Given the various capacity expansions (FY20E capex guided at ~Rs13bn) in a muted demand scenario, anticipated rise in raw material costs (particularly natural rubber, up ~17% YoY) and management’s focus on OEMs (mix to rise by 4-5% towards OEMs for utilization of new capacity coming in PCR segment), we expect margins to remain under pressure ahead. We maintain ‘Reduce’ witha lower TP of Rs757, based on 14x FY21E Consol EPS.
We expect margins to subside from current levels and hence, taper our margin expectations for FY20/21E by 40/80bps to 8.9%/8.8% respectively. We cut our valuation multiple, downgrading the stock to ‘Reduce’ with a TP of Rs886, based on 14xFY21E (earlier 15xFY21E) Consol EPS.
we expect CEAT’s operating performance to remain under pressure due to limited pricing power. Moreover, higher debt in B/S due to high capex over the next 2 years may prove to be major headwind for the stock in the medium-term. In view of lower volume, margin pressure, higher depreciation and interest expenses for higher debt, we cut our EPS estimates by 22%/6% for FY20E/FY21E. We expect down-cycle for automobile industry in FY21 and stock to underperform. Maintaining our P/E valuation multiple at 12.5x factoring lower return ratios on higher capex, we maintain our REDUCE recommendation on the stock with a revised Target Price of Rs875 (from Rs930 earlier), valuing it at 12.5x FY21E EPS.