In spite of subdued single-digit revenue growth, Ceat Ltd posted decent results for the March quarter, in line with expectations on the Street. Lower raw material price and a dip in interest outgo helped clock net profit of Rs.69 crore, in line with Bloomberg’s consensus estimate and about 13% higher than a year back.
Ceat’s revenue growth of 7.5% at Rs.1,396 crore came from a similar growth in the number of tyres sold during the quarter. The management admits to a slowdown in the replacement market sales of commercial tyres and passenger vehicles over the last couple of quarters. The declining trend in auto sales during the last two years is now hitting replacement market sales.
Of course, lower rubber prices came to the rescue of tyre firms. Ceat’s raw material cost as a percentage to sales dropped by around 2 percentage points, although there was a marginal increase in the cost of traded goods. Operating profit rose by 11.7% as a result of lower costs to Rs.156 crore, which was only slightly below forecasts.
One must note that the company has lifted its operating performance significantly in the last four quarters. In fact, the March quarter’s performance compares favourably with MRF Ltd (among the leaders in the tyre market), whose operating profit and profitability contracted when compared with the previous year period. Ceat’s operating margin rose by around 0.8 percentage point.
But, according to Yaresh Kothari, analyst, Angel Broking Pvt. Ltd, “Gains accrued from lower interest cost… shored up net profit for the quarter. We are positive on the stock as the company will continue to benefit from the new OEM (original equipment manufacturer) partnerships and expected stability in raw-material prices.” The interest outflow dropped by about 13%, which the management said was the result of debt reduction and improved credit rating. But one is not sure if the trend to cut debt will continue, given that Ceat has lined up a capex of about Rs.1,000 crore in the next two years.
Ceat shares, which rose marginally after the results were announced, have also steadily beaten the benchmark indices. At Rs.408, the stock trades at a reasonable 5.5 times its 2013-14 earnings per share, which had almost doubled over the last year. Of course, a similar earnings growth may be too much to expect in the current fiscal year.