India Ratings & Research (Ind-Ra) has assigned CEAT Rs 1,930 million fixed deposit programme an 'A+' rating, while affirming its long-term issuer rating at 'A' with a Stable outlook.
CEAT has been among the top four manufacturers in the domestic tyre market since FY10 (year end March) through regular capacity augmentation consistent with steady demand growth. Its market position is bolstered by a diversified product range, which, along with large revenue from exports and overseas operations, has helped strengthen its overall business profile. The company’s strong revenue growth at a CAGR of 18% over FY10 to reach Rs 55,539.8 million in FY14 was aided by demand from the replacement and original equipment manufacturers markets, as well as exports.
Ind-Ra has taken a consolidated view of CEAT and its JVs in Sri Lanka and Bangladesh. CEAT's EBITDA margins have significantly varied in the past, a trend witnessed across the industry and attributed primarily to volatile rubber prices. However, margins are likely to display less variation FY15 onwards. This is attributed to a change in product mix FY11 onwards with a greater proportion of two and three wheelers and passenger vehicle tyres which may enable better pass-through of rubber prices.
Ind-Ra believes CEAT's margins would be more resilient to input price volatility due to increased revenue contribution from the light commercial vehicle, two-wheeler, passenger vehicle segments and exports. These segments entail higher profitability than tyres for trucks and buses and also allow for a greater pass-through of input cost increases. Volume contribution by truck and bus tyres reduced to 52% in FY13 from 60% in FY11. Investments in the JV in Bangladesh are also likely to benefit the company by way of significantly higher margins than in Indian operations.
EBITDA margins rose to 11.8% in FY14 due to a reduction in rubber prices globally. Margins had recovered to 9% earlier in FY13 (FY12: 5.9%) on the softening of raw material prices in FY12 and FY13 and stabilization and high capacity use at Halol. However, margins fell to 9.4% in 1QFY15 (1QFY14: 11.9%, 4QFY14: 11%) due to an increase in employee as well as advertisement costs and payment of bonus and arrears due to wage revision.
Ind-Ra expects the impact of higher employee costs to prevail in the next two-to-three years considering the fixed nature of these expenses.
The margin improvement in FY14 is attributed to low international prices of natural rubber (due to a slowdown in auto demand) because of which the landed cost of natural rubber was lower than domestic prices. This had led to large scale imports by most tyre manufacturers in India, and a marked improvement in industry EBITDA margins.
The increase in customs duty in December 2013 (to Rs 30/kg or 20%, whichever is lower, from the earlier rate of Rs 20/kg or 20%, whichever is lower) has not significantly impact CEAT's margins in FY14 and in the current year considering that domestic natural rubber prices are currently muted. However, in the agency’s opinion, a sustained uptick in demand from the auto industry from FY16 could cause increase in rubber prices. This, along with higher fixed costs, could lead to moderation in the margins from 11.8% in FY14 to around 8%-9% levels in FY16 and beyond.
Shares of the company declined Rs 0.05, or 0.01%, to trade at Rs 588. The total volume of shares traded was 35,771 at the BSE (2.59 p.m., Thursday).
