Legacy Segments Will Decline While Exports Might Improve Slowly

Key Takeaways

• Shifting mobility trends, regulatory pressures, and evolving technology threaten CEAT's traditional product relevance, squeezing margins and revenue growth potential.
  
• Overreliance on volatile domestic two-wheeler markets and increased competition heighten risks to CEAT's stability and long-term market position.
  
• Expansion in premium products, global market presence, operational efficiency, and sustainability initiatives positions CEAT for stable revenue growth and stronger margins.

Catalysts

Manufactures and sells automotive tyres, tubes, and flaps in India and internationally.

• Growing adoption of electric vehicles worldwide, combined with a governmental push for EV-specific products, could mean CEAT's core two-wheeler and conventional tire segments face a contraction in replacement cycles and demand, resulting in recurring revenue headwinds as their traditional portfolio becomes less relevant.
  
• The rapid emergence of shared mobility and autonomous vehicles in urban centers is likely to reduce per-capita vehicle ownership, leading to fundamental softness in tire replacement and OEM volumes, and directly constraining CEAT's ability to grow top-line sales over the long term.
  
• Intensifying regulatory requirements focused on sustainability and carbon emissions may force the company into substantial new investments for compliance and raw material substitution, compressing gross and net margins for years to come as cost recovery options remain limited.
  
• Dependence on the domestic and two-wheeler market, which faces softness in urban demand and volatile rural differentiation, exposes CEAT to demand concentration risk, increasing revenue instability and amplifying the effects of any regional or segment-specific downturn.
  
• Heightened competition from multinational tire manufacturers and emerging low-cost Asian players, coupled with accelerating technological changes like smart tire production, may outpace CEAT's R&D and capital deployment, leading to loss of market share and driving sustained margin and earnings pressure.

CEAT Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more pessimistic perspective on CEAT compared to the consensus, based on a Fair Value that aligns with the bearish cohort of analysts.
• The bearish analysts are assuming CEAT's revenue will grow by 8.5% annually over the next 3 years.
• The bearish analysts assume that profit margins will increase from 3.6% today to 5.0% in 3 years time.
• The bearish analysts expect earnings to reach ₹8.5 billion (and earnings per share of ₹210.32) by about July 2028, up from ₹4.7 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bearish analyst cohort, the company would need to trade at a PE ratio of 19.0x on those 2028 earnings, down from 33.0x today. This future PE is lower than the current PE for the IN Auto Components industry at 32.4x.
• Analysts expect the number of shares outstanding to decline by 0.91% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.21%, as per the Simply Wall St company report.

CEAT Future Earnings Per Share Growth

Risks

• Robust long-term domestic growth prospects, supported by government infrastructure investment and rising rural demand, are expected to drive steady increases in both volume and revenues for CEAT through expansion of the addressable market.
  
• The successful integration and scaling up of the Camso acquisition, with plans to boost capacity utilization and leverage Camso's presence in North America and Europe, has the potential to meaningfully increase export revenues and margin accretion over the medium to long term.
  
• Ongoing premiumization, innovation in high-performance and EV-compatible tires, and growing brand recognition, especially in premium segments (e.g., Z-rated, run-flat, and low-noise EV tires), give CEAT greater pricing power and support stronger net margins.
  
• Operating leverage from capacity expansions and sustained cost control initiatives, including efficiency programs and automation at newly designated lighthouse plants, are likely to improve profit margins and support healthy EBITDA growth.
  
• CEAT's advances and recognition in sustainability, ESG scores, and certifications (e.g., EcoVadis, ISCC PLUS), will enhance global OEM relationships, help meet tightening regulatory requirements, and open new export markets, supporting both revenue growth and long-term margin stability.

Valuation

• The assumed bearish price target for CEAT is ₹2777.66, which represents two standard deviations below the consensus price target of ₹3713.78. This valuation is based on what can be assumed as the expectations of CEAT's future earnings growth, profit margins and other risk factors from analysts on the more bearish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹4198.0, and the most bearish reporting a price target of just ₹2350.0.
  
• In order for you to agree with the bearish analysts, you'd need to believe that by 2028, revenues will be ₹168.7 billion, earnings will come to ₹8.5 billion, and it would be trading on a PE ratio of 19.0x, assuming you use a discount rate of 14.2%.
  
• Given the current share price of ₹3855.25, the bearish analyst price target of ₹2777.66 is 38.8% lower. Despite analysts expecting the underlying buisness to improve, they seem to believe the market's expectations are too high.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.