APRIL 2013

INITIATING COVERAGE REPORT: CEAT Ltd.

BUY : TP ` 141 ; CMP : 93

Key Share Data
Face Value (Rs.) No of Shares (Rs. Cr.) M.Cap (Rs. Cr.) 52-wk high/Low (Rs.) Avrg Qtrly Volume BSE code NSE code Reuters code Bloomberg code
Shareholding Pattern (%)

CEAT Ltd.

Initiating Coverage:
10 3.42 307.8 125/89 5,760,098 500878 CEATLTD CEAT.BO CEAT IN

CEAT Ltd. (CEAT), a flagship company of RPG Enterprises, is among the top 5 leading tyre manufactures in India with a market share of 12% of Indian tyre market. CEAT has good brand equity with the presence in Domestic and Export markets. The company owns two tyre manufacturing facilities in Maharashtra (Bhandup and Nasik) and has also set up a green filed tyre manufacturing facility at Gujarat (Halol).

Investment Rationale:
Radialisation demand to push the growth:
Tyre industry is structurally shifting from the bias to radial tyre. In India radialisation is still very low for the truck and bus (T&B) segments compared to the global market. The Company has set up a green field radial tyre manufacturing plant in Halol to cater the increasing demand for T&B segments.

Promoters FII Inst Investor Public

Institutional Holdings (%)

Q3FY13 Q3FY12 52.9 51.3 1.5 1.8 11.0 14.3 34.7 32.6 Q3FY13 Q3FY12 4.03 4.03 1.46 0

Institutional LIC SBI Magnum Balanced Fund

Replacement demand and change in revenue mix to expand margins:

We expect replacement demand to grow sharply. The company has increased its focus toward the high margin products. The change in product mix along with the increasing demand for the replacement is likely to push the margins upward, as the margins are higher in the replacement compared to OEM and export segments.

Financials (Consolidated) Particulars FY12

Nat Sales EBIDTA EBIT Adj. PAT EPS (Rs.)

FY13

FY14

4649.0 5042.2 5568.6 282.5 458.4 514.4 209.7 18.2 5.3 375.4 115.3 33.7 424.5 176.0 51.4 1.8 0.3 1.2 0.1 3.1 17.7% 18.7% 9.2%

Greenfield plant in Bangladesh-coats to attain 35-40% of the market:

The Company has entered in to joint venture (JV) agreement with the AK Khan & Company Ltd, to set up a manufacturing facility in Bangladesh. The Management expects Bangladesh plant to be operational by the third quarter of FY15. In addition, the said facility is likely to be 110-tonnes per day (TPD) facility and expects to manufacture tyres for light commercial vehicles (LCVs), 2/3 wheelers and truck bias tyres for the Bangladeshi market.

Key Ratios
P/E(x) 17.5 2.8 P/BV(x) 0.5 0.4 P/CEPS(x) 3.5 1.6 M.Cap/Sales (x) 0.1 0.1 EV/EBIDTA(x) 4.9 3.5 ROCE (%) 11.9% 18.2% ROE (%) 2.7% 14.8% EBIDTAM 6.1% 9.1% Price Performance Chart

Potential growth in the Sri Lankan Subsidiary:

CEAT Sri Lanka subsidiary has the leadership position in the Sri Lanka market with more than 60% of the market share for the trucks and light trucks. The Sri Lankan plant has the capacity of 55 TPD.

Valuation:
We expect CEAT to showcase improvement in the EBIDTA margin on the back of softening in the raw material prices coupled with the change in product mix. At the current market price of Rs. 93, stock is trading at an EV/EBIDTA of 3.5x and 3.2x for FY13 and FY14 respectively. We recommend BUY rating on the stock with the target Rs. 141 price at the EV/EBIDTA of 4x on FY13 earning over the period of 18 months. Page 1

Savitree Singh savitree@tathastuadvisory.com Research Analyst

www.tathastu.com

APRIL 2013

INITIATING COVERAGE REPORT: CEAT Ltd.

Industry overview: The Indian tyre industry contributes approximately 5% of the nearly
$100 bn global tyre industry demand, generating turnover of13,500 crores annually. Top players in the market are MRF, Apollo, JK and Ceat, accounts for 85% of the total industry sales and rest the market is occupied with the unorganized players in the main segment of Indian tyre market. Despite the economic slowdown and high input costs last year, the Indian tyre industry showcased a growth of 5.3% (volume) in 2011-2012.

Market Share
1% 14% 5%

MRF
30%

Apollo Tyres JK Tyres & Ind Balkrishna Inds

8%

20% 22%

CEAT TVS enterprises Others

The domestic tyre industry is expected to grow at a modest 6-7% revenue growth during the 2012-13. On the back of flattish volumes across most auto Original Equipment (OE) segments and replacement markets, demand is expected to remain muted. Globally too, the tyre industry faced several headwinds with declining demand from EU, weaker replacement demand in the USA and sagging sales in the Chinese infrastructure equipment market also impacting tyre demand. We do foresee volumes from the T&B segment to be significantly weaker, offset to an extent by the healthy growth witnessed in the LCV and scooter segments. However, we foresee industry growth to revive to 10-12% during 2013-14, driven mainly by continued strong LCV demand, stable two-wheeler (2W) demand and pick up in tractor demand.

Tyre Sector Overview: Tyre industry is highly raw material sensitive industry, where
raw material cost accounts for more than 70% of the total turnover of the company. In addition, 63% of the total Natural Rubber consumption goes in the tyre sector.

Raw Material Composition

Natural Rubber 5% 5% 43% 5% 11% 18% 9% Nylon Cord fabric Carbon Black Rubber chemicals Butyl Rubber PBR SBR Other

4%

www.tathastu.com

Page 2

APRIL 2013

INITIATING COVERAGE REPORT: CEAT Ltd.

Driver for the Industry growth:

The revenue growth was definitely aided by the depreciating rupees and stable rubber prices by the end of the financial year. At the beginning of 2011, the rubber prices were about Rs.240/ kg which came to Rs.165-180/ kg by the year end. Slackening pace of economic activity and demand slowdown in the domestic auto industry has had an adverse impact on the domestic tyre industry during the last fiscal (2012-13). Tyre manufacturer have major goal to further global expansion of their operations. Although the demand in mature economies is likely to pick up with the immense opportunities in emerging markets have led tyre companies to decide on investing in boosting capacity in already established plants or building new ones. Recently weak economic conditions, troubled financial markets and detrimental exchange rates resulted in a drop in rubber tyre sales volume in the country, Which has been impacting demand for the tyres. Recently feeble economic conditions, troubled financial markets and detrimental exchange rates resulted in a drop in rubber tyre sales volume in the country. The prevailing weakness in global markets slump auto demand during 9M 2012-13, we estimate the tyre industry to have recorded a low 6-7% growth in revenues during 2012-13. We expect volumes from the T&B segment to be significantly weaker, offset to an extent by the healthy growth witnessed in the LCV and scooter segments. Tyre manufacturer have major goal to further global expansion of their operations. Although the demand in mature economies is likely to pick up with the immense opportunities in emerging markets have led tyre companies to decide on investing in boosting capacity in already established plants or building new ones. Margin respite on account of softening in rubber prices: The weakness in the auto demand globally and excess supply, rubber price witnessed the sharp correction that supported the tyre manufacturer to showcase healthy margins. However owing to the pileup of inventory during Q4, 2012-13, the industry has resorted to discount and price cuts. Overall we expect tyre industry to post a 270-300 bps expansion in operating margins during 2012-13. A global auto manufacturing hub: With increasing per capita income, infrastructure development and growing urbanization in India, the automobile industry has showcased significant growth in this decade. The outlook for the domestic automobile industry in India remains robust supported by Indias growing importance as an automotive export hub for small cars. As per the news, most of the overseas automobile players are planning to set up their manufacturing plants in India. Therefore, the growing demand for automobile products is expected to fuel the growth in the tyre industry.

www.tathastu.com

Page 3

APRIL 2013

INITIATING COVERAGE REPORT: CEAT Ltd.

Domestic and foreign manufacturers to invest in incremental capacities: The domestic tyre industry continued to witness healthy capacity additions during 2012-13, primarily in T&B radial segment. However, with automotive OEs gradually shifting to radial tyres (in the T&B segment), domestic tyre manufacturer are expected to continue their capacity expansion in anticipation of a sharp off-take in radial tyre demand over the next 3-4 years. Demand contraction results in deceleration in sales growth: Subdued OEM demand, modest replacement demand and relatively muted exports affect the sales growth of the domestic tyre industry during current fiscal. Price hikes were possible only to the extent of 1.5-2.5% with dropping input costs. Global tyre industry also witnessed significant contraction in volumes during the first nine months of CY 2012, led by falling replacement demand in major geographies.

Raw Material Composition:

Natural Rubber: Indian stands at the fourth place in the production of natural rubber
and second place in world consumption. Thailand, Indonesia and Malaysia retain over 70% of the global natural rubber reserves and rubber production facilities are concentrated in these countries. Europe and North America hold significant role in the production of synthetic rubber, but they dont posses any natural rubber resources. Lower graded Ribbed Smoked Sheets (RSS4 & RSS5) are used for the manufacture of bias tyres and retreading materials and all other general products. RSS 3 and RSS4 are the preferred raw material for radial tyres. Kerala accounts for the 90% of the total Indian production of natural rubber wherein 72% of the total production is in the form of RSS. Natural rubber nearly accounts for 70% of the input cost of the total tyre production hence, so any upswing in the raw material prices will enforce tyre companies to increase the cost.

Nylon tyre cord fabric:

A nylon tyre cord fabric is a core reinforcement material that is used in making bias tyres for truck and buses (T&B) as well as tyres for other land vehicles. It provides higher tenacity, heat resistance, higher temperature and strength resistance to the tyre, also due to its excellent adhesive force over rubber; nylon tyre cord is mainly used to manufacture bias tyres.

Carbon Black: It provides balance of treads wear, rolling resistance and traction to
the tyres.

www.tathastu.com

Page 4

APRIL 2013

INITIATING COVERAGE REPORT: CEAT Ltd.

Others: Two type of synthetic rubber are used in tyre, one is poly butadiene rubber (PBR) and another is styrene butadiene rubber (SBR). The tyre industry sells its products in two main markets: Majority sells in the replacement and rest to OEM and export market. The Company generates majority of revenue from the replacement market. We believe, on the back .. replacement demand to grow sharply. Replacement market is known for a high margin business, so keeping that in mind the company has been continuously increasing its focus toward the high margin business products. The company is likely to increase the share in the replacement demand by increasing the presence in different market through the significant expenditure toward the advertisement and add campaigns. During FY12, the Company launched IDIOT SAFE add campaign which managed to increased its share in the 2-W markets from 12% to 18% in last one year. In addition, the Company is likely to increase its focus on the change in product mix. The Company has increased its focus from the T&B segment to 2-3 wheelers, which is high margin segment. We believe, the increase in replacement demand along with the change in revenue mix would enable the company to post decent EBIDTAM and push the revenue growth significantly. In addition, the Management is also targeting to increase its presence in the twowheelers tyres which has higher margin. The Companys current market share in the two-wheeler tyre segment is 18%. In the wake of the recent slowdown economy, there has been a noteworthy change in Demand of tyres in mature markets, where increasing orders for vehicles with high fuel economy led to a shift to smaller size passenger tyres light truck tyres, product of lower profitability to the industry. In order to boost sales in the replacement market, tyre companies pursue extensive marketing campaigns using tremendous resources and budget. A Fluctuation in the production of vehicles is correlated with the decrease or increase in the tyre industry revenues. The demand from the Original Equipment Manufacturers is derived and directly correlated to the level of automotive production. Raw material prices are set to be volatile: Tyre production is the biggest consumer of synthetic and natural rubber. The industry uses the majority of natural and synthetic rubber output.

Investment Rationale:
1. Capacity additions and increasing radialisation demand to push the growth:
Tyre industry is structurally shifting from the bias to radial tyre. Rate of radialisation is an
index of the status of the road of development and economy. Due to longer durability and better fuel efficiency as compared to cross ply, radial tyres have already replaced cross ply tyres crossed the world. In India radialisation is still very low for the commercial vehicle (CV) segments (16%) compared to the global market (65%). Page 5

www.tathastu.com

APRIL 2013

INITIATING COVERAGE REPORT: CEAT Ltd.

While, it is almost 99% radialised in the passenger car segment. The radial tyre markets
need to have a deeper penetration in the future so there is enormous growth for the same. Currently, the tyre industry is showcasing fast and structural changes from bias to radial tyres. Radialisation is one of the important structural changes that the tyre industry of India has begun to embrace. During FY12, the Company has set up a green field radial tyre manufacturing plant in Halol to cater the increasing demand for T&B radial tyres. Earlier, T&B were dominated by the cross-ply tyres but a positive growth has been witnessed in recent times toward the radial tyres in T&B segment. T&B segment that imports from China have made great progress and as early as 2008 Chinese radials came to occupy around 60% shares of the Indian TBR market. The enormous demand-supply gap in the Indian market (in 2010 the demand for tyres reached 2.7 mn unites and the supply came short by 1.7 mn units) opened the door for Chinese products and this has been heavily reflected in radial import figures.

Radial and Cross Ply (% of sales mt)

100% 80% 60% 40% 20% 0% FY11 FY12 Q1FY13 Q2FY13 Q3FY13

Cross Ply

Radial

2. The replacement market to be the largest market segment: change in revenue mix to expand margins:

The tyre industry sells its products in two main markets: Majority sells in the replacement and rest to OEM and export market. The Company generates majority of revenue from the replacement market. We believe, on the back .. replacement demand to grow sharply. Replacement market is known for a high margin business, so keeping that in mind the company has been continuously increasing its focus toward the high margin business products. The company is likely to increase the share in the replacement demand by increasing the presence in different market through the significant expenditure toward the advertisement and add campaigns. During FY12, the Company launched IDIOT SAFE add campaign which managed to increased its share in the 2-W markets from 12% to 18% in last one year. In addition, the Company is likely to increase its focus on the change in product mix. The Company has increased its focus from the T&B segment to 2-3 wheelers, which is high Page 6

www.tathastu.com

APRIL 2013

INITIATING COVERAGE REPORT: CEAT Ltd.

margin segment. We believe, the increase in replacement demand along with the change in revenue mix would enable the company to post decent EBIDTAM and push the revenue growth significantly.

In addition, the Management is also targeting to increase its presence in the twowheelers tyres which has higher margin. The Companys current market share in the two-wheeler tyre segment is 18%. In the wake of the recent slowdown economy, there has been a noteworthy change in Demand of tyres in mature markets, where increasing orders for vehicles with high fuel economy led to a shift to smaller size passenger tyres light truck tyres, product of lower profitability to the industry. In order to boost sales in the replacement market, tyre companies pursue extensive marketing campaigns using tremendous resources and budget. A Fluctuation in the production of vehicles is correlated with the decrease or increase in the tyre industry revenues. The demand from the Original Equipment Manufacturers is derived aqnd directly correlated to the level of automotive production. The demand in the replacement market depends on the size of the vehicle fleet, the level of economic activity, the price of tyres and the quality of road infrastructure. The replacement market always offers higher margins are therefore extremely competitive.

75% 60% 45% 30% 15% 0%

66%

Key Customer Segments (% of sales mt)

59% 61% 54% 54%

FY11

FY12

Q1FY13

Q2FY13

Q3FY13

Replacement

Export

OEM

3. Greenfield plant in Bangladesh-coats to attain 35-40% of the market:

Domestic tyre capacities grew by over 16% on a compounded basis during the last three years (FY 10-12). Capacities worth Rs. 35.9 bn were commissioned during 2011-12 and the industry stands poised for an incremental investment of Rs. 54.2 bn during 2012-13. During Q3FY13, the Company has entered in to joint venture (JV) agreement with the AK Khan & Company Ltd, one of the most reputed business conglomerates in Bangladesh, to set up a manufacturing facility in Bangladesh. Page 7

www.tathastu.com

APRIL 2013

INITIATING COVERAGE REPORT: CEAT Ltd.

Under the proposed JV, CEAT Ltd., is likely to hold 70% shareholding and A K Khan & Company Ltd. will hold balance of 30%. As per the JV agreement, CEAT Ltd. would provide technical and business expertise & manage the JV Company operations while A K Khan & Company will bring in their vast knowledge of Bangladesh market besides providing the strength of their goodwill and local presence. The total investment in the Bangladesh JV is expected to be approximately Rs. 2700 mn, with CEAT contribution at Rs. 1890 mn spread over the next two years. The Management expects Bangladesh plant to be operational by the third quarter of FY15. Initially the said plant is expected to have a capacity of 65 tonnes per day (TPD), which would soon be ramped up to 110 TPD. In addition, the said facility is likely to produce tyres for light commercial vehicles (LCVs), 2- and 3- wheelers and truck bias tyres for the Bangladesh market. The Company made an investment of Rs. 109.6 mn in CEAT Bangladesh Ltd. Currently, Bangladesh imports more than 95% of its tyre requirement for its 160 mn population. Management stated that the Company has the target to achieve a market share of 35-40% in the next three to four year. The management expects to capture 40% of the Bangladeshi market over the next three years. We do expect the company to showcased healthy top-line growth on the back of Increased focus on the tyre production capacity for the truck and light-truck tyres, 2-3 wheelers and last-mile vehicles.

The Company had announced voluntary Retirement Schemes (VRS) for employees of its Bhandup plant. During the quarter, 188 employees opted for VRS and the total payment for this compensation stood at Rs. 136.3 mn which was disclosed as an exceptional item. The company in FY12 acquired CEAT brand from Italy based Pirelli for Rs. 55 crores which would enable the Company to export radial and bias tyres to the whole world under the CEAT brand. CEAT Ltd is currently the owner of the CEAT brand in nine South Asian Countries. Pirelli is the owner of the Ceat trademark in the rest of the world. We expect the company to generate higher export revenue on account of that. The company is likely to manufacture world class high quality tyres for T&B, LCV, SCV, Motorcycle and Auto rickshaw. Rubber prices are quite volatile and have been trending downwards during the last 18 months. So any further softening for the same is likely to boost margins. Additionally, prices of other key inputs, which are largely crude dependant, have also softened in the past few months, in line with the drop in crude prices. In the below chart, volatility of the raw material is given:

4. Expenditure toward brand building:

www.tathastu.com

Page 8

APRIL 2013

INITIATING COVERAGE REPORT: CEAT Ltd.

Effect of rubber prices volatility on EBIDTA margin

12.0% 10.0% 8.0% 6.0% 4.0% 2.0% 0.0% 11.3% 9.1% 7.2% 8.9% 195 190 185 180 175 170 165 160

Q4FY12

Q1FY13

Q2FY13

Q3FY13

Rubber Prices

EBIDTA margin(%)

Additionally, we believe increase in tyre price is lagging behind the increase in input cost. This is because of intense competition in the market. So any further fall in raw material prices will positively affect the margins of the company. During FY12, the company has set up a world-class research center at its new Halol facility with an investment of approximately Rs 30 crores.

5. Capacity expansion at Halol Plant to match the increasing demand:

Radial and Cross Ply (% of sales mt)

100% 80% 60% 40% 20% 0% FY11 FY12 Q1FY13 Q2FY13 Q3FY13

Cross Ply

Radial

With the commencement of Halol plants operation, CEAT entered in to radial tyre market in India. The company is likely to increase its focus on radial tyres to strengthen margins. Currently, the Halol plant is being operated at 95 TPD but the management expects it to utilize at full capacity by the end of FY14. With the increasing capacity, we expect company to cater to the increasing demand of OEM and replacement market.

www.tathastu.com

Page 9

APRIL 2013

INITIATING COVERAGE REPORT: CEAT Ltd.

Company Snapshot:
CEAT, a flagship company of RPG Enterprises, is among the top 5 leading tyre manufactures in India with a market share of 12% of Indian tyre market. Manufacturing facilities: The Company owns two tyre manufacturing facilities in Maharashtra (Bhandup and Nasik) and has also set up a green filed tyre manufacturing facility at Gujarat (Halol).

Capacity of different plants (TPD)

300 250 200 150 100 50 0 2012 2013 E 2014 E 2015 E

Halol

Nasik

Bhandup

Outsourcing

Products: The Company manufactures wide range of tyres catering to all user segments. This includes tyre for heavy duty T&B, Light commercial vehicles (LCV), earthmovers and forklifts (specialty segment), tractor, trailers, passenger cars (PCs), motorcycle.

Segmental Revenue Breakup

11%

89%

Tyres

Flaps

Tubes

www.tathastu.com

Page 10

APRIL 2013

INITIATING COVERAGE REPORT: CEAT Ltd.

Products Breakup (% of sales mt)

120%

% to Sakes ( In MT)

100% 80% 60% 40% 20% 0% 61% 56% 61% 54% 55%

FY11 Truck and Buses

FY12

Q1FY13 LCV

Q2FY13 Farm

Q3FY13 Speciality

2-3 wheelers

Car/Jeep

Brand Equity: CEAT carries along a legacy of over years and has established a strong brand equity, which plays a principal role in this industry and also attributed to customer acquisition and retention. The role of brand equity becomes crucial at this stage and we believe, the goodwill relished by the company is likely to add new customers and retain existing customers. Possibility of Structural changes in the future: The Companys Bhandup plant is the oldest plant and is being operated at the maximum capacity utilization. The company is likely to shift this Bhandup plant to Ambernath in some time and for that reason they have already bought land for the same. The company has decided to take the decision for the shifting on the back of heavy octroi which they do pay on the annual basis. The company is also giving VRS to their Bhandup plant employee to cut down the number of employee. Currently, plant has 1600 employee and CEAT has the target to reduce it till 1200 employee by giving VRS schemes to their employee. CEAT generates majority of its revenue from the replacement market. The company has increased its OEM market share from 7% to 8.5%. The company has also increased motorcycle market share from 12% to 16% in the very short span of time.

Subsidiary Performance: ACHL

The company has a subsidiary in Sri-Lanka, which is a JV between CEAT and Kelani Group. CEAT acquired 100% stake in Associated CEAT Holding Company Private Ltd.( ACHL) and it has become wholly owned subsidiary of CEAT. ACHL is in the business of manufacturing and selling automotive and industrial tyres, tubes and flaps. Sri-Lankan subsidiary is the only manufacturer of the tyre in Sri-Lanka with the strong market share of more than 40%. This JV dominates the Sri-Lanka tyre market with 55% in T&B and LCV. Currently, subsidiary is being operated at 55 TPD and they export to Nigeria, Singapore, Egypt and Dubai. Page 11

www.tathastu.com

APRIL 2013

INITIATING COVERAGE REPORT: CEAT Ltd.

The company manufactures bias tyres and radial tyres, in which Sri-Lankan market consumed 50% of it and rest them export to different countries. Sri Lanka is hub for the production of natural rubber, so they dont need to import from the outside. JV company being the sole producer of tyres, has the bargaining power and ability to pass on increased cost to the market, therefore the company margins are high compare to CEAT itself.

120 100

CEAT Srilankan Performance

107 94 93 102

Rs in Cr.

80 60 40 20 0

11 FY12

14 Q1FY13

18 Q2FY13

17 Q3FY13

Net Sales

EBIDTA

PAT

Key Customer segments: The Company is shifting its product base from Truck to nontruck segment and it has been

Broad Dealer network:

The company has 450 dealers across the Islandone of the largest dealer network. CEAT Kelani has three state-of-the-art manufacturing facilities, which match International

Key Concerns:

Raw material price volatility could hurt the margins:The cost

of raw materials represents the largest component of the total cost of goods sold. The sharp price volatility for natural rubber and petroleum-based materials could hamper the profitability of the company.

Economy growth worries can impact the output:

www.tathastu.com

Currently, all the industry is facing slowdown. Most of the OEM are facing cut down their production on the back of muted demand. So any further slowdown in the economy may impact adverse effect on the OEM which ultimately put negative impact on the tyre companies. Page 12

APRIL 2013

INITIATING COVERAGE REPORT: CEAT Ltd.

Threat from the Chinese Market: China is the

leading tyre producing country in the world with exports of 235 mn tyres. Radialisation is one of the important structural changes that the tyre industry in India has begun to embrace. The huge-demand supply gap in the Indian market has shown Chinese competitor to invade their way in Indian market with their competitive pricing structure.

Rise in crude oil prices: Most of the raw materials of the tyre industry are
crude oil by-products like synthetic rubber, Nylon tyre cord, carbon etc. So any upswing in the prices of crude will accelerate the prices of raw materials

Financial Performance: Net Sales growth to remain subdued :The companys net sales gone up to
Rs. 4439 cr. in FY12, registering a growth of 28% on Y-o-Y basis, due to new capacity addition of Halol Plant. We expect company to report 8% growth in FY13 on the back of subdued global automotive production and sluggish demand in the replacement market. The slump in the automotive industry affected results of tyre companies who make approximately 25% of the sales in the OEM, CEAT being no exception.

Sales Growth ( In %)
6000

Net Sales (In Cr.)

5000 4000 3000 2000 1000 0

27%

28%

30% 25% 20% 15% 8% 10% 10% 5% 0%

2011

2012

2013 E

2014 E

Net Sales

% Growth

Steady decline in raw material Prices to boosts EBIDTA margin: The tyre industry is highly raw material sensitive industry which plays the major role in the composition of raw materials, it accounts approximately to 70-72% of the total revenue of the company. We expect company to report improvement in EBITDTA margin on the back of softening in rubber prices.

www.tathastu.com

Page 13

APRIL 2013

INITIATING COVERAGE REPORT: CEAT Ltd.

Sales Growth ( In %)
6000

4000 3000 2000 1000 0 2011 2012 2013 E 2014 E 8% 10%

20% 15% 10% 5% 0%

Net Sales

% Growth

Valuation: We expect company to report improvement on EBIDTA margin on the back of

softening in raw material prices and increase the production at the Halol plant. At the current market price of Rs 90, stock is trading at an EV/EBIDTA of 3.5x and 3.2x for FY13 and FY14 respectively. We recommend BUY rating on the stock with the target Rs. 141 price at the EV/EBIDTA of 4x on FY13 earning over the period of 18 months.

www.tathastu.com

EBIDTA Margin (%)

Net Sales (In Cr.)

5000

27%

28%

30% 25%

Page 14

APRIL 2013

INITIATING COVERAGE REPORT: CEAT Ltd.

Financial Performance:
Income statement Financials Net Operating Income Operaing Expenditure EBIDTA Depreciation EBIT Interest Other Income PBT Tax Adj PAT EPS FY12 4649.0 4366.5 282.5 72.8 209.7 195.8 13.6 27.4 6.1 18.2 5.3 FY13 (E) FY14 (E) Balance Sheet Equity Capital 5042.2 5568.6 Reserves 4583.9 5054.1 Share Warrants 458.4 514.4 Net Worth 83.0 90.0 Loan Funds 375.4 424.5 Deffered tax liability 201.0 201.0 Total Liabilties 16.0 16.0 Net Fixed Assets 190.4 239.5 Capital WIP 47.1 63.4 Investment 115.3 176.0 Net Current Assets 33.7 51.4 Total Assets FY12 FY13 (E) FY14 (E) 34.2 34.2 34.2 630.4 741.7 906.0 3.6 3.6 3.6 668.3 779.6 943.9 1094.6 1286.3 1457.4 24.8 24.8 24.8 1119.4 1311.1 1482.2 1566.0 1697.3 1774.4 17.6 28.9 35.5 45.6 45.6 45.6 102.1 279.4 390.5 1731.3 2051.2 2246.0

Cash Flow Statement PBT Add: Depreciation, Interest & other exp. Change in Working capital Operating Cash Flow Financing Cash Flow Capex Investing Cash Flow Total Cash Flow Opening Cash Balance Closing Cash Balance

FY12 FY13 (E) FY14 (E) Financial Ratios 18.2 115.3 176.0 Valuation Ratios(x)
P/E

FY12
17.49 3.50 0.48 4.87 0.07 0.30 6.1% 11.9% 2.7% 1.6 50.0 70.8 47.3

FY13 (E) FY14 (E)

2.76 1.61 0.41 3.46 0.06 0.31 9.1% 18.2% 14.8% 1.7 50.0 70.0 50.0 1.81 1.20 0.34 3.15 0.06 0.29 9.2% 17.7% 18.7% 1.6 50.0 70.0 58.0

72.8 -123.6 -32.5 171.3 -245 -153 -14 48 34

83.0 -190.6 7.7 191.7 -214 -214 -15 34 19

90.0 P/BV (x) -133.0 133.0 171.1 -167 -167 137 19 156
EV/EBIDTA Market Cap/ Sales (x) EV/Sales Earning Ratios (%) EBIDTAM ROCE ROE B/S Ratios D/E Debtors Days Creditors Days Inventory Days

P/CEPS

www.tathastu.com

Page 15

APRIL 2013

INITIATING COVERAGE REPORT: CEAT Ltd.

Exhibit: Monthly Technical Chart

www.tathastu.com

Page 16

APRIL 2013

INITIATING COVERAGE REPORT: CEAT Ltd.

Savitree Singh Fundamental Research Analyst Tathastu Advisory Services Pvt. Ltd.

Disclaimer:

This Document has been prepared by Tathastu Research (A Division of Tathastu Advisory Private Limited). The information, analysis and estimates contained herein are based on Tathastu Research assessment and have been obtained from sources believed to be reliable. This document is meant for the use of the intended recipient only. This document, at best, represents Tathastu Research opinion and is meant for general information only. Tathastu Research, its directors, officers or employees shall not in anyway be responsible for the contents stated herein. Tathastu Research expressly disclaims any and all liabilities that may arise from information, errors or omissions in this connection. This document is not to be considered as an offer to sell or a solicitation to buy any securities. Tathastu Research, its affiliates and their employees may from time to time hold positions in securities referred to herein. Tathastu Research or its affiliates may from time to time solicit from or perform investment banking or other services for any company mentioned in this document.

www.tathastu.com

Page 17