Ceat investors should brace for a few more quarters of subdued margins

The management expects raw material prices to increase by 4% on a sequential basis in Q3FY22. In a bid to protect margins, the company has taken price hikes of 2% during the first 20 days of October in the two-wheelers and farm equipment segments and will take further price hike at the end of October. The management highlighted that the company needs to take further price hikes of 1.5-2% to offset the raw material inflation impact.

Analysts caution that despite these gradual price hikes, margins are unlikely to improve in a hurry. They expect an entire pass through of commodity cost inflation only by next year.

“Contrary to our earlier expectation, cost inflation is expected to persist in H2FY22, thereby deferring Ceat’s margin improvement to H1FY23. Hence, we cut our FY22E/FY23E EPS estimates by nearly 42%/13% to factor in the raw material cost inflation, higher depreciation and interest cost,” analysts at Motilal Oswal Financial Services Ltd said in a report.

Sharing a similar concern, analysts at Nirmal Bang Securities Ltd said, “We note that Ceat has been ramping up its capacities with the aim to increase its market share in the PCR and TBR segments through an enhanced OEM presence and expanded distribution network and new product offerings in the replacement market. However, we do see pressure on profitability persisting on account of the lag in pass-through of elevated commodity costs and higher interest and depreciation expenses going forward.”

Meanwhile, reacting to the earnings, shares of the company fell around 2% on the NSE in Wednesday’s opening trade.