CEAT shares: Despite a manifold rise in Q1 PAT, analysts see up to 45% fall in the stock

CEAT has been thrashed by 'sell' ratings by various brokerage firms even after the tyre-maker reported a manifold rise in the profit after tax (PAT) in the June 2023 quarter. Not all analysts were negative on the stock, however, the stock lagged those who were positive on the stock.

Shares of CEAT gained about a per cent to Rs 2511.25 on Thursday, before giving up its gains and falling to Rs 2,474.55 at 10.25 am as the company's total market capitalization stood a little above Rs 10,000 crore. The scrip at settled at Rs 2,493.55 on Wednesday.

Shares of CEAT have rallied about 80 per cent in the last three months, while the stock has gained about 20 per cent in the last one month. The stock has surged more than 100 per cent in the last one year so far.

Tyre maker CEAT reported a multi-fold jump in consolidated net profit at Rs 144.01 crore in the June quarter. The company had posted a consolidated net profit of Rs 8.68 crore in the year-ago period. Consolidated revenue from operations was at Rs 2,935.17 crore as against Rs 2,818.38 crore a year ago.

On the operating performance, the company's EBITDA) during the June quarter stood at Rs 384.7 crore, compared to Rs 171.3 crore in the year-ago period. Earlier this year, CEAT's board of directors had proposed a dividend of Rs 12 per equity share.

CEAT’s Q1FY24 EBITDA margin at 13.2 per cent beat consensus estimate, driven mainly by 100 bps QoQ gross margin improvement. The margin expansion resulted from a decline in raw material basket (RMB) cost and better product mix. Capex in Q1FY24 was at Rs 220 crore with targeted capex for the year at Rs 750 crore, said ICICI Securities.

Controlled capex in FY24E-FY25E would help CEAT control its financial leverage ratio and improve capital efficiency. Post the 80 per cent rally in the last 3 months and 33 per cent potential downside from current levels, we downgrade CEAT to 'Sell' with a DCF-based target price of Rs 1,669, it added.

"CEAT reported 1QFY24 consolidated EBITDA of Rs 390 crore, up 134 per cent YoY due to better-than-expected gross margin print. Though we expect FY2024E profitability to sustain at around current levels, we believe sustenance of the same will be challenging over the medium term," said Kotak Institutional Equities.

Valuations at 19 times FY2024E consolidated EPS are expensive, given a weak return-ratio profile of the business over the capex cycle and commoditized nature of the business, it added while maintaining its sell rating in the stock with a fair value of Rs 1,400 apiece.

While Kotak Institutional Equities is expecting a 45 per cent fall in the stock from day's high, while ICICI Securities a 33 per cent fall in the stock. However, YES Securities and Prabhudas Lilladher remain neutral in the counter but see a mild correction in the stock.

Sustained volumes in both OEMs and replacement will enable faster absorption of new capacities and drive operating leverage. This, coupled with price retention should keep margins at elevated levels. However, valuations do factor in positives with limited headroom for muted performance, said YES Securities with a 'neutral' rating on the issue, with a target price of Rs 2,344.

Prabhudas Lilladher has a 'hold' rating on the stock with a target price of Rs 2,430 as it expects near term pressures on profitability given impact on export, moderate growth and higher interest costs. Yet correction in commodity cost coupled with cost control would aid margin expansion.


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