EV Tire Focus And Camso Integration Will Expand Global Markets

Key Takeaways

• Strategic focus on electric vehicle and high-tech tires could enhance margins through premium and specialty product lines.
  
• Leveraging international operations and Camso integration is expected to drive robust growth and revenue expansion.
  
• CEAT faces risks from global market exposure, high raw material costs, integration challenges, and financial pressures from increased debt and ongoing expenses.

Catalysts

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

• CEAT anticipates a substantial long-term growth in both domestic and export markets, expecting the tire market in India to grow at a CAGR of 6%-7% until 2047 and exports at 10%-11%. This potential increase in demand is likely to positively impact future revenues.
  
• The company is focusing on electric vehicle-specific tires in response to government incentives for EV adoption, which could drive significant future demand and potentially improve net margins due to higher-margin specialty products.
  
• CEAT is planning to improve their product mix by focusing on premiumization and high-tech tire segments, such as ultra-high-performance tires and run-flat tires, which could enhance gross and operating margins going forward.
  
• The acquisition and integration of Camso into CEAT is expected to be margin-accretive and contribute to robust growth, potentially increasing earnings as the integration stabilizes and expands.
  
• CEAT plans to strategically scale international operations and leverage existing capacity in both the Ambernath plant and through the Camso acquisition, which could provide revenue growth and volume expansion in the medium to long term.

CEAT Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming CEAT's revenue will grow by 10.3% annually over the next 3 years.
• Analysts assume that profit margins will increase from 3.6% today to 6.8% in 3 years time.
• Analysts expect earnings to reach ₹12.0 billion (and earnings per share of ₹297.0) by about May 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 analysts price target, the company would need to trade at a PE ratio of 16.8x on those 2028 earnings, down from 28.4x today. This future PE is lower than the current PE for the IN Auto Components industry at 28.3x.
• Analysts expect the number of shares outstanding to remain consistent over the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 14.19%, as per the Simply Wall St company report.

CEAT Future Earnings Per Share Growth

Risks

• CEAT's exposure to international markets presents risks, with global uncertainties and tariff/non-tariff barriers affecting growth negatively, impacting export revenues and margins.
  
• Challenges in the OEM segment, particularly in passenger vehicles due to soft urban demand, could limit growth and affect revenue performance.
  
• High raw material costs, especially natural rubber, remain a concern despite some stabilization, potentially squeezing gross margins if pricing adjustments lag behind cost increases.
  
• The recent acquisition of Camso carries integration risks, with exposure to the U.S. market under uncertainty due to potential tariffs, which could impact expected synergies and earnings.
  
• CEAT's ongoing capital expenditure and increased debt levels following the Camso acquisition might strain financial flexibility and pressure net margins if cash flow does not improve as projected.

Valuation

• The analysts have a consensus price target of ₹3382.944 for CEAT based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of ₹4000.0, and the most bearish reporting a price target of just ₹2350.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be ₹177.7 billion, earnings will come to ₹12.0 billion, and it would be trading on a PE ratio of 16.8x, assuming you use a discount rate of 14.2%.
  
• Given the current share price of ₹3315.0, the analyst price target of ₹3382.94 is 2.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.