Ceat Ltd had a good run in the December quarter, riding on the tails of a marketing push aided by lower raw material prices and healthier growth in the original equipment segment. The company’s net sales increased by 15% from a year-ago and this was accompanied by volume growth of 16%, according to Anant Goenka, managing director of Ceat.
More than half of the sales come from the replacement market, where growth was good, but the icing on the cake was good growth in the OEM (original equipment manufacturers) market as well. Analysts said that the companies kept prices in check, helped by lower raw material prices, and offered discounts and promotions to push sales.
Despite all these efforts, the company’s margins are on an upswing due to softer rubber prices, the main raw material for tyre companies. As rubber output increased from a year ago, domestic rubber prices (RSS-4 grade) fell by 9% in the December quarter. Consequently, raw material costs as a percentage of net sales fell by 10 percentage points to 58%.
This helped the company report a strong 48% rise in operating profit, or earnings before, interest, tax, depreciation and amortization (Ebitda) in the latest quarter. Ebitda margin expanded 255 basis points to 11.4%. Net profit almost tripled to Rs.67 crore as the company did not see any exceptional expenditure in the December quarter.
Ceat’s good performance contributed to a 4% rally in the stock on Monday. The company continues to gain market share in the lucrative passenger car radials business and benefit from tie-ups with two-wheeler companies. In 2014 so far, rubber prices have declined by 7%, which perhaps explains the management’s confidence. “I see the momentum continuing for the next couple of quarters at least. Focus on exports, passenger vehicle segment should help us maintain margins and current sales growth levels (of 10% plus),” said Goenka.
But analysts are growing wary of the sharp run-up in Ceat’s share price, as the stock has risen by 170% in the past six months. Though rising volumes and falling raw material costs are conducive to sales and profit growth, expectations have risen to high levels. “The re-rating in Ceat’s valuations has been rapid, and much faster than expected. While a decent trajectory is likely to be persisted with in terms of financial performance in 4Q as well, a further rerating appears unlikely,” Anand Rathi Share and Stock Brokers Ltd said in a research note.
Source: Live Mint
Published: 10 Feb 2014