Ceat Shares Jump To Highest In Over Two Years As Brokerages Up Targets

Shares Ceat Ltd. rose to the highest in more than two years after analysts raised price targets on the tyremaker, citing an increase in replacement demand, better cash flows and volume growth, among others.

The tyremaker reported a 26% year-on-year rise in revenue at Rs 2,221.2 crore in the quarter ended December, according to an exchange filing. That compares with the Rs 1,996.8-crore consensus estimate of analysts tracked by Bloomberg.

Its net profit stood at Rs 132.1 crore against Rs 52.5 Ceat a year ago.

Other highlights (year-on-year)

• Operating profit, or earnings before interest, tax, depreciation and amortisation, surged 79% to Rs 327.7 crore.
• Margin expanded more than 400 basis points to 14.8%.

While the company remained optimistic of maintaining strong growth over the next few months, it may witness pressure on margins in the fourth quarter. “There is expected to be some margin pressure in the next quarter due to increasing raw material prices,” it said in an investor presentation.

Shares of Ceat gained as much as 6.8% to Rs 1,399.4 apiece — the highest since September 2018. The stock is up for the third straight day, gaining more than 15% during the period. Of the 23 analysts tracking the company, 14 have a ‘buy’ rating, five suggest a ‘hold’ and four recommend a ‘sell’. The average of Bloomberg consensus 12-month price targets implies upside of 2.1%.

Here’s what brokerages are recommending on the stock:

Kotak Institutional Equities

• Maintains ‘add’ rating; raises price target to Rs 1,500 apiece from Rs 1,250.
• Expects volume growth to remain strong on account of strong replacement segment demand and recovery in the OEM segment in the near term.
• Margin will likely come down due to the higher share of OEM sales and higher input costs.
• Will further require price hikes of 3% to completely offset raw material headwinds.
• Expects 11% revenue CAGR over FY20-23, led by a cyclical recovery in the OEM segment, strong order book and capacity ramp-up.
• Raises consolidated Ebitda estimates by 7-8% for FY22-23.

IIFL Securities

• Upgrade to ‘buy’ from ‘add’; hikes price target to Rs 1,560 apiece from Rs 1,120.
• Volume ramp-up has been faster than expected.
• Expects CEAT to outperform the industry in FY21.
• Outperformance may even out in FY22 due to lower exposure to truck and bus tyres.
• Input cost pressure unlikely to drive earnings downgrades.
• Expects positive free cash flow starting FY23.
• Raises FY21-23E Ebitda estimates by 9-10%.

PhillipCapital

• Maintains ‘neutral’ rating, raises price target to Rs 1,378 apiece from Rs 1,183.
• Shift towards personal mobility continues to drive replacement as well as OEM demands across segments.
• Expects volumes to remain strong in the near term, especially given the low channel inventory.
• Retains cautiously optimistic view in the near term due to a sharp rise in input prices; new plant ramp-ups to impact operating leverage and channel mix to turn adverse.
• Valuation support is limited.
• Raises FY21/, FY22 revenue and Ebitda estimates by 12% and 10%, respectively.

Motilal Oswal

• Maintains ‘buy’ rating; raises price target to Rs 1,575 apiece from Rs 1,325.
• Strong demand and low inventory to support price hike.
• Strong demand to help utilise recent capacity additions, drive free cash flow generation and deleverage the balance sheet.
• Upgrades FY21, FY22 EPS estimates by 21% and 14% to factor in expected volume growth and price hikes.
• Sees catalysts in the form of strong demand and robust margins to rollback the underperformance of the stock.
• Valuations do not fully capture benefit of substantial capacity addition.

Prabhudas Lilladher

• Maintains ‘accumulate’ rating; raises price target to Rs 1,434 apiece from Rs 1,297.
• Replacement volumes grew 35% in Q3; expects momentum to continue in Q4.
• Raises FY22, FY23 consolidated EPS estimates by 13.5% and 10.6%, respectively.
• Margin can normalise at 11.5%-12%, led by stabilising replacement mix and increasing marketing spends.
• Expects gross margin to remain under pressure in Q4.