Payables days Fixed Asset Turnover

11.2 0.5 7.9 4.6 7.6 2.0 35.3 1.4 19.1 5.2 0.3 59 50 77 3.3

35.0 0.5 5.1 1.5 11.7 1.0 52.3 1.6 -52.9 4.2 0.3 47 50 54 3.1

3.4 0.5 3.2 13.4 18.6 1.5 7.0 1.4 4.1 1.9 0.3 47 50 54 3.1

2.6 0.4 2.6 15.3 21.1 2.0 6.0 1.2 2.9 1.5 0.3 47 50 54 3.5

2.0 0.3 2.0 16.8 23.3 2.5 5.7 1.0 2.2 1.3 0.2 47 50 54 3.9

Source: Company, Anand Rathi Research

Source: Company, Anand Rathi Research

Fig 5 PB band
300

Fig 6 Segment-wise mix (% of revenues)

100% 90% 80% 70% 60% 50%
Ceat 0.6x 0.4x

240

1.0x 0.8x

69

66

59

180

120

40% 30% 20% 10% 0% FY10 FY11 12 19 14 20 17 24 FY12

60

0.2x

0 Jul-08 Jul-09 Jul-10 Jan-09 Jan-10 Jan-11 Jul-11 Jan-12 Oct-08 Oct-09 Oct-10 Oct-11 Apr-08 Apr-09 Apr-10 Apr-11

Exports
Source: Company

OEM

Replacement

Source: Bloomberg, Anand Rathi Research

Anand Rathi Research

44

Appendix
Analyst Certification The views expressed in this Research Report accurately reflect the personal views of the analyst(s) about the subject securities or issuers and no part of the compensation of the research analyst(s) was, is, or will be directly or indirectly related to the specific recommendations or views expressed by the research analyst(s) in this report. The research analysts are bound by stringent internal regulations and also legal and statutory requirements of the Securities and Exchange Board of India (hereinafter SEBI) and the analysts compensation are completely delinked from all the other companies and/or entities of Anand Rathi, and have no bearing whatsoever on any recommendation that they have given in the Research Report. Important Disclosures on subject companies
Rating and Target Price History (as of 16 February 2013)

240 200 160 1 120 80 40 0 Feb-08 Feb-09 Feb-10

Ceat
1 2
2

Date 7-Sep-09 24-Sep-12

Rating Hold Buy

TP (`) 181 151

Share Price (`) 148 114

Feb-11

Feb-12

The research analysts, strategists, or research associates principally responsible for the preparation of Anand Rathi Research have received compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors, firm revenues and overall investment banking revenues. Anand Rathi Ratings Definitions Analysts ratings and the corresponding expected returns take into account our definitions of Large Caps (>US$1bn) and Mid/Small Caps (<US$1bn) as described in the Ratings Table below: Ratings Guide Large Caps (>US$1bn) Mid/Small Caps (<US$1bn) Buy >15% >25% Hold 5-15% 5-25% Sell <5% <5%

Anand Rathi Research Ratings Distribution (as of 29 Oct 2012) Buy Anand Rathi Research stock coverage (155) 65% % who are investment banking clients 5%

Hold 25% 3%

Feb-13

Jun-08

Jun-09

Jun-10

Jun-11

Jun-12

Oct-08

Oct-09

Oct-10

Oct-11

Oct-12

Sell 10% 0%

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