Tough Road Ahead - Ceat

We had recommended Ceat to our investors in our Issue No 22 dated October 26, 2008 in the Analysis column at Rs 45. At that time the price of the scrip was Rs 50.55 and we had suggested to investors to stay away from the counter on account of the losses in Q1FY08 and the expectation of further losses in the next few quarters. This proved to be right. Secondly, the company had a capex plan of Rs 1,000 crore which was to lead to either dilution of equity or debt, thereby putting a strain on the profitability of the company. However, we had also recommended that investors should enter the counter at lower levels. The counter then hit its 52-week low of Rs 31 in March 2009 and recently touched a high of Rs 94.85 that was more than double our recommended price. Currently the scrip is trading at Rs 88.05, providing a whopping return of 95.67 per cent.

With 14 per cent market share, Ceat is the fourth largest player in the Indian tyre industry by revenue. For FY09, Ceat registered marginal topline growth of 7.89 per cent; however, it recorded a loss of Rs 37.18 crore as compared to the profit of Rs 197.31 crore (including exceptional income of Rs 79.95 crore) last year. This decline was due to the huge fluctuations in raw material cost such as rubber and other operating expenses as also the overall slowdown in the automobile industry.

The company has announced that its capex plan’s first phase of setting up a radial project in Halol, Baroda is expected to be commissioned as per schedule in the second half of 2010. Considering that the industry is still under margin pressures owing to higher raw material cost and cheap imports from China, our suggestion is to book profit.