BUY CEAT TYRES

CEAT (CEAT IN, INR 193, maintain Buy)

CEAT’s Q3FY08 results were in line with our expectations. Net sales were up 5% Y-o-Y at INR 5.6 bn; EBITDA and net profits were up 7% and 63% Y-o-Y, at INR 418 mn and INR 192 mn, respectively, in the quarter.

We have revised our FY09 estimates to incorporate demerger of the investment arm, capex of INR 2 bn, changes in working capital cycle and absence of carbon credit income in FY09E. Post all the adjustments, our sales estimates remain intact, whereas our PAT is revised downwards by ~13.5%. CEAT has already taken price hike of ~2% in the replacement segment. We believe OE price hike would happen during Q109E. Further, we also expect the land sale to be completed by Q4FY08E, which will add ~INR 19.6 to EPS.

We have not included land sale in our estimates. We expect CEAT’s revenue and (core) profit to grow at CAGR of 8% and 65%, respectively, during FY07-09E. With increased focus on outsourcing, coupled with strong demand from the replacement market, we have a positive outlook on CEAT’s prospects. At CMP of INR 193, the stock is trading at 8.4x FY08E (core) EPS of INR 22.9 and 6.2x FY09E EPS of INR 31.2. We maintain our ‘BUY’ recommendation.