Increased rubber prices not sustainable – CEAT
Update on the Indian Equity Market:
On Tuesday, NIFTY ended lower at 16,983 (-0.4%). Among the sectoral indices, CONSUMER DURABLES (+2.2%), REALTY (+0.6%), and IT (+0.5%) ended higher, whereas METAL (-1.9%), AUTO (-0.9%), and PRIVATE BANK (-0.7%) led the losers. Among the stocks, POWERGRID (+3.1%), SHREECEM (+3.0%), and BAJAJFINSV (+2.0%) led the gainers while TATASTEEL (-4.0%), KOTAKBANK (-3.1%), and JSWSTEEL (-2.7%) led the losers.
Excerpts of an interview with Mr. Kumar Subbiah, CFO at CEAT LTD. with CNBC TV18 on 26th November 2021:
- The rubber industry is currently struggling with a big demand-supply mismatch and this will impact tyre manufacturers. Approximately 60% of India’s rubber requirement is sourced locally.
- Availability of natural rubber from local suppliers has been difficult in the last couple of weeks. The quantity of rubber was coming into the market was lower because of heavy rains in Kerala therefore tapping was slightly lower. Another reason was the inventory levels of the traders was also on the lower side.
- The demand-supply mismatch is a short-term problem, the availability is a major challenge right now. Shortage of 30% to 40% is on a short-term basis.
- As of now, it doesn’t affect CEAT’s production because they have inventory in the pipeline. But if adequate quantities of rubber are not supplied from the local markets, then the option is to import the natural rubber. If the Government facilitates in terms of concession in import duty, it will help the manufacturers.
- An import of natural rubber needs to be planned because in the current situation it takes a little longer time for vessels to come from Southeast Asian markets.
- The rubber prices in the local market as well as in the international market have gone up. It moved up from Rs 170 per kg to Rs 180 per kg due to the demand-supply gap in the local market. The increase in rubber prices will have a negative impact on margins.
- The company expects the rubber prices will come down shortly and the current prices are not sustainable. The prices will come down closer to import parity levels soon.
- Demand continuesto be similar to the previous quarter, there are different categories and they performed differently. The company expects some weakness in Truck, Bus and farm tyres to continue. The company expects weakness particularly in two-wheelers and passenger cars segments due to the shortage of chips.
- In the export segment, CEAT is facing the issue of availability of containers, vessels, and increase in freight costs. It has seen some softness in material prices, but the vessels movement, container availability, continue to be a challenge. Post covid the company saw a positive response from the international markets.
Asset Multiplier Comments
- The Global lockdowns, higher freight cost and issues of container availability and vessels might be impacting CEAT’s revenue, as out of total sales ~20% of sales come from Exports.
- Increase in rubber prices are likely to continue in 2HFY22, and this higher input cost may affect margins in short term. The recovery in local rubber market will drive the company’s margin recovery in near term.
Consensus Estimate: (Source: market screener website)
- The closing price of CEAT LTD. was ₹ 1,165/- as on 30-Nov-2021. It traded at 18x/13x/12x the consensus earnings estimate of ₹ 65/88/98 for FY22E/FY23E/FY24E respectively.
- The consensus target price of ₹ 1,334/- implies a PE multiple of 14x on FY24E EPS of ₹ 98/-.
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