Ceat, 11th January, 2013

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Please refer to important disclosures at the end of this report 1

EBITDA 102 66 54.5 78 30.1

EBITDA margin (%) 8.5 6.2 227bp 6.7 180bp

Source: Company, Angel Research

Ceat reported better-than-expected performance in 3QFY2013 driven by sharpimprovement in operating margins, largely due to the receding cost pressures.

The top-line growth on a sequential basis was however modest on account of thedemand slowdown in the automotive industry. During the quarter, Ceat recordedan exceptional expense of `14cr related to the VRS scheme announced for theemployees at the Bhandup plant. Around 188 employees opted for the VRSscheme during the quarter. We retain our positive view on Ceat and believe thatthe company will continue to report a strong performance led by steady ramp-upat the Halol plant and stable raw-material pricing environment. Howeverslowdown in OEM demand remains a concern.

For 3QFY2013, the standalone top-lineposted an in-line growth of 2.4% qoq to `1,202cr driven by 3.9% growth involumes to ~53,000MT. On a yoy basis though, the top-line grew by a strong

13% led by volume growth of 15.2%. The yoy growth appears strong due to lowbase of 3QFY2012 which was impacted by a 23-day strike at the Nashik plant.The net average realization, however, was down by 1% yoy (1.2% qoq) primarilydue to unfavorable product-mix (larger share of OEMs in the volume mix). On theoperating front, EBITDA margins surged substantially by 180bp qoq (227bp yoy)to 8.5% against our expectations of 7.9%, as raw-material cost as a percentage ofsales witnessed a decline of 210bp qoq (470bp yoy) led by correction in naturalrubber prices. However on a yoy basis, employee cost (due to onetime gratuitypayment of `6.5cr) and other expenditure as a percentage of sales increased by100bp and 140bp respectively. Led by strong operating performance, theadjusted net profit jumped 82.2% qoq to `31cr.

At `103, the stock is trading at an attractive valuation of2.5x FY2014E earnings. We retain our Buy rating on the stock with a target priceof `163, valuing the stock at 4x FY2014E earnings.

% chg 24.6 27.8 7.8 12.0

% chg (83.3) (64.8) 951.1 37.0

EBITDA (%) 4.0 5.6 8.2 8.3

P/E (x) 15.9 46.9 3.5 2.5

P/BV (x) 0.5 0.5 0.5 0.4

RoE (%) 4.3 1.5 14.5 17.0

RoCE (%) 7.3 10.9 17.1 18.8

EV/Sales (x) 0.3 0.3 0.3 0.2

EV/EBITDA (x) 8.1 5.2 3.3 2.8


CMP `103

Target Price `163

Investment Period 12 Months

Stock Info

Sector

Bloomberg Code

Shareholding Pattern (%)

Promoters

MF / Banks / Indian Fls

FII / NRIs / OCBs

Indian Public / Others

Abs. (%) 3m 1yr 3yr

Sensex 3.4 10.0 22.3

CEAT (4.9) 19.4 (24.4)

Net Debt (`cr) 1,007

1.5

27.4

Tyre

Avg. Daily Volume

354

0.8

125/82

81,451

10

19,485

Face Value (`)

BSE Sensex

Market Cap (`cr)

Beta

52 Week High / Low

52.9

18.2

CEAT@IN

Nifty

Reuters Code

5,904

CEAT.BO

022-3935 7800 Ext: 6844

[email protected]

Performance Highlights

3QFY2013 Result Update | Auto Ancillary

February 8, 2013

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CEAT | 3QFY2013 Result Update

February 8, 2013 2

Exhibit 1:Financial performance (Standalone)

Consumption of RM 803 766 4.8 816 (1.6) 2,443 2,432 0.5

(% of Sales) 66.8 72.1 69.6 68.6 74.9

Staff Costs 74 54 36.4 70 5.2 206 170 20.9

(% of Sales) 6.1 5.1 6.0 5.8 5.2

Purchase of traded goods 23 14 58.6 15 48.5 52 40 29.6

(% of Sales) 1.9 1.3 1.3 1.5 1.2

Other Expenses 200 163 23.1 194 3.4 577 482 19.7

(% of Sales) 16.7 15.3 16.5 16.2 14.8

OPM (%) 8.5 6.2 6.7 8.0 3.8

Interest 47 49 (4.3) 50 (6.1) 149 138 7.9

Depreciation 20 19 6.2 20 2.0 59 52 13.4

Other Income 3 5 (32.9) 9 (62.4) 18 20 (10.3)

Extr. Income/(Expense) (14) - - (14) - (28) (3) -

(% of Sales) 2.1 0.3 0.3 1.9 (1.5)

Provision for Taxation 8 1 613.2 1 506.7 22 (16) -

(% of PBT) 32.4 32.3 32.8 32.5 32.5

Adj. PATM 2.5 0.2 1.4 2.1 (0.9)

Equity capital (cr) 34.2 34.2 34.2 34.2 34.2


For 3QFY2013, the standalone top-line

registered an in-line growth of 13% yoy to `1,202cr led by a volume growth of

15.2% yoy to ~53,000MT. The yoy growth appears strong due to the low base of

3QFY2012 which was impacted by a 23-day strike at the Nashik plant. On a

sequential basis though, the top-line posted a modest growth of 2.4% driven by

3.9% growth in volumes. The net average realization however registered a decline

of 1% yoy (1.2% qoq) primarily due to unfavorable product-mix (larger share of

OEMs in the volume mix).

During 3QFY2013, Ceat operated at capacity utilization levels of 85-90% across

its plants. The capacity at the Halol plant has been ramped up to 110TPD from

~90TPD in 2QFY2013. Ceat now plans to ramp-up to the full capacity levels of

150TPD by the end of 2QFY2014. The Halol plant contributed 16% to total

volumes during the quarter (15% in 2QFY2013).

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February 8, 2013 3

Exhibit 2:Modest growth in top-line on a sequential basis

895998

1,077 1,107 1,063

1,222 1,187 1,173 1,202

25.227.8

38.5

31.4

18.8

22.5

10.3

6.0

13.0

0.0

5.0

10.0

15.0

20.0

25.0

30.0

35.040.0

45.0

0

200

400

600

800

1,000

1,200

1,400

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

(%)(`cr) Net sales (LHS) Net sales growth (RHS)


On the operating front, EBITDA margins

surged substantially by 180bp qoq (227bp yoy) to 8.5% against our expectations

of 7.9%, as raw-material cost as a percentage of sales witnessed a decline of

210bp qoq (470bp yoy) led by correction in natural rubber prices. As a result,

operating profit surged 30.1% sequentially to `102cr.

On a yoy basis, margins improved by a strong 227bp as raw-material expense as

a percentage of sales declined by 468bp. However, employee cost and other

expenditure as a percentage of sales increased by 100bp and 140bp respectively.

The employee cost was higher on account of the one-time gratuity payment of`6.5cr to the employees.

Exhibit 3:Average natural rubber price trend

78 72

98 102119

142

165177

195

225 229211 203

191 193181 174

0

50

100

150

200

250

3QFY09

1QFY10

3QFY10

1QFY11

3QFY11

1QFY12

3QFY12

1QFY13

3QFY13

(`/kg)


Exhibit 4:EBITDA margin improves sharply to 8.5%

3.8 1.9 (0.4) 5.6 6.2

10.6 8.86.7

8.5

74.078.9 80.6

75.0 74.571.2 71.0 71.4 68.7

(10.0)

0.0

10.0

20.0

30.0

40.0

50.0

60.0

70.0

80.0

90.0

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

(%) EBITDA margin Raw material cost/sales


During the quarter, Ceat recorded an exceptional

expense of `14cr related to the VRS scheme announced for the employees at the

Bhandup plant. Around 188 employees opted for the VRS scheme during the

quarter. Adjusted for the exceptional expense, net profit registered an 82% qoq

growth to`

31cr mainly due to margin expansion at the operating level.

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February 8, 2013 4

Exhibit 5:Adjusted net profit at `31cr

5

(12)

(39)6 2

41

26 31 31

0.6

(1.2)

(3.6)

0.50.2

3.4

2.22.6 2.5

(4.0)

(3.0)

(2.0)

(1.0)

0.0

1.0

2.0

3.0

4.0

(50)

(40)

(30)

(20)

(10)

0

10

20

3040

50

3QFY11

4QFY11

1QFY12

2QFY12

3QFY12

4QFY12

1QFY13

2QFY13

3QFY13

(%)(`cr) Net profit (LHS) Net profit margin (RHS)


Exhibit 6:Financial performance (Consolidated)

Consumption of RM 828 801 3.4 849 (2.4) 2,529 2,528 0.0

(% of Sales) 66.5 72.3 69.4 68.4 74.9

Staff Costs 77 57 35.6 73 5.1 215 178 21.0

(% of Sales) 6.2 5.1 6.0 5.8 5.3

Purchase of traded goods 22 12 77.5 12 82.5 46 37 25.4

(% of Sales) 1.7 1.1 1.0 1.2 1.1

Other Expenses 208 170 22.3 201 3.2 598 500 19.6(% of Sales) 16.7 15.3 16.5 16.2 14.8

OPM (%) 8.9 6.2 7.2 8.4 3.9

Interest 47 50 (4.8) 50 (6.1) 152 140 8.1

Depreciation 21 19 6.3 20 1.9 61 53 13.4

Other Income 3 11 (68.2) 3 5.8 12 22 (45.7)

Extr. Income/(Expense) (14) 0 0.0 (14) (2.7) (28) (3) -

(% of Sales) 2.6 0.9 0.5 2.2 (1.3)

Provision for Taxation 10 2 337.7 2 311.0 27 (13) -

(% of PBT) 31.1 22.6 39.2 32.8 30.0

Adj. PATM 2.9 0.7 1.5 2.2 (0.8)

Equity capital (cr) 34.2 34.2 34.2 34.2 34.2


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February 8, 2013 5

Conference call Key highlights

According to the company, the OEM demand remains weak currently, giventhe weak macro-economic environment. The demand in the replacement

segment is also seen sluggish.

Ceat has signed a joint venture (JV) agreement with A K Khan and Company,a Bangladesh based business house, to set up a bias tyre manufacturing

facility in Bangladesh. Ceat will hold 70% in the JV Company. The balance

30% will be held by A K Khan and Company. The JV would entail an

investment of US$67mn (`355cr) towards the new plant and is expected to

commence operations by the end of 2014.

The Management is targeting to increase its presence in the higher margintwo-wheeler tyres where there is less competition. The company has managed

to increase its market share in the two-wheeler tyre segment to ~18% from~14% in 1QFY2013.

Ceat is operating at ~75% utilization levels across all its plants. Around 20-25% of the raw-material requirement of Ceat is currently imported. The company reported an 8% yoy (5% qoq) decline in net sales to `102cr in its

Sri Lanka operations with EBITDA margins at 17.1% (flat qoq). The top-line

was impacted due to a 2% qoq decline in volumes. On a yoy basis, decline in

net average realization impacted the performance. The net profit declined 9%

yoy to `11cr. Ceat enjoys ~50% market share in the replacement segment in

Sri Lanka. The current capacity stands at 60TPD and is operating at 100%utilization levels. The exports from Sri Lanka operations account for ~35% of

its revenues. The realization on the exports front is generally lower.

The Management stated that the consolidated debt has been reduced to`1,257cr from `1,350cr in 1QFY2013.

The company expects the raw-material prices to remain soft going ahead andtherefore expects margins to remain strong in the near term. However, there is

pressure from the OEMs to reduce prices. The company is currently

negotiating on a new pricing formula with the OEMs.

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February 8, 2013 6

Investment arguments

Currently, manufacturing radial tyres isfar more capital intensive than cross-plys. The investment per tpd for radial

tyres is 3.2x of cross-plys at `6.1cr/tpd. On the other hand, the selling price of

radial tyres is around 20% higher than cross-ply tyres. Taking into account the

difference in capital requirements and the consequent impact on asset

turnover, for interest cost and depreciation to generate a similar RoCE and

RoE, tyre companies would need to earn EBITDA margins of around 21%

compared to around 9% being earned on cross-ply tyres. Thus, higher capital

requirements will help protect margins from upward-bound input costs, as the

business model evolves bearing in mind the final RoE rather than margins.

With the sector set for a structural shift and apparent pricing flexibility, it will

result in an improvement in RoCE and RoE of tyre manufacturers going

forward.

Ceat is ramping up itsradial capacity at the Halol plant to 150TPD, which is likely to be fully

operational by 2QFY2014. With the completion of the proposed expansion,

the product mix of truck : non-truck is likely to improve to 55:45, thereby

fetching better margins.

Ceat has been increasingly focusing on exports,especially the high-margin specialty tyres, in a bid to offset volatility in its

domestic tyre business in the long run.

We retain our positive view on Ceat and believe that the company will continue to

report a strong performance led by gradual ramp-up at the Halol plant and stable

raw-material prices. However a slowdown in demand remains a concern as the

replacement demand has not picked up as anticipated. Consequently, we estimate

Ceat to post an EPS of `40.8 in FY2014. At `103, the stock is trading at an

attractive valuation of 2.5x FY2014E earnings.

Any rise in input costs, increasing competitive

intensity with major players diversifying globally, and lower-than-anticipatedgrowth in replacement tyre demand pose downside risks to our estimates

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February 8, 2013 7

Exhibit 7:One-year forward P/BV band

0

50

100

150

200

250

300

Apr-03

Jan-04

Nov-04

Sep-05

Jul-06

Apr-07

Feb-08

Dec-08

Oct-09

Jul-10

May-11

Mar-12

Jan-13

(`) Share Price (`) 0.2x 0.5x 0.8x 1.1x


Exhibit 8:One-year forward EV/EBITDA band

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

Apr-03

Jan-04

Nov-04

Sep-05

Jul-06

Apr-07

Feb-08

Dec-08

Oct-09

Jul-10

May-11

Mar-12

Jan-13

(`cr) EV (` cr) 2.0x 4.0x 6.0x 8.0x


Exhibit 9:Auto Ancillary Recommendation summary

Apollo Tyres* Accumulate 86 97 12.1 6.6 6.0 4.4 3.9 21.0 19.4 33.2

JK Tyre* Buy 116 165 42.3 3.1 2.8 5.2 4.3 18.8 17.8 -

Source: Company, Angel Research; Note: *Consolidated

Company background

Ceat, a part of the RPG Group, is amongst the leading tyre manufacturers in the

country with an overall market share of ~12%. The companys manufacturing

facilities are located in Bhandup, Nashik and Halol. The company has an overall

production capacity of 615TPD (including outsourced). It exports to countries

across Asia, Africa, Europe and America. Exports constitute 22-24% of Ceat's total

volumes. The company has recently acquired the global rights of the Ceatbrandfrom Italian tyre maker Pirelli - this will enable the company to expand its global

presence. Ceat also operates in Sri Lanka through a JV and has a ~50% share in

Sri Lanka's tyre market.

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February 8, 2013 8

Profit and loss statement (Standalone)

% chg 1.7 18.6 24.6 27.8 7.8 12.0

Net raw material costs 1,799 1,869 2,594 3,336 3,394 3,812

Other mfg costs 211 253 306 372 424 470

Employee expenses 159 190 212 236 285 321

Other 175 200 248 275 323 348

% chg (88.1) 1,178.1 (52.9) 81.2 56.9 13.9

(% of total op. income) 1.0 10.5 4.0 5.6 8.2 8.3

Depreciation & amortization 26 27 34 70 80 85

% chg - - (60.9) 73.0 73.4 15.9

(% of total op. income) (0.1) 9.6 3.0 4.1 6.5 6.8

Interest and other charges 84 72 100 192 201 183

Other income 49 42 28 20 21 26

% chg - - (86.1) (70.5) 1,288.6 53.4

Extraordinary items - - (5) (2) - -

Tax (21) 74 11 2 34 69

(% of PBT) 57.1 31.0 28.5 18.8 25.0 33.0

% chg - - (83.3) (64.8) 951.1 37.0

(% of total op. income) (0.7) 5.9 0.8 0.2 2.1 2.6

% chg - - (83.3) (64.8) 951.1 37.0

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February 8, 2013 9

Balance sheet statement (Standalone)

Equity share capital 34 34 34 34 34 34Reserves & surplus 454 594 615 622 720 854

Total loans 645 654 904 1,071 1,146 1,046

Deferred tax liability 16 20 24 22 22 22

Other long term liabilities - - 1 1 1 1

Long term provisions 8 8 8 8

Gross block 1,234 1,256 1,882 2,112 2,146 2,243

Less: Acc. depreciation 459 487 520 588 668 753

Capital work-in-progress 20 234 107 13 64 67

Investments 43 59 87

Long term loans and advances - - 22 8 8 8

Other noncurrent assets - - - - - -

Current assets 819 1,032 1,222 1,369 1,609 1,741

Cash 202 140 48 33 109 60

Loans & advances 79 109 126 143 193 216

Other 538 782 1,048 1,192 1,307 1,464

Current liabilities 507 790 1,212 1,229 1,309 1,422

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February 8, 2013 10

Cash flow statement (Standalone)

Profit before tax (37) 239 39 12 136 209

Depreciation 26 27 34 70 80 85Change in working capital 47 (260) 131 (144) (85) (67)

Others 123 343 80 156 - -

Other income (49) (42) (28) (20) (21) (26)

Direct taxes paid 21 (74) (11) (2) (34) (69)

(Inc.)/Dec. in fixed assets (36) (237) (499) (136) (85) (100)

(Inc.)/Dec. in investments (33) (16) (28) 12 (7) (1)

Other income 49 42 28 20 21 26

Issue of equity - - - - - -

Inc./(Dec.) in loans 168 9 250 167 75 (100)

Dividend paid (Incl. Tax) 0 0 16 8 4 6

Others (119) (93) (104) (16) - -

Inc./(Dec.) in cash 160 (61) (92) (15) 77 (49)

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February 8, 2013 11

Key ratios

P/E (on FDEPS) - 2.2 15.9 46.9 3.5 2.5P/CEPS 37.2 1.9 5.7 4.4 1.9 1.6

P/BV 0.7 0.6 0.5 0.5 0.5 0.4

Dividend yield (%) 0.0 3.9 1.9 1.0 1.0 1.5

EV/Sales 0.3 0.3 0.3 0.3 0.3 0.2

EV/EBITDA 32.6 2.7 8.1 5.2 3.3 2.8

EV / Total Assets 0.7 0.6 0.7 0.7 0.7 0.6

EPS (Basic) (4.7) 48.2 6.5 2.2 29.8 40.8

EPS (fully diluted) (4.6) 48.3 8.0 2.8 29.8 40.8

Cash EPS 2.8 55.0 18.0 23.4 53.3 65.7

DPS 0.0 4.0 2.0 1.0 1.0 1.5

Book Value 142.6 183.6 189.6 191.7 220.3 259.4

EBIT margin (0.1) 9.6 3.0 4.1 6.5 6.8

Tax retention ratio 0.4 0.7 0.7 0.8 0.8 0.7

Asset turnover (x) 2.5 2.8 2.7 2.9 2.8 3.0

ROIC (Post-tax) (0.1) 18.5 5.9 9.5 13.9 13.7

Cost of Debt (Post Tax) 6.4 7.7 9.2 15.8 13.6 11.2

Leverage (x) 0.8 0.8 1.0 1.3 1.4 1.1

Operating ROE (5.5) 26.8 2.7 1.2 14.5 16.6

ROCE (Pre-tax) (0.2) 21.9 7.3 10.9 17.1 18.8

Angel ROIC (Pre-tax) (0.3) 24.4 7.2 11.0 18.1 20.1

ROE (3.2) 29.6 4.3 1.5 14.5 17.0

Asset Turnover (Gross Block) 1.9 2.3 2.2 2.2 2.3 2.6

Inventory / Sales (days) 43 41 51 47 52 52

Receivables (days) 48 45 45 45 47 47

Payables (days) 78 81 102 98 95 91

WC cycle (ex-cash) (days) 22 14 3 3 11 15

Net debt to equity 0.8 0.7 1.2 1.5 1.3 1.0

Net debt to EBITDA 17.3 1.5 5.5 3.8 2.4 2.0

Interest Coverage (EBIT / Int.) (0.0) 3.7 1.0 0.9 1.6 2.0

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February 8 2013 12

Research Team Tel: 022 - 39357800 E-mail: [email protected] Website: www.angelbroking.com

This document is solely for the personal information of the recipient, and must not be singularly used as the basis of any investment

decision. Nothing in this document should be construed as investment or financial advice. Each recipient of this document should make

such investigations as they deem necessary to arrive at an independent evaluation of an investment in the securities of the companies

referred to in this document (including the merits and risks involved), and should consult their own advisors to determine the merits and

risks of such an investment.

Angel Broking Limited, its affiliates, directors, its proprietary trading and investment businesses may, from time to time, make

investment decisions that are inconsistent with or contradictory to the recommendations expressed herein. The views contained in this

document are those of the analyst, and the company may or may not subscribe to all the views expressed within.

Reports based on technical and derivative analysis center on studying charts of a stock's price movement, outstanding positions and

trading volume, as opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's

fundamentals.

The information in this document has been printed on the basis of publicly available information, internal data and other reliablesources believed to be true, but we do not represent that it is accurate or complete and it should not be relied on as such, as thisdocument is for general guidance only. Angel Broking Limited or any of its affiliates/ group companies shall not be in any wayresponsible for any loss or damage that may arise to any person from any inadvertent error in the information contained in this report .Angel Broking Limited has not independently verified all the information contained within this document. Accordingly, we cannot testify,nor make any representation or warranty, express or implied, to the accuracy, contents or data contained within this document. WhileAngel Broking Limited endeavours to update on a reasonable basis the information discussed in this material, there may be regulatory,compliance, or other reasons that prevent us from doing so.

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redistributed or passed on, directly or indirectly.

Angel Broking Limited and its affiliates may seek to provide or have engaged in providing corporate finance, investment banking or

other advisory services in a merger or specific transaction to the companies referred to in this report, as on the date of this report or in

the past.

Neither Angel Broking Limited, nor its directors, employees or affiliates shall be liable for any loss or damage that may arise from or in

connection with the use of this information.

Disclosure of Interest Statement CEAT

1. Analyst ownership of the stock No

2. Angel and its Group companies ownership of the stock No

3. Angel and its Group companies' Directors ownership of the stock No

4. Broking relationship with company covered No

Buy (> 15%) Accumulate (5% to 15%) Neutral (-5 to 5%)Reduce (-5% to -15%) Sell (< -15%)

Note: We have not considered any Exposure below`

1 lakh for Angel, its Group companies and Directors

Ceat, 11th January, 2013

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