CEAT Fundamental Analysis and Future Outlook
CEAT was established in 1958 and is a flagship company of INR 220 billion RPG Enterprises. Today, CEAT is one of India’s leading tyre manufacturers and has a strong presence in global markets. The company produces over 15+ million tyres a year. CEAT manufactures radial tyres for heavy-duty trucks and buses, light commercial vehicles, earthmovers, forklifts, tractors, trailers, cars, motorcycles and scooters as well as auto-rickshaws.
- The business model of the company is such that a major portion of the revenue comes from the after-sales market of automobiles. Therefore the company also needs to spend a considerable amount on branding and advertising.
- Overall CEAT has a presence in 100+ countries and has been able to achieve a strong brand recall amongst its customers. The revenue split is such that 31% comes from Trucks and Buses tyres, 32% from 2/3 wheeler tyres, 11% from LCV tyres, 14% from Car tyres, and 12% from the farm equipment and speciality tyres.
- The market revenue breakup is such that 58% comes from replacement (after-sales), 15% from the exports and the remaining 27% from OEMs. The company also has R&D centres in Halol and Germany and their focus is on upcoming technologies like electric vehicles, sustainability and smart tyres.
- Overall the business model is focused on core growth without much diversification which subjects the company to the auto industry and aftersales replacement cycles.
I have evaluated the company on 10 fundamental categories and each has been given a rating out of 5 stars. From this, I have arrived at a combined stock rating for the company.
This is the summary of the analysis. You can read the detailed analysis with the excel models on my blog (Check the source link)
Some insights for the coming years from the analysis, management discussions and con calls are as follows.
- The effect of the Covid-19 outbreak and the subsequent lockdown will be severe on the company both due to production loss and sales decline in double digits. The near future concerns for the company include downsizing of operations, selective price cuts to stimulate demand, managing labour crunch and disrupted supply chains. Any recovery will only be witnessed after FY 2022 depending on the conditions of the auto industry and retail credit availability in the market.
- Approximately 27% of the revenue comes from OEM partnerships for the company. Last year, the OEM demand declined by 8% due to the slowdown in the Auto Industry. This decline is expected to reach the levels of 40%+ in FY 2021.
- The management is evaluating the merits of the new corporate tax regime but is yet to take a final decision as it does not offer MAT credit (Minimum Alternate Tax).
- CEAT has invested heavily in the new Truck and Bus Radials (TBR) plant and its is operating at 50–55% capacity. Any further investment in it will only create overcapacity in the coming years. So the company is expected to stop any further Cap-Ex and conserve cash for the coming years.
The company will suffer from over-capacity, labour crunch and a sharp decline in demand in the coming years. The financial position is also not very strong and the management also does not have significant experience in the industry. Hence the stock can see further correction in its price and valuation multiples in the near future
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