2,500% jump in Q2 profit! This small-cap firm zooms on operational efficiency, volume growth in Q2

A small-cap tyre firm reported 2,556 per cent year-on-year growth in net profit last week at Rs 208 crore for the September quarter (Q2FY24). Its revenue increased 5.5 per cent YoY to Rs 3,053.32 crore, aided by volume growth of around 7 per cent YoY, partially offset by lower realisations. While retaining their bullish view on the company, market watchers believe that operational efficiency supported by volume growth led to the top line growth during the quarter under review.

This company is Ceat Ltd, which posted a 119 per cent YoY jump in operating profit at Rs 467 crore. According to BP Wealth, Ceat’s Q2FY24 result was a splendid display of operational efficiency buoyed by volume growth which led to a revenue growth of over 5 per cent YoY.

The brokerage believes by intensifying its focus on R&D expenditures Ceat is bolstering the quality of tyres, particularly in the PCR and truck and bus radial (TBR) segments, thereby reinforcing its competitive pricing strategy.

With passenger car radial (PCR) and two-wheeler utilisation levels remained stable at 80 per cent, Ceat’s capital expenditure is expected to remain below historical levels.

The company is considering incremental and conservative capital outlays over the next 2-3 years, with no substantial greenfield investments until fiscal year 2026. Notable capital investments would primarily be directed toward the TBR (truck, bus and radial) and OHT (off-highway tyre) segments. The company has also successfully reduced its debt by around Rs 450 crore over the past three quarters, attributable to strong free cash flow generation, improved profitability and a reduction in capital expenditures.

“Going forward, a steady expansion in sales volume for OEMs and a concurrent rise in replacement demand are expected to facilitate the swift assimilation of new production capabilities, leading to better operating leverage. Furthermore, Ceat’s strategic emphasis on specific sectors like PVs, 2Ws, OHTs, and exports (aimed at bolstering margins), combined with cautious capital expenditure strategies (to enhance free cash flow), is poised to serve as a catalyst for sustained long-term ROE growth,” BP Wealth said in a report.

Way2Wealth added that Ceat surprised on the margin front in Q2 posting a margin of around 15 per cent aided by correction in the raw material basket and product mix improvement. Volume is likely to grow at mid-single-digit going ahead, led by recovery in export volume and replacement volume, while OEM volume is expected to moderate.

“The management’s growing focus on expanding channels in North America, Europe, and increasing exports of OHT will lead to stronger exports in the next 2–3 years. Hence, we continue to view it as a ‘Buy’ with a target range of Rs 2,730-2,750,” Way2Wealth said.

Prabhudas Lilladher has an ‘Accumulate’ rating on the stock with a target price of Rs 2,515. Shares of the company traded at Rs 2,138 in the afternoon trade on October 23. “We believe margins will peak out in the near term due to increased raw material price. Though the demand environment has been stable, Ceat’s focus on the export market should help volumes and margins. Also, the stock has corrected to attractive levels based on the current commodity price environment,” Prabhudas Lilladher said in a report.

 

 

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