CEAT: Expanding capacity in PV/2W to bolster growth

Initiating Coverage | Sector:

Automobiles

CEAT

Buy

BSE Sensex

27,156

S&P CNX

8,725

CMP: INR1,086

TP: INR1,406 (+29%)

Stock Info

Bloomberg

Equity Shares (m)

52-Week Range (INR)

M.Cap. (INR b)

M.Cap. (USD b)

1, 6, 12 Rel. Per (%)

Avg Val, (INR m)

Free float (%)

CEAT IN

40.5

1422 / 731

48.4

0.7

-13/25/-6

779

49.2

CEAT, a flagship company of the RPG Group, is the fourth largest tyre manufacturer in

India in terms of revenue (~12% market share). With manufacturing facilities at

Bhandup (bias tyres), Nashik (bias and radial), Halol (radial) and Nagpur (2W/3Ws),

the company’s capacity stands at >900MT/day (95,000 tyres/day). It operates in India

via a robust distribution network of 4,500+ dealers, 33 regional offices, 400+

franchisees, 6 manufacturing facilities and 250+ distributors.

Well balanced

Expanding capacity in PV/2W to bolster growth



Financial Snapshot (INR b)

Y/E Mar

FY17E FY18E

Sales

64.5 71.1

EBITDA

6.7

7.8

3.6

4.4

EPS (Rs)

89.9 107.6

EPS Growth (%)

-20.0 19.8

BV/Share (Rs)

588.6 682.0

P/E (x)

12.1 10.1

P/BV (x)

1.8

1.6

RoE (%)

16.4 16.9

RoCE (%)

13.3 14.2

Shareholding pattern (%)

As On

Promoter

DII

FII

Others

FY19E

79.1

9.5

5.7

140.6

30.6

804.0

7.7

1.4

18.9

16.8



Sep-16 Jun-16 Sep-15

50.8

7.9

25.5

15.8

5.2

26.1

17.9

7.3

19.3

22.6



We expect CEAT to continue with its strategy of focusing on the consumer-facing

passenger segment – two-wheeler (2W)/passenger vehicles (PV) – which should

reflect in its resource allocation. As a result, we expect its market share to

improve in 2W/PV (where the threat of Chinese competition is relatively low)

from 27%/9% currently.

CEAT plans to double its capacity in its currently capacity-constrained passenger

segment over FY16-18. Its foray into the high-margin, export-focused off-highway

tyres (OHT) business is likely to help drive the dwindling exports business (which

was impacted due to radialisation in the market).

The product mix should improve further, with revenue contribution of 2W/PV

expected to increase from 38% to 49% over FY16-19E. This will partly insulate

CEAT against rubber price volatility and help improve margins.

As a result, we expect revenue CAGR of 11% and PAT CAGR of 25% with a 150bp

margin improvement over FY17-19E. In our view, RoE is likely to improve by

260bp to 19% over FY17-19E, despite a decline in gearing.

We value the stock at 10x FY19E EPS, and initiate coverage on CEAT with a Buy

rating and a target price of INR1,406 (implying ~29% upside from current levels).

Strategic capital allocation in profitable segments

Until FY11, CEAT derived 60% of its revenues from the low-margin truck & bus

(T&B) segment, while the higher-margin segments of 2W and PV contributed

just 14%, leading to multiple years of low margins and profitability. However,

over the past five years, CEAT has been focusing on and allocating resources to

categories like 2W and UV (which is part of the PV segment), where brand

equity leads to better margins and makes it easier to pass on the cost push

(relative to T&B segment). With a view to increase contribution from 2W/PV,

management took a four-pronged approach of: (1) increasing reach (3x increase

in district penetration), (2) expanding capacity for higher-margin segments, (3)

extending presence across OEMs and (4) spending more on marketing &

branding of 2W/PV. These measures resulted in an improvement in the market

share of the 2W segment from 8% in FY11 to 27% in FY16 (second largest after

MRF which commands a 35% market share) and of the PV segment from 4% to

9%. Revenue contribution of 2W/PV increased from 15% in FY11 to 38% in FY16,

leading to an improvement in overall margin from 4% to 13%. We believe CEAT’s

strategy to allocate capital to the profitable categories like 2W, PV and off-

highway tyres is commendable. It is likely to help gain market share, insulate

against volatility in raw material prices and provide high earnings visibility.

CEAT

Well Balanced

Niket Shah

91 22 3982 5426

Niket.Shah@motilaloswal.com

Please click here for Video Link

16 February 2017

CEAT

Doubling of capacity in focused segments to drive market share gains

CEAT plans to increase its capacity from 900MTPD to 1,245MTPD over FY17-18.

Around 70% of this new capacity addition (230MTPD of total 345MTPD) will be in

the 2W (170MTPD in FY16 to 290MTPD in FY18) and PV (84MTPD in FY16 to

194MTPD in FY18) segments, which should allow CEAT to maximize

growth/profitability and resolve supply constraints in these segments. The

company’s plan to venture into the OHT segment with capacity of 100MTPD is a

testimony of the fact that it plans to chase high-margin businesses to achieve

profitable growth. With CEAT’s recently announced capex of INR28b by FY22, it

envisages to increase annual capacity in TBR from 110MTPD in FY18 to 310MTPD in

FY22, in 2W from 290MTPD in FY18 to 430MTPD in FY22, and in passenger cars from

190MTPD in FY18 to 340MTPD in FY22. In our view, this will address supply issues

until FY22, boost the 2W/PV businesses further and help improve the market share

of radial within the T&B segment.

International business to get boost from OHT segment

The influx of Chinese tyres and the higher level of radialisation in the markets where

CEAT exports its products have impacted its performance. Thus, the company has

forayed into high-margin export-focused off-highway tyres with capacity of

100MTPD at an outlay of INR6b, which should come on stream in FY18 in a phased

manner. We believe the foray into OHT should be margin-accretive for the

company. ACHL, the company’s Sri Lanka arm, is a market leader in that country

with ~50% share and ~25% EBITDA margin, which are expected to continue growing

at a stable pace.

Product mix improvement to continue, boosting margins

CEAT has improved its product mix in favor of the passenger segment (2W/PV) in

Indian operations from 15% to 38% over FY11-16. With market share gains and

doubling of capacities in both segments over FY16-19E, we expect revenue CAGR of

20%/13% for 2W/PV over FY17-19E. With the first phase of capacity expansion

(INR14b) likely to be completed by 1HFY18, the product mix is expected to improve

further (revenue share of 2W/PV likely to increase from 38% to 49% over FY16-19E),

partly insulating CEAT against rubber price volatility and improving margins.

Valuation and view

After witnessing three years of muted revenue growth, CEAT is expected to come

back on the growth path, driven by new capacity, product mix improvement, unique

ad campaigns for every segment and increasing distribution reach. Improvement in

the product mix in favor of the passenger segment is likely to partly insulate CEAT

against rubber price volatility. We expect sales and PAT CAGR of 11% and 25%,

respectively, and margins to improve by 150bp over FY17-19E. The first phase of

capex of INR14b (to be completed by FY18) is being met entirely by internal

accruals, while the recently announced capex of INR28b (to be incurred over FY18-

22) is expected to be funded via a mix of debt and equity. Despite ongoing capex,

we expect RoE to improve by 260bp to 19%, with strong FCFF generation of INR6.7b

over FY17-19E. Based on superior EPS CAGR v/s peers over FY17-19E and an

improving product mix, we value the stock at a P/E of 10x FY19E EPS (20% premium

to 10-year median P/E). Thus, we initiate coverage on CEAT with a

Buy

rating and a

target price of INR1,406 (~29% upside).

16 February 2017

CEAT

Strategic capital allocation in profitable segments

Focused approach (2W/PV/UV) to drive growth ahead



Post 2011, CEAT has been focusing on branding, distribution reach and mainly on the

passenger segment (2W/PV), which has improved its financial profile considerably.

CEAT is a success story in 2W, with market share in this segment increasing from 11%

in FY11 to 27% in FY16. New capacity of 120MT/day is expected to be fully operational

by 1HFY18, which should drive further market share gains. It aims to be a market

leader in this segment in next 5-7 years.

CEAT’s focus on UVs led to significant market share gains in this segment over past five

years. It is now focusing on replicating this success in passenger cars and increasing PV

radial tyre capacity (Halol phase II brownfield expansion) by 110MT.

How CEAT got it right?

At the start of FY11, CEAT underwent leadership change with Mr. Anant Goenka

taking over as managing director.

CEAT identified 2W and 4W tyre segments as its strategic focus areas, given their

ability to boost margins and lower the company’s dependence on the truck

segment. A three-pronged strategy was adopted to achieve its outlined goals: (1)

raise sales and distribution reach by increasing dealers, franchises and distributors;

(2) ramp-up presence across OEMs to enhance demand for replacement tyres; and

(3) increase marketing spend on brand-building initiatives.

In FY11, CEAT’s revenue profile mirrored the industry mix, with T&B accounting for a

lion’s share. However, by FY16, the company’s mix had changed drastically, with the

passenger segment accounting for 38% of revenue, as against 15% in FY11.

Exhibit 2: However, CEAT’s product mix shifted from T&B to

2W/PVs…

Truck and Buses

Two wheelers

FY11

Source: Industry, MOSL

Speciality/Farm

Passenger/UV

FY16

LCV

Exhibit 1: Industry product mix relied on T&B

Trucks and Buses

Speciality/Farm

1HFY17

Source: Company, MOSL

Two Wheelers

Cars and Uvs

16 February 2017

CEAT

Exhibit 3: …leading to healthy revenue 5 year CAGR (CEAT

v/s competitors)

CAGR Growth(%)

12.9%

8.9%

5.9%

3.1%

9.5%

16.5%

Exhibit 4: …and best EBITDA CAGR (CEAT v/s competitors)

EBITDA CAGR(%)

28.8%

15.2%

27.5%

37.9%

27.2%

24.4%

Apollo

MRF

JK tyre

Balkrishna

Industries

CEAT

TVS

SriChakra

Apollo

MRF

JK tyre Balkrishna

Industries

CEAT

TVS

SriChakra

Note: Net revenues used Source: Capital Line, MOSL

Source: Capital Line, MOSL

Exhibit 5: CEAT improved margins due to focus on passenger segment

EBITDA Margin(%)

10.0

4.5

0.9

1.3

0.3

2.3

4.0

5.8

7.5

4.2

5.7

0.0

1.6

-0.6

0.9

5.4

0.7

0.4

2.2

5.5

4.4

5.0

7.0

PAT Margin(%)

10.8

7.9

10.7

12.9

-0.4

Note: Excise duty has been accounted in expenses Source: Company, MOSL

2Ws: Eyeing leadership in the space

CEAT began focusing on the passenger segment by first targeting the 2W sub-

segment. In FY11, 2W revenues formed 10% of CEAT’s total revenues. Since then,

the company recorded 2W revenue CAGR FY11-FY16 of 34% to INR14.6b, accounting

for 27% of overall revenues.

This segment has limited players, with the key ones being MRF, TVS Srichakra and

CEAT. This market is more brand-focused – pricing differential between the price

leader and the third/fourth player in this segment can be much larger (nearly 15%-

20%) than that in the commercial vehicle space (about 4%-5%). CEAT currently is the

second highest-priced motorcycle tyre player after MRF (more than MRF at a dealer

level). Despite this, it is able to grab market share because of its focus on brand

campaigns and advertisements, increasing district penetration, and introduction of

new products.

The motorcycle tyre market (~80% of 2W market) is much larger than the scooter

tyre market (~20%). However, the scooter tyre market has grown faster than

expected, and thus the new Nasik plant is more skewed toward higher scooter

quantities to fulfill the gap in supplies.

The company has also entered into new

partnerships with OEMs like Honda Motorcycles, Scooters India (HMSI) and Suzuki

Motorcycles India, and received approvals for new products like Bajaj V-15, Splendor

16 February 2017

CEAT

iSmart 110 and Suzuki Access 125. Compared to T&B, the 2W sub-segment offers

advantages of higher realizations, product price inelasticity, less competitive

intensity and opportunity to differentiate/market.

Exhibit 6: 2W revenue CAGR of 34%...

2w Revenue Trend(INR m)

54.4

44.0

33.8

19.0

3,339

FY11

5,156

FY12

6,138

FY13

8,837

FY14

11,824

FY15

23.1

Growth(%)

14,561

FY16

Source: Company, MOSL

Exhibit 7: …with increased market share…(in volume terms)

Ceat's Two wheeler market Share

27%

Exhibit 8: …and higher contribution to total revenue

Contribution of 2W to Total Revenue

FY11

FY16

Source: Industry, MOSL

FY11

FY12

FY13

FY14

FY15

FY16

Source: Company, MOSL

Exhibit 9: CEAT now second-largest 2W tyre player in India

16%

35%

MRF

CEAT

22%

TVS Srichakra

Others

27%

Source: Industry, MOSL

In 2W and 3W tyre categories, CEAT uses outsourced capacities, which helps it

maintain an asset-light approach and allows it to concentrate purely on quality

control systems at its outsourced locations. Increasing presence across several

OEMs depicts robustness of the quality systems. The company has three principal

outsourcing facilities at Hyderabad, Calicut and Halol. To address growing demand,

the company has put up greenfield plant in Nagpur for the manufacture of 2W/3W

16 February 2017

CEAT

tyres with capital outlay of INR4.2b. The plant has commenced production at

19MT/day from Jun-16, and is expected to reach 120MT/day at full capacity by

1HFY18.

CEAT has initiated the Bike Shoppe concept, first such in Bangalore and Kolkata. The

Bike Shoppe is a company-branded outlet dedicated to provide products and

services exclusively for 2Ws. It will house the entire range of CEAT’s 2W products,

including Pirelli and Metzeller tyres for super bikes, and will be equipped with state-

of-the-art technology for tyre changing, fitment, alignment and balancing, nitrogen

inflation etc.

Exhibit 10: Bike Shoppe concept..

Exhibit 11: ..in Bangalore and Kolkata

Source: Company, MOSL

Passenger vehicles: Replicating the success story of 2W

CEAT clocked 4W revenue CAGR FY11-16 of ~29%, outperforming peers like Apollo

(~9% CAGR). Despite this, the company’s 4W revenue (INR5.9b) is one-fifth of

Apollo’s. The opportunity remains sizeable for CEAT. As it attains scale, it will benefit

from enhanced brand equity and better customer acceptance of its products. Even

in 4Ws, the company’s focus has largely been on UVs rather than cars. UVs account

for ~25% of industry volumes.

India’s PV penetration is at 17 vehicles per 1,000

people, whereas the same is on the higher side at 39 for China, 93 for Thailand,

147 for Brazil and 385 for the US.

CEAT is pushing all-out for growth in the PV sub-

segment, with an aim to replicate its 2W success story.

CEAT is launching new products every year in this segment to expand growth

frontiers beyond India. Launched in Italy in January 2016, its tyre range

encompasses two new patterns: CEAT EcoDrive and CEAT SecuraDrive. While

EcoDrive is ideal for low rolling resistance tyres needed for city driving, SecuraDrive

has been developed for high wet grip tyres for safer highway driving. The range is

set to expand with more patterns in FY17.

16 February 2017

CEAT

Exhibit 12: Increase in market share in PC… (in volume

terms)

Passenger Cars

Exhibit 13: …and in UV(in volume terms)

Utility Vehicles

15%

FY11

FY16

Source: Industry, MOSL

FY11

FY16

Source: Industry, MOSL

CEAT chose to focus on the UV segment, given its relatively small share and hence

lower competition. Also, the segment’s share has been on the rise, with consumer

preference shifting toward UVs. CEAT’s current UV market share of ~15% is twice

that in passenger cars. With doubling of capacity, the company aims to make further

inroads in the segment. CEAT has also entered into new partnership with Renault

and Nissan, and is now associated with products like Datsun Redi-Go, Renault Kwid

and Mahindra TUV 300. Gradually, it aims to cover the entire passenger car market

as it ramps up capacity and completely penetrates the UV market.

Exhibit 14: …increasing share of UV(%) to total PV sales in industry

UV Share of Total PV sales

20.8

21.2

12.6

13.8

FY11

FY12

FY13

FY14

FY15

FY16

Source: Industry, MOSL

Exhibit 15: …led to 29% CAGR for PV for CEAT

PV Revenue Trend(INR m)

54.4

46.5

4,679

3,777

2,578

1,669

23.9

14.9

10.4

5,375

Growth(%)

5,932

FY11

FY12

FY13

FY14

FY15

FY16

Source: Company, MOSL

Note: Srilanka revenue not included

16 February 2017

CEAT

CEAT’s market share in passenger cars is less than half (7%) that of UVs (15%), and

management considers capacity as the only constraint in increasing market share in

PCs. The company has taken concrete steps in increasing PV radial tyre capacity

(Halol Phase II brownfield expansion) by 110MT (entire capacity to be operational by

1HFY18) to address this gap. It will also simultaneously start ramping up its

engagements with OEMs, given that it has reasonable capacity at hand to commit

production.

Exhibit 16: CEAT occupies 7% market share(FY15 data) in PV segment

20%

MRF

Bridgestone

53%

20%

CEAT

Others

Source: Industry, MOSL

Pact with Pirelli to drive paradigm shift in CEAT’s portfolio

CEAT was named the exclusive pan-India distributor for Pirelli motorcycle tyres,

underscoring the company’s successful distribution build-out. It was only five years

ago that RPG Enterprises acquired the global rights to Pirelli for CEAT, by paying a

sum of INR550m. The Italian brand’s tyres were formerly distributed by Celite and

Ralson in India. Pirelli has a range of premium tyres, and given that CEAT has no

offering in this segment, this tie-up will enhance the company’s capability to offer a

full basket of products and thus further improve its brand perception.

Consistent margin performance despite raw material price volatility

CEAT manages commodity price risk via strategies like market intelligence to better

forecast RM prices for efficient inventory management, addition of new vendors,

and R&D efforts to develop alternate materials that lower weight without

compromising on performance. With increasing contribution from its strategic focus

areas (2W/PV), it is easier to retain low rubber price benefits due to brand,

compared to T&B which is a very price-sensitive segment.

Exhibit 17: Rubber price sensitivity v/s gross margin

Rubber Price(INR/kg)

41%

31%

Gross Margin(%)

42% 44%

50%

10.0%

5.8%

4.0%

104 109 185 210 179 167 133 115

7.5%

104

109

0.9%

185 210 179 167 133 115

4.2%

5.5%

7.9%

Exhibit 18: Rubber price sensitivity v/s operating margin

Rubber Price(INR/kg)

EBITDA margin(%)

12.9%

10.8%10.7%

38% 38%

38%

32% 31%

37%

Note: Gross revenues used for calculation Source: Bloomberg, MOSL

16 February 2017

CEAT

Branding and distribution thrust to enhance visibility

Emphasis on brand, increasing penetration and focused marketing



CEAT placed a special emphasis on 2W & PV segments via a three prolonged approach

of: (1) increasing dealers, franchisees and distributors (3x increase in district

penetration) (2) extending its presence across OEMs to boost replacement demand,

and (3) spending more on marketing & branding. These initiatives have paid off

handsomely for CEAT and improved its financial profile significantly.

Emphasis on focused ads for each segment, unique distributor led model for 2W and

increasing distribution reach has increased its market share in the passenger segments

(2Ws /passenger cars/UVs).

Focus on R&D, new product launches; extensive distribution network, optimum

product mix (non-T&B) and intensive marketing have helped CEAT to grow volumes in

the more profitable passenger segment.

Differentiated strategy for products working well for CEAT

CEAT has been consistently strengthening its distribution network and looking for

innovative ways to widen its reach. The company has a three-pronged approach to

reach customers: 1) dealers, 2) distributors and 3) branded/exclusive franchises.



Dealers:

This is a traditional model. Dealers could be single or multi-brand. This

model has been used for CV and passenger car tyres.

Exhibit 19: Increasing dealer strength

Number of Dealers

4,300

3,500

2,610

4,500

FY12

FY15

FY16

1HFY17

Source: Company, MOSL



Distributors:

An FMCG kind of model was adopted primarily for 2Ws. Compared

to dealers, distributors have larger capacity and ability to reach end-customers

(small garages, etc.). This model has enabled CEAT to penetrate rural and semi-

urban markets swiftly and effectively. 2W tyre selling is effective with an FMCG

kind of a model as distributors have the sales force to transport and sell

products in rural markets. CEAT has more than 250 distributors across the

country.

CEAT Shoppe and Hubs:

These are dedicated retail outlets providing better

experience to customers, thereby reinforcing the brand-building effort. CEAT

Shoppe is the company’s exclusive retail channel that sells and services CEAT

products, primarily PC and 2W tyres. CEAT Hubs sell and service primarily truck



16 February 2017

CEAT

and LCV tyres. Notably, CEAT has doubled the number of CEAT Shoppes outlets

from 102 in FY12 to 243 currently.

Exhibit 20: Increasing presence of CEAT Shoppes…

Ceat Shoppes

231

176

102

243

124

Exhibit 21: …and CEAT Hubs…

Ceat Hubs

169

FY12

FY15

FY16

1HFY17

FY15

FY16

Source: Company, MOSL

Exhibit 22: …with 3x increase in district penetration

Districts Covered

601

464

212

601

FY12

FY15

FY16

1HFY17

Source: Company, MOSL



Shop-in-Shop:

These are dedicated areas in dealers’ outlets that display CEAT’s

branded products. This enables the company to create branding at low cost.

Over past few years, the company has come out with two more marketing

initiatives: (1) MBO, a “multi-brand outlet” with a predominant CEAT share and

(2) SIS, a “shop-in shop” concept having demarcated area in high footfall shops.

MBO and SIS concepts are CEAT’s newest innovations aimed at enhancing

penetration in the replacement market via increased product and brand

visibility. CEAT has >240 MBO outlets and >45 SIS outlets.

Exhibit 24: Shop in Shop (SIS)

Exhibit 23: Multi Brand Outlets (MBO)

Source: Company, MOSL

16 February 2017

CEAT

Spends on brand building and business promotion set to increase

Along with quality and innovation, CEAT has also laid equal emphasis on effective

marketing and branding of its products. Since the passenger segment is consumer-

facing, we believe factors such as brand loyalty, visibility and recall go a long way in

creating replacement market demand. To position its products competitively, the

company develops creative ad campaigns based on extensive research/consumer

insights and also invests in innovative marketing programs. In FY16, CEAT launched

two new television campaigns – “Our Grip Your Stories” campaign for utility vehicle

tyres and the Tubeless campaign for motorcycle tyres – and participated in key

events like MTV Roadies, MTV Chase the Monsoon, India Bike Week 2016 and

Mahindra Adventure. These initiatives have enhanced product recalling in the minds

of end-consumers. Consolidated advertising and sales promotion expenses have

increased at a 21% CAGR FY11-FY16 to INR4.6b. Notably, CEAT plans to increase its

marketing spend going ahead.

Exhibit 25: CEAT tubeless bike tyre campaign

Exhibit 26: CEAT SUV tyre campaign: “Our Grip Your stories”

Source: Company, MOSL

Exhibit 27: IPL strategic timeout partner

Exhibit 28: Bat endorsement deal

Source: Company, MOSL

16 February 2017

CEAT

Exhibit 29: Focus on ad spend to continue

Ad spends(INR m)

1.2

0.7

0.8

0.7

0.9

% of Income

1.3

1.2

1.6

1.9

0.5

117

173

222

224

466

441

743

754

1,042

1,185

Note: Gross Revenues considered Source: Company, MOSL

Exhibit 30: Ad spend as % of sales compared to competitors

Apollo

2.8%

2.1%

1.4%

0.7%

0.0%

FY11

FY12

FY13

FY14

FY15

FY16

Source: Capital Line, MOSL

MRF

JK tyre

CEAT

Increasing presence across OEMs through R&D/new products

To expand revenues from non-trucking segments, CEAT entered into niche

categories like 2Ws and UVs in the early years of this decade. It started working

closely with OEMs to understand their requirements in terms of product quality and

backed this up with new products catering to every segment (~100 launches in both

FY14 /FY15 and 70 in FY16). Over past few years, CEAT has added marquee clients to

its OEM portfolio in both 2Ws and 4Ws, showcasing its R&D capabilities. The

company is consistently investing in upgrading its technological capabilities and R&D

to deliver high-quality, innovative and specialized products across categories.

Ties

with OEMs serve twin objectives of staying updated on the technological curve

and acting as a natural branding exercise for replacement demand.



OEM relationships and R&D:

On R&D front, CEAT’s key focus has been on

superior grip, improved fuel efficiency, lower rolling resistance and faster

turnaround time. This has fostered new client additions, and improved share of

business (SoB) across existing clients.



Replacement demand:

Passenger segment customers are more likely to replace

tyres with the same brand, unlike T&B customers. CEAT’s efforts on R&D and

product development fronts have been aptly marketed through

product/feature-specific advertisements and publicity strategies.

16 February 2017

CEAT

Exhibit 32: …led to increase in number of products

developed mainly in 2W/PC

Number of Products developed

102

Exhibit 31: World-class R&D facilities at Halol…

FY11

Source: Company, MOSL

FY12

FY13

FY14

FY15

FY16

Source: Company, MOSL

Exhibit 33: Increasing OEM penetration

Source: Company, MOSL

Exhibit 34: Rising OEM share as % in revenue

OEM (%)share in revenue

FY11

FY12

FY13

FY14

FY15

FY16

Source: Company, MOSL

16 February 2017

CEAT

Exhibit 35: New products developed in FY16

Source: Company, MOSL

Exhibit 36: CEAT tubeless bike tyre campaign

Exhibit 37: Key developments

New entries into OEMs

Primary supplier for

OEM launches

Entry into existing models

New platforms

Honda Motorcycle, Renault, Suzuki

Motorcycle, etc.

Renault Kwid, M&M TUV300, RE

Himalayan, Honda Navi, Bajaj

VikrantV15, Hero Splendor

iSmart110, Datsun Redigo, Suzuki

Access125, etc.

Daimler Truck Radials, Suzuki Gixxer,

RE Classic, Yamaha FZ, etc.

Fuelsmart, Gripp, Mileage.

Source: Company, MOSL

16 February 2017

CEAT

Doubling of capacity in focused segment to drive market

share gains

Expect CEAT to maximize growth and capacity constraints to get addressed



CEAT is currently on track to double its 2W/PV capacity which will increase its product

capacity in India by 38% from 900MTPD to 1,245MTPD over FY16-18E.

Around 70% of the new capacity addition (230MTPD of total 340MTPD) is attributed to

the passenger segment (2W/PV), letting the company maximize growth and

profitability and resolve supply side constraints in these segments.

With CEAT’s recently announced capex of INR28b by FY22, it envisages to increase

annual capacity in TBR from 110MTPD in FY18 to 310MTPD in FY22, in 2W from

290MTPD in FY18 to 430MTPD in FY22, and in passenger cars from 190MTPD in FY18

to 340MTPD in FY22. In our view, this will address supply issues until FY22, boost the

2W/PV businesses further and help improve the market share of radial within the T&B

segment.

Capacity increase by 38% over FY16–18 to drive growth

CEAT plans to aggressively expand its capacity by 38% from 900MTPD to 1,245MTPD

over FY16–18. Till FY15, the company outsourced its entire 2W/3W capacity

(including tubes) of 270MT/day and was facing difficulty in expanding capacity on

the outsourcing platform due to limited investing capabilities of its outsourcing

partners. To maximize revenue growth potential of the passenger segment, the

company has commissioned two plants: 1) greenfield plant in Nagpur for the

manufacture of 2W/3W tyres at capital outlay of INR4.2b, producing 32MT/day till

1HFY17 (120MT/day expected at full capacity by 1HFY18) and 2) brownfield

expansion of Halol Phase II for the manufacture of PC/UV radial tyres at capital

outlay of INR6.5b, producing 69MT/day till 1HFY17, (110MT/day expected at full

capacity by 1HFY18). Also, for off-highway farm radials, it is commissioning

~100MT/day plant at Ambernath with initial capacity of 40MT/day (INR 3.3b capex).

This first phase of this plant of 40MT/day is expected to be operational in FY17

which would be further expanded to 100MT/day at cost of INR2.7b in FY18.

Also, With CEAT’s recently announced capex of INR28b by FY22, it envisages to

increase annual capacity in TBR from 110MTPD in FY18 to 310MTPD in FY22, in 2W

from 290MTPD in FY18 to 430MTPD in FY22, and in passenger cars from 190MTPD

in FY18 to 340MTPD in FY22. In our view, this will address supply issues until FY22,

boost the 2W/PV businesses further and help improve the market share of radial

within the T&B segment.

16 February 2017

CEAT

Exhibit 38: Capacity expansion in 2W/PCR/OHT…

T&B

2W/3W

Srilanka capacity

Speciality/Farm

PCR

168

235

140

345

FY17E

LCV

Tubes

194

290

200

355

FY18E

Source: Company, MOSL

Exhibit 39: …and higher capacity share in 2W/PCR…

T&B

2W/3W

Srilanka capacity

19%

10%

11%

38%

FY16

Speciality/Farm

PCR

15%

21%

13%

32%

FY17E

LCV

Tubes

16%

23%

16%

29%

FY18E

Source: MOSL

170

100

345

FY16

Exhibit 40: ..will lead to rising share of 2W/4W in revenue mix

T&B

FY14

Speciality/Farm

FY15

LCV

FY16

2W/3W

FY17E

PCR

FY18E

FY19E

FY12

FY13

Note: Only Standalone product revenues considered Source: MOSL

Exhibit 41: Capex plans for CEAT

Location

Nagpur

Halol Phase II

expansion

Ambernath

Purpose & Status

Plant has commenced production at 19MT/day from

Jun-16, and is expected to reach 120MT/day at full

capacity by 1HFY18.

69MT commissioned till 1HFY17,Entire capacity of

110MT to be operational by 1HFY18

Off Highway tyres facility of 40MT/day to be

operational in end of FY17

Incremental capacity of 60MT/day to be operational

in end of FY18

Incremental annual capacities by 1m tyres for TBR,

17m tyres for 2W and 6m tyres for passenger cars

Capex

Amount

4.2b

6.5b

3.3b

2.7b

28b

Timeline

FY15-18

FY16-19

FY18-22

Not yet

Announced

Source: Company, MOSL

16 February 2017

CEAT

International business to get boost from OHT segment

Foray into OHT would be margin accretive for the company



Exports for CEAT have slowed down over past three years due to dumping of Chinese

tyres in Ceat’s key export markets, devaluation of currencies and increasing level of

radialisation in the market. Thus, the company has forayed into high-margin (EBITDA

margins of >18%), export-focused off-highway tyres (40MT/day capacity to be

operational in FY17 at cost of INR3.3b in Ambernath, which would expand to

100MT/day at incremental cost of INR2.7b) to drive dwindling exports.

CEAT’s foray into OHT would be margin-accretive for the company.

ACHL, the company’s investment arm in Sri Lanka, is a market leader in that country

with ~50% market share and ~25 % EBITDA margin. It is expected to continue growing

at a stable rate.

Slowdown in exports due to increasing radialisation and Chinese imports

CEAT is a leading exporter among Indian tyre companies. It is one of the major

exporters of tyres in the truck, off-the-road (OTR) vehicle and light commercial

vehicle (LCV) categories. It exports to various markets across the world (divided into

seven clusters), with many of its products developed exclusively for certain

geographies. The company has also formed two JVs and is increasing its presence in

Sri Lanka and Bangladesh. Overall, CEAT supplies to 110 countries globally and 80-

85% of its export products consist of truck, bus and LCV tyres. Currently, export sales

have been impacted due to increasing influx of Chinese radial tyres (available at cost

of TBB tyres) and increasing radialisation (impacting TBB sales for the company).

CEAT unlike other players does have the advantage of having its TBB facility in the

heart of Mumbai (Bhandup). Thus, if TBB utilization declines below 65-70%

(currently greater than 80%), it does have the option to monetize the land.

Exhibit 42: Export clusters for CEAT

Source: Company, MOSL

16 February 2017

CEAT

Exhibit 43: Fall in exports over the years…

Exports(INR m)

% of Sales

Exhibit 44: Typical tyre replacement demand

MHCVs

PVs(PC and UV)

2Ws

LCVs

Tractors(Front Tyre)

Tractors(Back Tyre)

6-8months

3-4years

2-3years

3-4years

Source: Crisil, MOSL

7,046

FY11

11,010

FY12

12,697

FY13

12,192

FY14

11,419

FY15

8,289

FY16

Source: Company, MOSL

Exhibit 45: …and increasing radialisation in T&B segment

Truck/Bus

Passenger Cars

99.1 99.2

98.5 98.1 98.2 98.4 98.8 98.9

Exhibit 46: Channel-wise radialisation

Domestic

OEM

18.6

22.2 26.4

32.7

43.5

Source: Industry, MOSL

Off-highway farm radials to drive dwindling exports

CEAT is setting up a new facility at Ambernath (INR3.3b for initial 40MT/day

capacity) in Maharashtra for specialty farm radial tyres to be exported to Europe

and the US. The foray would be through its 100% subsidiary, CSTL. The plant’s

capacity would be 100MT, of which 40MT would be operational in end of FY17 and

the remaining in end of FY18. While CEAT has presence in this segment

(farm/specialty) via its Bhandup and Nasik plants, the company is now looking at

increased presence in the specialty segment. Currently, 50% of the company’s

farm and specialty tyres are exported. The agri-tyre segment in exports is consumer-

focused, where CEAT’s channel partners have given a feedback that there is a gap

for a third player (Balkrishna Industries and Alliance Tyres are the other two

companies). As overall market size is huge, there is a good chance for CEAT to

succeed in this venture. The positive aspect is that China does not have significant

presence in agri tyres, given the higher SKUs and that it is not a mass production

market.

OHT is a niche segment comprising high-end tyres used across applications

like agriculture, mining and industrial. Competitive intensity in this segment is low

with superior profitability and margins.

Market leadership in Sri Lanka…

ACHL, the company’s investment arm in Sri Lanka, has a 50:50 joint venture

company, CEAT-Kelani Holdings Private Limited, which operates four manufacturing

plants through its wholly owned subsidiaries in Sri Lanka. CEAT has 60MT

manufacturing capacity in Sri Lanka, while overall market size there is 120MT (since

CEAT has ~50% market leadership position). CEAT is the sole manufacturer in that

16 February 2017

CEAT

country and competes with other Indian/international brands. The company gets

some duty incentives from the government, while imported tyres attract a higher

duty. Imported tyres are also impacted by currency depreciation. CEAT has a clear

cost advantage in terms of brand and focus. Thus, the equity of CEAT in Sri Lanka is

very high. This is proving to be a steady market for the company with stable

profitability. However, faster growth in this market would be difficult. As the market

grows, CEAT may make small capacity additions, if required. Exports form ~20-30%

of the venture revenues.

Exhibit 47: Healthy revenue growth

Srilanka Sales(INRm)

19.7

1,543

2,272

3.9

FY13

FY14

-2.7

FY15

18.4

Growth(%)

2,210

2,184

17%

12%

1,847

-1.1

Exhibit 48: Improving margins

EBITDA margin(%)

20%

23%

26%

1,919

FY11

FY12

FY16

FY12

FY13

FY14

FY15

FY16

Source: Company, MOSL

Exhibit 49: Healthy PAT growth

Srilanka PAT(INRm)

53.6

353

Growth(%)

63.6

366

19.7

112

FY11

134

FY12

206

FY13

337

FY14

4.8

FY15

3.6

FY16

Source: Company, MOSL

16 February 2017

CEAT

Earnings CAGR of 25% over FY17–19E

Balance Sheet to continue to remain healthy



With first phase of capacity expansion (INR14b) likely to be completed by 1HFY18,

product mix is expected to further improve with revenue share of 2W/PV expected to

further increase from 38% to 49% over FY16-19E which partly insulates CEAT against

rubber price volatility and improves margins.

We expect 11% revenue CAGR, 25% PAT CAGR with 150bp improvement in margins

over FY17-19E.

First phase of capex of ~INR14b over FY16-18 will be funded via internal accruals,

thereby significantly de-leveraging the balance sheet, improving return ratios and

generation of healthy FCFF over FY17-19E.

Improvement in product mix to continue

CEAT has improved its product mix in favour of passenger segment (2W/PV) in

Indian operations from 15% to 38% over FY11-16. With doubling of capacities in

both segments over FY16-18E, we expect 2W/PV to grow at 20%/13% revenue CAGR

over FY17-19E led by market share gains in each segment. With first phase of

capacity expansion (INR14b) likely to be completed by 1HFY18, product mix is

expected to further improve with revenue share of 2W/PV expected to further

increase from 38% to 49% over FY16-19E which partly insulates CEAT against rubber

price volatility and improves margins.

Exhibit 50: Shift in product mix to 2W/PV

T&B

Speciality/Farm

FY15

LCV

FY16

2W/3W

FY17E

PCR

FY18E

FY19E

FY12

FY13

FY14

Source: Company, MOSL

Capacity expansion in strategic focus areas (2W/4W) to drive revenue

growth, and deleveraging to drive PAT

Revenues will be driven by 20% revenue CAGR in 2Ws, while passenger cars/UVs

would post revenue CAGR of 13% over the same period due to doubling of capacity

in both segments. Due to increasing revenue share of 2W/PV we expect CEAT to be

relatively insulated against rubber prices and drive healthy 11% revenue CAGR over

FY17-19E.We expect increased offtake from the OEM and replacement segments,

driven by the company’s branding efforts and new capacities, while exports are

likely to remain muted, especially in the T&B segment. We believe CEAT’s foray into

less competitive and highly profitable off-highway radial tyres will help boost

dwindling exports and drive margins. Led by product mix change and foray into OHT,

we expect margins to improve by 150bp and EBITDA to grow at 19% CAGR over

16 February 2017

CEAT

FY17-19E. Since major part of first phase of capex (INR14b) is being met via internal

accruals, we expect interest cost to decline with PAT to grow at 25% CAGR over

FY17-19E.First phase of capex of ~INR14b over FY16-18 will be funded via internal

accruals, thereby significantly de-leveraging the balance sheet, improving return

ratios and generation of healthy FCFF over FY17-19E.

Exhibit 52: With Increasing 2W and 4W contribution (%

share)

T&B

79,060

Speciality/Farm

LCV

2W/3W

PCR

Exhibit 51: Revenues to post 11% CAGR over FY17–19

27.9

Revenue(INR m)

Growth(%)

71,077

10.2

4.1

0.5

1.1

50,046

55,205

60,960 63,436 63,765 64,493

10.3 10.4

11.2

Note: Gross revenues considered due to IndAs adjustment Source:

Company, MOSL

Note: Standalone product Revenues considered Source: Company,

MOSL

Exhibit 53: EBITDA to post 19% CAGR over FY17–19

EBITDA(INR m)

12.9

10.8

7.9

5.5

10.7

10.5

Margin(%)

11.0

12.0

Exhibit 54: PAT to post 25% CAGR over FY17-19

582.0

PAT(INR m)

4,544

2,780

1,402

98.3

3,213

41.4

3,636

Growth(%)

4,354

5,688

2,737

4,380

6,579

6,804

8,223

6,746

7,818

9,487

(35.1)

206

15.6

(20.0)

19.8

30.6

Note: Excise Duty included in expenses Company, MOSL

Source: Company, MOSL

Exhibit 55: Continues to reduce debt

Net Debt(INR m)

1.8

1.2

12,407

1.0

3,390 5,228

0.3

0.2

Net Debt/Equity(x)

Exhibit 56: Return ratios to remain healthy

RoE(%)

19.5

14.2

6,357

0.3

4,223

0.2

506

0.0

9.2

3.1

19.2

30.6

RoCE(%)

19.9

13.3

23.7

24.3

16.4

16.9

18.9

14.2

17.4

16.8

9,250

10,059

Source: Company, MOSL

16 February 2017

CEAT

Exhibit 57: CFO to remain healthy

CFO(INR m)

7,487

5,844

1,968

169

(1,350)

6,862

4,642

7,720

4,998

Exhibit 58: Will generate FCFF despite capex lined up

FCFF(INR m)

4,488

2,850

523

(192)

(358)

4,220

6,350

Source: Company, MOSL

Exhibit 59: WC to remain healthy

Working capital turnover (Days)

Exhibit 60: Asset turnover to remain ~2x

Asset Turnover(x)

2.5

2.9

2.6

2.4

2.2

2.0

2.1

2.2

Source: Company, MOSL

16 February 2017

CEAT

Valuation and view

Initiating with Buy rating

Compelling story of India’s tyre market



The tyre industry had benefited over past two years from multi-year low rubber

prices. While prices have now increased from the lows, we expect CEAT to

counter this rise by a combination of product mix improvement, operating

leverage and selective price increases.

We value the company at 10x FY19E EPS, led by:



At the start of FY11, CEAT underwent a leadership change with Mr Anant

Goenka taking over as managing director. He drove the strategy with a clear

focus on 2W/PV, given the ability of these segments to boost margins and

lower dependence on the truck segment. A three-pronged strategy was

adopted to achieve its outlined goals: (1) raise sales and distribution reach

by increasing the number of dealers, franchises and distributors; (2) ramp

up presence across OEMs to enhance demand for replacement tyres; and

(3) increase marketing spend on brand-building initiatives.



In FY11, CEAT’s revenue profile mirrored the industry mix, with T&B

accounting for a lion’s share. However, by FY16, the company’s mix had

changed drastically, with the passenger segment accounting for 38% of

revenue, as against 15% in FY11.



CEAT’s strategic focus on the more profitable 2W/PV segments would lead

to product mix improvement, with revenue contribution from these

segments increasing from 38% to 49% over FY16-FY19 and market share

increasing from 27%/9% currently. Improving product mix toward

consumer-facing segments partly insulates CEAT against rubber price

volatility. Also, its foray into high-margin OHT will aid in improving margins.



We expect sales and PAT CAGR of 11% and 25%, respectively, and expect

margin to improve by 150bp over FY17-19E, led by an increasing focus on

the consumer-facing segments.



First phase of capex of INR14b (to be completed by FY18) is being met

entirely by internal accruals, while the recently announced capex of INR28b

(to be done over FY18-22) is expected to be funded via a mix of debt and

equity. However, despite ~33% increase in gross block over FY16-18E, we

expect net debt to equity to decline from 0.3 in FY16 to 0.2 in FY18.



Despite ongoing capex, we expect RoE/ RoCE to improve by 260bp/350bp to

18.9%/16.8%, with strong FCFF generation of INR6.7b over FY17-19E.



The stock has traded at 8x P/E (10-year average with EPS CAGR of 8% over

FY06-16) and witnessing a rally since past three years on account of its

stellar outperformance led by product mix improvement.



Based on expectations of CEAT’s superior EPS CAGR (25%) v/s Indian tyre

peer companies over FY17-19 and also its 10-year EPS CAGR (8%), we

believe 10x (20% premium to 10-year average) is justified for CEAT for FY19.



We believe the current valuations are attractive. We also see potential re-

rating as its consumer-facing businesses grow and cross-cycle margin

resilience increases. Thus, we initiate coverage on CEAT with a

Buy

rating

and a target price of INR1,406, valuing the company at 10x FY19 earnings.

16 February 2017

CEAT

Exhibit 61: P/E (x)

Negative

Earnings

Cycle

P/E (x)

5 Yrs Avg(x)

15 Yrs Avg(x)

10 Yrs Avg(x)

Exhibit 62: P/B (x)

2.5

2.0

1.5

1.0

6.8

5.6

0.0

6.3

10.6

0.5

0.9

1.2

1.0

1.7

P/B (x)

5 Yrs Avg(x)

15 Yrs Avg(x)

10 Yrs Avg(x)

Source: MOSL

Exhibit 63: Peer valuation

Company

Name

APTY IN Equity

CEAT IN Equity*

JKI IN Equity

MRF IN Equity

BIL IN Equity

SRTY IN Equity

FY17E FY18E

FY19E

EV/EBITDA

RoE %

EV/Sales

Sales CAGR

FY17E FY18E FY19E FY17E FY18E FY19E FY17E FY18E FY19E FY17-19E

PAT CAGR

FY17-19E

*: CEAT nos are MOSL estimates Source: Bloomberg, MOSL

Exhibit 64: Peer Valuation of Global tyre companies

Company Name

Continental AG

Bridgestone Corp

Michelin(CGDE)

Goodyear Tyre & Rubber Co

Sumitomo Rubber industries

CY16

EV/EBITDA

RoE %

EV/Sales

Sales CAGR PAT CAGR

CY17E CY18E CY16 CY17E CY18E CY16 CY17E CY18E CY16 CY17E CY18E CY16-18E CY16-18E

-4

Note: FY16 is CY15, FY17E is CY16E while FY18E is CY17E Source: Bloomberg, MOSL

Exhibit 65: Raw material sensitivity

Change in natural rubber price

Change in Synthetic rubber price

Total Impact on EBITDAM (FY18 & FY19)

EPS FY18 - normal case

EPS FY18 - post impact

Impact on EPS - FY18

EPS FY19 - normal case

EPS FY19 - post impact

Impact on EPS - FY19

10.0%

20.0%

30.0%

40.0%

50.0%

10.0%

20.0%

30.0%

40.0%

50.0%

(200bps) (400bps) (600bps) (800bps) (1000bps)

107.6

86.1

64.6

44.1

22.6

1.1

-20%

-40%

-59%

-79%

-99%

140.6

116.7

91.4

67.5

43.6

19.7

-17%

-35%

-52%

-69%

-86%

16 February 2017

CEAT

SWOT Analysis



Robust brand name

in PV and 2W

segments

Exposure to emerging

markets: Sri Lanka

and Bangladesh

R&D capabilities and

fast roll-out of new

products

Strategic focused

approach at

management level



Presence in TBB

segment (38%

revenue as per FY16),

which is shrinking

due to Chinese

imports

Comparatively

smaller player in a

competitive market



Scale-up of export of

radial tyres which is

lagging currently

Foray into profitable off

highway radial tyres for

driving exports growth

Increasing presence in

PV segment, whose

current industry

penetration in India is

very low



Increasing competition

from Chinese imports

Raw material volatility

Intensifying

competition in 2W

segment with scale up

of new players



16 February 2017

CEAT

Competitive Positioning

Exhibit 66: Player Wise Details

Player

Revenue

Composition

LCV-7%

Farm & others-

11%

PCR & LT-34%

T&B-48%

T&B – 67%

LCV – 12%

PCR – 15%

Farm – 4%

OTR & Others –

T&B-38%

Speciality/Farm-

11%

LCV-13%

2W/3W-27%

PCR-11%

Balkrishna

Industries

Only into

Speciality/Farm

Agriculture-64%

OTR-32%

Others 4%

TVS Srichakra

Bridgestone

22%; market leader

Only into 2W/3W

in OEM segment

PCR,TBR,2W

2,400

76,000 tyres per day

PCR-25,000 tyres per day

5% market share

globally

Market Share

TBR,TBB -25%,

PCR-16%

Distribution

Strength

4,900

Segment wise capacity

(MTPD)

TBR-6,000 tyres per day

Capacity

(MTPD)

Expansion Plans

Apollo

Enhancing TBD and PCR

capacities by 6,000 tyres

FY16-1,645

per day and 8,000 per day

respectively.

TBB-10,000 tyres per day FY20E-2,300

PCR-32,000 tyres per day

TBR – 30%

4,000

TBB - 47.1 lakhs pa

TBR – 34.6 lakhs pa

PCR – 150.8 lakhs pa

2/3W – 63 lakhs pa

OTR and Others – 54.6

lakhs pa

T&B-345

Speciality/Farm-100

LCV-86

2W/3W-170

PCR-84

Will focus on Bhuj rampup

3,00,000MTP

in speciality tyres and

Y operating at

entered 2/3Wheeler tyres

55-60%

via Asset light model

utilization

approach

FY16-2,110

No expansion plans

JK Tyre

CEAT

2W-27%, PCR-9%

4,300

FY16-905

FY18E-1,245

Doubling capacity in 2W,

PCR and setting up 100MT

plant for OHT.

Increasing the total

capacity from 2.3 million

tyres a month to 2.5

million by 2QFY17

Source: Industry, MOSL

Exhibit 67: Healthy revenue CAGR for last 5 years

Revenue CAGR(%)

16.5%

12.9%

8.9%

5.9%

3.1%

9.5%

Exhibit 68: Highest 5 year EBITDA CAGR

EBITDA CAGR(%)

28.8%

15.2%

27.5%

37.9%

27.2%

24.4%

Apollo

MRF

JK tyre

Balkrishna

Industries

CEAT

TVS

SriChakra

Apollo

MRF

JK tyre

Balkrishna

Industries

CEAT

TVS

SriChakra

Note: Net Revenues are used Source: Capital line, MOSL

Source: Capital line, MOSL

16 February 2017

CEAT

Bull & Bear case

Bull case



Our bull case assumptions have positive impact on volume growth, sales growth

and operating margins. We assume higher capacity utilization on account strong

volume traction in 2W/PCR space. Additionally, we assume prices of critical raw

material rubber decrease for FY17E, FY18E and FY19E and CEAT doesn’t pass on

entire raw material benefits due to better product mix.

We assume CEAT would be benefited on both volume and margin terms, we are

assuming 320bps margins improvement over FY17-19E, 12% revenue CAGR

(11% revenue CAGR in base case), 36% PAT CAGR over FY17-19E with falling raw

material prices and softer impact of de-monetisation on industry.

In the bull case we are assuming that company will not pass on benefit on lower

raw material prices and thus enjoy higher margins. Company will continue to

garner market share in 2W/PV segment and retain market share in T&B

segment.

There is an increase of 1%/16%/19% in FY17E /FY18E/FY19E EPS over the base

case EPS to INR90, INR124.8 and INR166.7 respectively.

Assuming the target multiple as 12x in bull case instead of 10x that we have

taken for the base case, we get a bull case target price of INR2,001 (upside of

84% to CMP) based on FY19 EPS instead of the base case target price of

INR1,406, upside of 29%.

Exhibit 69: Bull case scenario

Sales (INR m)

Sales growth (%)

EBITDA (INR m)

EBITDA Margin (%)

EBITDA growth (%)

PAT (INR m)

PAT Margin (%)

PAT growth (%)

EPS (INR)

Target multiple (x)

Target price (INR)

Upside/downside (%)

FY16

63,765

0.5

8,223

12.9

20.9

4,544

7.1

41.4

112.3

FY17E

64,493

1.1

6,746

10.5

-18.0

3,636

5.6

-20.0

90.1

FY19E

80,380

12.1

11,012

13.7

24.8

6,744

8.4

33.6

166.7

2001

Source: Company, MOSL

FY18E

71,712

11.2

8,821

12.3

30.8

5,048

7.0

38.8

124.8

Bear case



Our bear case assumptions mainly have a negative impact on both sales growth

and operating margins for FY17E, FY18E and FY19E compared to base case. We

assume lower capacity utilization on account increasing competition in 2W/PCR

space. Additionally, we assume prices of critical raw material rubber increase for

FY17E, FY18E and FY19E and CEAT doesn’t pass on entire price increase because

of higher competition.

We assume CEAT would be at disadvantage on both volume and margin terms,

we are assuming 280bps EBITDA margin dip over FY17-19E, 4% revenue CAGR

(11% revenue CAGR in base case), (12%) PAT CAGR over FY17-19E with

16 February 2017

CEAT



increasing raw material prices and higher impact of de-monetisation on

industry.

In the bear case we are assuming that raw material prices would increase and

company won’t be able to pass on costs due to low volume growth. We expect

2W and PV growth to get impacted due to de-monetisation.

There is a decline of 1%/26%/50% in FY17E /FY18E/FY19E EPS over the base

case EPS to INR88, INR79.3 and INR70.4 respectively.

We would cut our multiple and give it 8x target multiple and get a bear case

target price of INR563(downside of 48% to CMP) based on FY19 EPS instead of

the base case target price of INR1,406, upside of 29%.

Exhibit 70: Bear case scenario

Sales (INR m)

Sales growth (%)

EBITDA (INR m)

EBITDA Margin (%)

EBITDA growth (%)

PAT (INR m)

PAT Margin (%)

PAT growth (%)

EPS (INR)

Target multiple (x)

Target price (INR)

Upside/downside (%)

FY16

63,765

0.5

8,223

12.9

20.9

4,544

7.1

41.4

112.3

FY17E

64,493

1.1

6,746

10.5

-18.0

3,636

5.6

-20.0

88.7

FY19E

69,890

5.5

5,382

7.7

-12.7

2,847

4.1

-11.3

70.4

563

-48

Source: Company, MOSL

FY18E

66,273

2.8

6,163

9.3

-8.6

3,209

4.8

-11.7

79.3

16 February 2017

CEAT

Industry overview

Indian tyre industry on road to recovery

Industry landscape

The INR500b Indian tyre industry comprises 39 companies and overall 60

manufacturing plants across India. The industry is heavily concentrated, with the top

four players holding ~70% market share and the top 10 companies accounting for

90% of industry sales (both value and volume). During FY11-16, the industry has

grown by 4% in terms of tonnage sold (to 1.7m from 1.4m tonnes). Commercial

vehicles (CV) is the largest segment in terms of volumes (contribution of 55%);

however, its performance has been sluggish with five-year CAGR of just 2%.

Subdued economic activity not only meant weaker OEM sales, but also lower

movement of trucks and thus slower replacement demand. PV tyres have seen the

strongest demand offtake with 8% CAGR, whereas 2W demand CAGR was 6%.

Exhibit 71: Product category-wise breakup of Indian tyre industry

Source: Company, ATMA, MOSL

Exhibit 72: Domestic Production of tyres (m units)

350.0

300.0

250.0

200.0

150.0

100.0

50.0

0.0

T&B

LCV

PCR

Farm/Tractor

2W/3W

OTR

Total

Source: ATMA,MOSL

16 February 2017

CEAT

Exhibit 73: Category wise Supply of tyres to segments

Category wise supply

of tyres to segments(m nos)

M&HCV(T&B)

PCR

LCV/SCV

Tractor(Front)

Tractor(Rear)

Scooter

Motorcycle/Mopods

Total

Replacement

12.9

24.8

5.6

1.3

0.7

6.6

0.5

30.7

83.1

As %

of (a)

70%

56%

58%

52%

35%

38%

10%

52%

53%

OEM

3.2

17.1

2.4

1.1

10.6

3.7

27.1

66.3

As %

of (a)

Govt

As %

of (a)

Export

1.92

2.3

1.7

0.1

0.8

1.3

8.32

As % Total domestic As %

of (a)

10%

18%

16%

prdn

16.8

38.7

9.7

2.5

17.2

56.5

148.4

of (a)

92%

87%

100%

96%

94%

Imports

1.5

5.6

2.5

9.6

As % Total As %

of (a) (a) of (a)

17% 0.2

39% 0

25% 0

44% 0

55% 0

62% 0

74% 0

46% 0

42% 0.2

18.3 100%

13%

44.3 100%

9.7 100%

2.5 100%

2 100%

17.2 100%

5 100%

59 100%

6% 158 100%

Source: ATMA,MOSL

Exhibit 74: Indian tyre industy: Market share by sales

MRF

Apollo Tyres

JK Tyres

Ceat

Balkrishna

Birla

Bridgestone

TVS Srichakra

Goodyear

Others

Source: Industry,MOSL

Exhibit 75: Typical tyre replacement cycles

MHCVs

PVs(PC and UV)

2Ws

LCVs

Tractors(Front Tyre)

Tractors(Back Tyre)

6-8months

3-4years

2-3years

3-4years

Source: Industry,MOSL

Gradual industry shift toward consumer-facing segments

The CV segment still forms over 55% of India’s tyre demand. However, globally, this

segment contributes a smaller 28% of industry volumes. The divergence between

global and Indian statistics is mainly because of the still very low penetration of PVs

in India (below 20 per 1,000 people). We expect the PV segment to post strongest

growth in volumes due to a recovery in rural markets, and higher increasing

purchasing power in urban markets leading to more demand for 4Ws.

Exhibit 76: Global tyre industry revenue mix (FY16)

14%

28%

Passenger cars/light

trucks

Others

58%

Source: Industry,MOSL

Trucks and buses

16 February 2017

CEAT

Exhibit 77: Domestic tyre industry revenue mix (FY11)

Trucks and

buses

Passenger

cars/light

trucks

Others

Exhibit 78: Domestic tyre industry revenue mix (FY16)

Trucks and

buses

Passenger

cars/light trucks

Others

18%

23%

20%

62%

55%

22%

Source: Industry,MOSL

India’s automobile industry is still developing with 18 vehicles per capita, as against

69 vehicles per capita in China and 786 in the US. Fortunes of the tyre industry are

clearly a derivative of automobile sales. While auto OEMs form only ~30% of overall

tyre demand, OEM sales reflect overall economic mood of the transport sector,

which is also mirrored in replacement demand for tyres.

Exhibit 79: Replacement demand contribution increasing…

OEM

Replacement

62%

58%

67%

70%

69%

38%

FY11

42%

FY12

33%

FY13

30%

FY14

31%

FY15

31%

FY16

Source: Industry,MOSL

Exhibit 80: …with demand from OEMs being widely spread

across segments…

21%

22%

27%

29%

FY14

PVs

2/3W

17%

23%

26%

33%

FY15

Tractor

Others

17%

22%

25%

Exhibit 81: …and replacement demand being CV-heavy

14%

PVs

2/3W

10%

15%

Tractor

Others

14%

67%

35%

FY16

Source: Industry,MOSL

FY14

65%

61%

FY15

FY16

Source: Industry,MOSL

16 February 2017

CEAT

CEAT and MRF are only players with meaningful exposure across segments

MRF is the largest player, dominating with 29% industry market share. It enjoys the

best brand recall among consumers, according to industry experts. MRF and CEAT

are the only players that have exposure across segments. Within the two, CEAT has

the lowest exposure to the highly price-sensitive commercial vehicle segment

Exhibit 82: Revenue exposure across segments

2/3W

Ceat

Apollo

JK Tyres

PV's

MHCV

LCV

OHT

Others

MRF

Source: Industry,MOSL

Exhibit 83: Manufacturing locations of major tyre companies

Source: ATMA, MOSL

Radialisation to support growth

Indian tyre industry is witnessing rapid adoption of radial tyres, backed by growing

awareness of cost benefits, improving road infrastructure and stringent

implementation of overloading norms. With longer tread life, better steering

control, lower rolling resistance and higher fuel efficiency, radial tyres are better

than cross-ply/bias tyres. In contrast, cross-ply tyres are better for off-roading,

overloading and have lower initial costs.

16 February 2017

CEAT

The PV segment has seen 99% radialisation, while the CV segment has registered

rapid adoption from 12% in FY11 to 44% in FY16. Rating agency ICRA expects truck

and bus radialisation levels to reach 66% in FY18. A higher share of radial tyres in

sales mix will push up industry realisations. In our view, radialisation is expected to

cover 76% of the industry by FY20, led by customers’ demand for better-quality

tyres with a longer life, as well as influx of cheaper Chinese tyres which has made

radial tyres more affordable to small fleet operators. A shift in preference toward

radial tyres is beneficial for domestic players, as these command 30-50% pricing

premium to bias tyres and are also more profitable.

Exhibit 85: T&B radialisation levels set to rise as awareness

increases

Truck/Bus

Passenger Cars

99.1 99.2

98.5 98.1 98.2 98.4 98.8 98.9

32.7

43.5

26.4

18.6 22.2

Exhibit 84: Radialisation level in different channels

Domestic

OEM

FY12 FY13 FY14 FY15 FY16 FY17E FY18E FY19E FY20E

Source: ATMA,MOSL

Chinese imports impact TBR segment

CY14 was a bumper year for China’s tyre industry. Falling prices of natural rubber

have substantially helped reduce cost for tyre vendors. Despite their shrunken

revenue in CY14, almost all tyre producers saw higher profit margins. This continued

in CY15 with lower prices of natural rubber and slight decline in tyre prices. In March

2015, state-owned China National Tire & Rubber acquired controlling stake in the

world's fifth-largest tyre company, Pirelli. For a long time, Chinese tyre makers have

not found a way into the field of sedan (OE) tyres. Hence, they primarily aimed at

radials and truck-tyre markets. Pirelli is the most important tyre supplier for BMW

and the second-largest for Mercedes-Benz; it is also one of Ford's main suppliers.

Through the Pirelli acquisition, China has begun to supply OE tyres for luxury cars.

China’s tyre industry, especially for truck tyres, is plagued with serious overcapacity.

Along with a decline in China's fixed investments and real estate, demand for trucks

has sharply contracted. The highly competitive highway logistics sector sees low

profits and minimizes tyre changes.

US impact:

The US anti-dumping investigation hit China’s tyre companies hard, but

more truck-tyre capacity in China is yet becoming operational. In Jan-15, the US

Commerce Department’s International Trade Administration proposed preliminary

anti-dumping duties of 19-88% on Chinese tyres, depending on the producer, which

was later confirmed by the US International Trade Commission in Jul-15. Demand

from the US (China’s biggest export market) has slackened.

16 February 2017

CEAT

Consequently, China’s tyre industry is trying to sustain itself by thrusting its

manufacturing produce into fast-growing developing economies such as India. The

yuan devaluation has led to Chinese TBRs ~30% cheaper than such tyres

manufactured in India. Domestic manufacturers strongly believe that a huge chunk

of growth in replacement demand has been captured by such Chinese imports.

Imports of truck and bus radial tyres in FY15-16 rose 64% YoY, while in the

replacement segment, the market share of China’s manufacturers has risen from

15% in FY14 to 30% in FY16. Thus, despite a growing market, domestic players are

struggling to gain volume share in the TBR segment in the replacement market,

while Chinese tyres are gaining significant market share.

Exhibit 86: Rising TBR imports in India…

TBR Import(nos)

70%

490,601

FY14

784,498

FY15

1,286,174

FY16

279,734

Apr-May17

Source: Industry,MOSL

FY14

FY15

FY16

Apr-May17

Source: Industry,MOSL

30%

YoY(%)

Exhibit 87: …with China contributing a major chunk of it

Chinese contribution(%)

90%

95%

Exhibit 88: Quarterly TBR imports trend

Trend in TBR imports(000 nos)

Growth

Exhibit 89: …Increasing imports proportion

Domestic TBR production(m nos)

Imports(m nos)

Imports as % of domestic TBR

115%

67%

76% 80%

101%

14%

0.8

21%

6.1

1.3

49%

40%

38%

78 156 126 131 168 176 13% 230 302 354 313 317 423

210

5.6

Source: Industry,MOSL

Exhibit 90: Import from countries in T&B segment(FY15)

13%

70%

Exhibit 91: Import from countries in T&B segment(FY16)

3%3%

90%

China

Spain

japan

Thailand

Others

China

Spain

japan

Thailand

Others

Source: Industry,MOSL

16 February 2017

CEAT

In the absence of any anti-dumping duties in India on Chinese tyres, China has been

able to supply TBR at almost the cost of TBB tyres, letting fleet operators upgrade

from TBB to TBR at the cost of TBB. These Chinese TBR imports have earned a

healthy market share of ~35% in the TBR replacement market. Moreover, India’s

inverted duty structure makes it cheaper to import tyres than import natural rubber.

Basic customs duty on import of finished rubber products into India is exempted,

while there is 0-25% duty levied on import of inputs required for their manufacture,

creating inversion in duty structure. Yuan devaluation has worsened the situation as

it has allowed Chinese tyres to be priced very competitively in global markets.

Benign commodity prices to cushion margins

The tyre industry is raw material-intensive, with raw material cost forming ~60% of

sales. Natural rubber and crude oil derivatives (such as synthetic rubber, NTCF,

carbon black and rubber chemicals) are key inputs for the sector. Due to a shortfall

in domestic production of raw materials, tyre manufacturers become dependent on

imports. Given weak commodity prices globally, tyre industry margins have moved

up. Raw material prices continue to be benign – in fact, natural rubber and crude oil

are still trending downward – and should cushion any margin headwinds in the short

term.

Exhibit 92: Breakup of raw materials ( by weight) used in a tyre

Material

Natural Rubber

Carbon Black

NTCF(Nylon tyre cord fiber)

SBR( Styrene Butadiene Rubber)

PBR( Poly Butadiene Rubber)

Chemicals

Others

% of weight

47%

24%

11%

Source: Crisil, MOSL

Exhibit 93: RSS 4 Kottayam spot price trend

250

200

150

100

INR/kg

Exhibit 94: Brent crude trend(USD/bbl)

160.0

140.0

120.0

100.0

80.0

60.0

40.0

20.0

0.0

Source: Bloomberg,MOSL

16 February 2017

CEAT

Exhibit 95: Region-wise Rubber details

(000 tonnes)

Natural Rubber Production

Asia-pacific

EMEA

Americas

Total

Natural Rubber Consumption

Asia-pacific

EMEA

Americas

Total

World NR supply-Demand Surplus/Deficit

World NR Stocks

Synthetic Rubber Production

Asia-pacific

EMEA

Americas

Total

Synthetic Rubber Consumption

Asia-pacific

EMEA

Americas

Total

World SR supply-Demand Surplus/Deficit

World SR Stocks

% SR in Total Rubber Consumption

2014

Year

11,236

564

335

12,135

8,916

1,553

1,712

12,181

(46)

3,181

7,321

3,887

2,970

14,178

7,800

3,537

2,930

14,267

(89)

3,535

54%

2610

153

2,855

2111

392

430

2,933

(78)

3,104

1,817

1,005

750

3,572

1817

1005

750

3,572

3,535

55%

2,411

125

2,634

2,307

399

468

3,174

(540)

2,564

1,849

1,056

784

3,689

2,033

945

775

3,753

(64)

3,471

54%

2015

3,106

155

3,330

2,278

431

427

3,136

194

2,759

1,861

940

759

3,560

1,985

883

765

3,633

(73)

3,397

54%

3,219

166

3,460

2,145

376

384

2,905

555

3,314

1,868

985

786

3,639

1,894

914

795

3,603

3,434

55%

Year

11345

599

334

12,278

8,840

1,597

1,709

12,146

132

3,314

7,395

3,985

3,079

14,459

2016

2,599

160

2,848

2,213

415

413

3,041

(193)

3,119

1,836

1,050

742

3,628

7,845

1,916

3,648

906

3,068

756

14,561

3,578

(102)

3,434

3,484

55%

54%

Source: ISRG

Exhibit 96: Falling rubber prices led to reduced mix of RM cost for tyre manufacturers

70%

RM cost as a % of Total Operating income

74%

71%

67%

65%

63%

56%

FY10

FY11

FY12

FY13

FY14

FY15

FY16

Source: Crisil, MOSL

16 February 2017

CEAT

Key risks

Unabated increase in Chinese imports

Tyre imports from China to India may continue growing at 10-12% over next few

years. Since the Chinese tyre market is facing challenges of overcapacity, slowing

domestic demand and anti-dumping duties in the US, Chinese tyre manufacturers

are flooding the Indian tyre market at distressed prices amid absence of any anti-

dumping duties. This trend is more evident in the T&B radial (TBR) segment since

2W and PV consumers tend to be brand-conscious. Chinese tyre pricing lets fleet

operators upgrade from TBB to TBR at the cost of TBB, and thus Chinese TBR

imports have gained a healthy market share of ~35% in the TBR replacement

market, impacting domestic players. CEAT is relatively insulated from this risk as it

focuses on the passenger segment (2Ws and PVs) where Chinese competition is

much lower.

Growing competition in 2W

CEAT’s strategic decision to focus on the highly profitable 2W segment has paid off,

leading to improvement in operating margin and RoCE. However, competition in the

segment is likely to intensify with the entry of new players like Apollo, Bridgestone

and Balkrishna Tyres. CEAT shall have the early-mover advantage here as the

company identified the B2C segment much ahead of others and has already

captured significant mindshare via extensive marketing. The company also

consistently launches unique products and brands them effectively, making it

difficult for newcomers to gain meaningful incremental market share.

Volatile rubber prices

Volatility in prices of key raw materials like natural and synthetic rubber can impact

margins of the company if it is not able to pass on price increase due to weak

demand. CEAT manages commodity price risk via strategies like market intelligence

to better forecast RM prices for better inventory management, addition of new

vendors, and R&D efforts to develop alternate materials that lower weight without

affecting performance.

Decline in auto OEM sales

Any slowdown in the economy might directly impact demand, which leads to

weaker consumer sentiment and decline in auto OEM sales. The company will be

impacted due to it.

Radialisation in truck & bus segment

Faster-than-expected increase in radialisation in the truck & bus tyre segment may

impact margins. To mitigate this risk, the company is converting its truck & bus bias

capacities into non-truck segments that have higher demand. The focus is also on

penetrating the overseas markets, where acceptability for bias tyres is higher.

16 February 2017

CEAT

Management overview

Anant V Goenka, Managing Director

Anant Goenka holds an MBA degree from the Kellogg School of Management and a

B.Sc. degree in Economics from the Wharton School. Mr. Goenka joined KEC

International (KEC) as Vice President (Corporate), and was in charge of the telecom

business, business development in North America and integrated planning and

monitoring of the transmission and distribution business. Prior to joining KEC, Mr.

Goenka was associated with CEAT Limited as Head of Specialty Tyre Business.

Earlier, Mr. Goenka also worked with Hindustan Unilever, Accenture, Mumbai and

Morgan Stanley, Hong Kong. He has 10 years of work experience and has been the

Chairman of ATMA (Automotive Tyre Manufacturers’ Association) in the year

2013.He is current MD of CEAT Ltd.

Arnab Banerjee, Executive Director – Operations

Arnab Banerjee is the Executive Director – Operations for CEAT. He joined CEAT in

the year 2005 as Vice President, Sales and Marketing. He also oversees all the

manufacturing plants. Prior to his joining CEAT, Mr. Banerjee worked with Marico

and Berger Paints in various sales and marketing domains. Mr. Banerjee has more

than 28 years of experience and has completed his B.Tech degree in Mechanical

Engineering from the Indian Institute of Technology, Kharagpur and Post Graduate

Diploma in Business Management from Indian Institute of Management, Kolkata

with specialization in Marketing.

Manoj Jaiswal, Chief Financial Officer

Manoj Jaiswal is the CFO of CEAT and also responsible for Information Technology,

therefore driving both Financial and Business Excellence. Before joining CEAT, Mr.

Jaiswal spent 17 years in Wipro in various capacities, having joined immediately

after qualifying for his Chartered Accountancy and completing his articleship from

Pricewaterhouse Coopers. Amongst his many roles in Wipro, Mr. Jaiswal was CFO

for the BPO business and thereafter headed the Treasury and Investor Relations

department globally.

Tom Thomas, Executive Director – Technology & Projects

Tom Thomas holds a Bachelor’s degree in Rubber Technology and Engineering from

the University of Cochin and has 40 years of experience in India’s tyre industry. He

was associated with the introduction of passenger radial technology by J K Tyres in

India in 1977 and was responsible for setting up the first all-steel truck/bus radial

facility at Mysore in 1999. He has held key positions including Chairman of Indian

Tyre Technical Advisory Committee, Member Of Indian Rubber Institute, Governing

Council Member of Indian Rubber Manufacturers’ Research Association, Member of

Academic Council of University of Cochin and has been on the guest faculty at

various colleges.

Dilip Modak, Senior Vice President – Manufacturing

Dilip Modak leads the manufacturing for CEAT with plants across four locations –

Mumbai, Nashik, Vadodara and Kochi. He has 30 years of experience in handling

16 February 2017

CEAT

plant operations, sourcing & supply chain management, total quality management,

human resources and various manufacturing/re-engineering projects.

Chandrasekhar Ajgaonkar, SVP – Quality Based Management

Chandrasekhar Ajgaonkar is the Senior Vice President – QBM CEAT and Corporate

Business Excellence Centre – RPG Group. He joined the RPG Group in 2005 as

Corporate Quality Head and from 2011 has been performing the dual role of Head –

QBM CEAT and Corporate Business Excellence Head. Under his leadership, RPG

Group and CEAT have successfully implemented Business Excellence initiatives over

last 10 years. He also oversees the initiatives of Centre of Excellence for the group.

Prior to his joining RPG and CEAT, Mr. Ajgaonkar has worked with Mahindra &

Mahindra, Crompton Greaves, Eicher Tractors and Eicher Consultancy Services in the

operations and TQM domains. He has over 28 years of experience, and has

completed his B.E Mechanical and MMS Master in Management studies from

Mumbai University.

Kumar Subbiah, Senior Vice President – Materials & Outsourcing

Kumar Subbiah joined the company in Feb-15 after spending a little over 20 years

with Unilever & Hindustan Unilever, where he handled various Finance &

Commercial roles in India and outside India. Kumar is a B.Com Graduate from Loyola

College, Chennai. He is also a Chartered Accountant and a Cost Accountant with

professional interests both in finance and supply chain.

16 February 2017

CEAT

Company overview

Background

CEAT, a flagship company of the RPG Group, is the fourth largest tyre manufacturer

in India in terms of revenue (~12% market share), with manufacturing capacity of

>900MT/day (95,000 tyres/day). Originally founded in Italy as Cavi Elettrici e Affini

Torino SpA, CEAT established a manufacturing plant in India in 1958 and was sold to

Pirelli in the 1970s. RPG Enterprises took over Pirelli’s Indian division in 1982 and

also bought rights to the CEAT brand, renaming the company as CEAT Limited. Apart

from automotive tyres, RPG Group has presence in infrastructure, IT,

pharmaceuticals, plantations and power ancillaries.

Among India’s leading tyre manufacturers

With manufacturing facilities at Bhandup (bias tyres), Nashik (bias and radial), Halol

(radial) and Nagpur (2W/3Ws), CEAT’s overall manufacturing capacity stands at

>900MT/day. It operates in India via a robust distribution network of 4,500+

dealers, 33 regional offices, 400+ franchisees and 250+ distributors. The company’s

product portfolio spans across the automotive spectrum; it offers tyres for 2Ws,

3Ws, passenger cars, UVs, trucks & buses and OTR (off-the-road) vehicles. CEAT and

Associated CEAT Holdings Company Private Limited (ACHL) have formed a JV

company – CEAT-Kelani Holding Company Private Limited – which owns and

operates three manufacturing plants in Sri Lanka.

Exhibit 97: Market share of Indian tyre players based on revenue

0.2

MRF

Apollo Tyres

JK Tyres

Ceat

TVS Srichakra

Goodyear

Kesoram

Others

Source: Industry, MOSL

Exhibit 98: CEAT-Revenue mix by market channel(FY16)

Exhibit 99: CEAT-Revenue mix by market segment(FY16)

Truck and Bus

Speciality / Farm

LCV

Two Wheeler

Passenger Cars

/UVs

Source: Company, MOSL

Replacement

OEM

Exports

Source: Company, MOSL

16 February 2017

CEAT

Exhibit 100: Manufacturing facilities locations

Source: Company, MOSL

16 February 2017

CEAT

Assumptions

Exhibit 101: Assumption sheet

CEAT Ltd

Revenue (INR m)

Truck and Bus

Speciality / Farm

LCV

Two Wheeler

Passenger Cars /UVs

Total product revenues (Net)

Tubes

Sri lanka and other subsidiary revenue

Gross Revenue

Excise Duty

Net Revenue

Growth (%)

Truck and Bus

Speciality / Farm

LCV

Two Wheeler

Passenger Cars /UVs

Total product revenues (Net)

Tubes

Sri lanka and other subsidiary revenue

Gross Revenue

Volume Growth (%)

Truck and Bus

Speciality / Farm

LCV

Two Wheeler

Passenger Cars /UVs

Total

Realisation Growth (%)

Truck and Bus

Speciality / Farm

LCV

Two Wheeler

Passenger Cars /UVs

Net Realisation(%)

Revenue mix(%)

Truck and Bus

Speciality / Farm

LCV

Two Wheeler

Passenger Cars /UVs

FY12

22,772

6,445

6,015

5,156

2,578

42,966

5,310

1,770

50,046

3,519

46,527

18%

38%

39%

54%

29%

28%

14%

44%

29%

-9%

12%

18%

20%

-4%

20%

70%

19%

FY13

24,552

6,138

6,610

6,138

3,777

47,215

5,836

2,155

55,205

4,683

50,522

-5%

10%

19%

47%

10%

22%

10%

-7%

11%

24%

-1%

-4%

18%

FY14

23,913

7,278

8,837

4,679

51,984

6,477

2,498

60,960

5,420

55,540

-3%

19%

10%

44%

24%

10%

11%

16%

10%

-2%

20%

14%

47%

27%

10%

-1%

-3%

-2%

-1%

FY15

22,574

6,987

11,824

5,375

53,747

7,090

2,599

63,436

5,915

57,521

-6%

-4%

34%

15%

-5%

10%

-4%

40%

19%

-1%

-13%

-4%

-3%

FY16

20,493

5,932

7,011

14,561

5,932

53,929

7,281

2,555

63,765

6,624

57,141

-9%

-15%

23%

10%

-2%

-3%

-6%

28%

24%

10%

-7%

-10%

-6%

-4%

-11%

-6%

FY17E

18,690

5,467

6,939

16,243

6,481

53,819

7,864

2,810

64,493

6,707

57,786

-9%

-8%

-1%

12%

10%

-4%

-5%

15%

-5%

-3%

-2%

-3%

-5%

-3%

FY18E

19,250

5,912

7,433

19,239

7,343

59,178

8,808

3,091

71,077

7,392

63,685

18%

13%

10%

12%

10%

15%

10%

FY19E

19,443

6,568

7,733

23,549

8,239

65,532

10,129

3,400

79,060

8,222

70,838

11%

22%

12%

11%

15%

10%

11%

10%

20%

10%

Source: Company, MOSL

16 February 2017

CEAT

Financials and Valuation

Consolidated - Income Statement

Y/E March

Total Income from Operations

Change (%)

Raw Materials

Employees Cost

Power & Fuel

Freight & Delivery Charges

Advertisement Expenses

Excise Duty

Other Expenses

Total Expenditure

% of Sales

EBITDA

Margin (%)

Depreciation

EBIT

Int. and Finance Charges

Other Income

PBT bef. EO Exp.

EO Items

PBT after EO Exp.

Total Tax

Tax Rate (%)

Minority Interest/Share of (profit) from JV

Reported PAT

Adjusted PAT

Change (%)

Margin (%)

FY13

55,205

10.3

34,758

2,830

1,732

1,611

743

4,683

4,469

50,826

92.1

4,380

7.9

806

3,573

1,808

177

1,942

-277

1,665

463

27.8

1,202

1,402

582.0

2.5

FY14

60,960

10.4

35,657

3,109

1,808

1,994

754

5,420

5,639

54,381

89.2

6,579

10.8

865

5,713

1,720

140

4,133

-100

4,032

1,324

32.8

-4

2,712

2,780

98.3

4.6

FY15

63,436

4.1

35,333

3,789

1,734

2,385

1,042

5,915

6,435

56,632

89.3

6,804

10.7

934

5,870

1,319

226

4,777

-61

4,716

1,576

33.4

-33

3,172

3,213

15.6

5.1

FY16

63,765

0.5

31,689

4,088

1,643

2,609

1,185

6,624

7,704

55,542

87.1

8,223

12.9

1,075

7,148

907

299

6,539

-114

6,425

1,978

30.8

-18

4,465

4,544

41.4

7.1

FY17E

64,493

1.1

33,369

4,192

1,677

2,644

1,290

6,707

7,868

57,747

89.5

6,746

10.5

1,344

5,401

816

199

4,784

-9

4,775

1,476

30.9

-330

3,630

3,636

-20.0

5.6

(INR Million)

FY18E

71,077

10.2

36,818

4,478

1,777

2,843

1,422

7,392

8,529

63,258

89.0

7,818

11.0

1,543

6,275

708

219

5,786

1,782

30.8

-350

4,354

19.8

6.1

FY19E

79,060

11.2

40,479

4,981

2,056

3,162

1,581

8,222

9,092

69,573

88.0

9,487

12.0

1,683

7,804

360

241

7,685

2,366

30.8

-370

5,688

30.6

7.2

Consolidated - Balance Sheet

Y/E March

Equity Share Capital

Total Reserves

Net Worth

Minority Interest

Total Loans

Deferred Tax Liabilities

Capital Employed

Gross Block

Less: Accum. Deprn.

Net Fixed Assets

Goodwill on Consolidation

Capital WIP

Total Investments

Curr. Assets, Loans&Adv.

Inventory

Account Receivables

Cash and Bank Balance

Loans and Advances

Curr. Liability & Prov.

Account Payables

Other Current Liabilities

Provisions

Net Current Assets

Appl. of Funds

E: MOSL Estimates

FY13

342

7,476

7,855

10,377

786

19,019

22,231

6,719

15,512

216

274

15,463

5,588

6,628

1,121

2,125

12,451

7,925

3,699

828

3,011

19,019

FY14

360

9,927

10,286

363

11,738

1,148

23,535

23,041

7,617

15,424

227

823

18,927

7,536

7,545

1,679

2,167

11,865

6,888

3,949

1,028

7,061

23,535

FY15

405

16,418

16,823

327

7,750

1,250

26,149

24,183

8,590

15,593

215

2,290

3,124

17,002

6,801

7,050

1,236

1,914

12,075

6,583

4,059

1,434

4,927

26,149

FY16

405

20,241

20,645

322

6,704

1,567

29,239

30,395

9,412

20,984

205

3,043

403

16,747

6,621

6,188

1,073

2,866

12,143

6,435

4,511

1,197

4,604

29,239

FY17E

405

23,404

23,809

313

6,904

1,567

32,593

36,829

10,756

26,073

205

1,609

403

18,663

8,227

7,068

144

3,225

14,360

7,911

5,159

1,290

4,303

32,593

(INR Million)

FY18E

405

27,182

27,586

313

4,904

1,567

34,370

40,329

12,299

28,030

205

1,609

403

19,550

8,319

7,400

278

3,554

15,427

8,319

5,686

1,422

4,124

34,370

FY19E

405

32,116

32,520

313

1,104

1,567

35,505

43,829

13,983

29,847

205

1,609

403

20,497

8,768

7,581

194

3,953

17,055

9,149

6,325

1,581

3,441

35,505

16 February 2017

CEAT

Financials and Valuation

Ratios

Y/E March

Basic (INR)

EPS

Cash EPS

BV/Share

DPS

Payout (%)

Valuation (x)

P/E

Cash P/E

P/BV

EV/Sales

EV/EBITDA

Dividend Yield (%)

FCF per share

Return Ratios (%)

RoE

RoCE

RoIC

Working Capital Ratios

Fixed Asset Turnover (x)

Asset Turnover (x)

Inventory (Days)

Debtor (Days)

Creditor (Days)

Leverage Ratio (x)

Current Ratio

Interest Cover Ratio

Net Debt/Equity

FY13

34.6

54.6

194.2

3.4

13.3

FY14

68.7

90.1

254.3

9.1

15.8

FY15

79.4

102.5

415.9

10.0

14.3

13.7

10.6

2.6

0.8

7.4

0.9

111.0

23.7

17.4

19.3

2.6

2.4

1.4

4.5

0.2

FY16

112.3

138.9

510.4

11.5

12.0

9.7

7.8

2.1

0.8

6.0

1.1

-4.8

24.3

19.9

22.4

2.1

2.2

1.4

7.9

0.3

FY17E

89.9

123.1

588.6

9.9

13.3

12.1

8.8

1.8

0.8

7.5

0.9

-8.8

16.4

13.3

13.5

1.8

2.0

1.3

6.6

0.3

FY18E

107.6

145.8

682.0

11.8

13.3

10.1

7.4

1.6

0.7

6.2

1.1

70.5

16.9

14.2

13.9

1.8

2.1

1.3

8.9

0.2

FY19E

140.6

182.2

804.0

15.5

13.3

7.7

6.0

1.4

0.6

4.7

1.4

104.3

18.9

16.8

16.5

1.8

2.2

1.2

21.6

0.0

0.3

123.5

19.2

14.2

13.9

2.5

2.9

1.2

2.0

1.2

0.8

12.9

30.6

19.5

19.9

2.6

1.6

3.3

1.0

Consolidated - Cash Flow Statement

Y/E March

OP/(Loss) before Tax

Depreciation

Interest & Finance Charges

Direct Taxes Paid

(Inc)/Dec in WC

CF from Operations

Others

CF from Operating incl EO

(Inc)/Dec in FA

Free Cash Flow

(Pur)/Sale of Investments

Others

CF from Investments

Issue of Shares

Inc/(Dec) in Debt

Interest Paid

Dividend Paid

Others

CF from Fin. Activity

Inc/Dec of Cash

Opening Balance

Closing Balance

FY13

1,665

806

1,501

-382

1,955

5,545

299

5,844

-847

4,998

303

-477

-3,076

-1,526

-40

-1

-4,643

724

397

1,121

FY14

4,032

865

1,720

-891

-3,736

1,991

-23

1,968

-1,446

523

370

-1,018

109

1,387

-1,723

-167

-392

558

1,121

1,679

FY15

4,716

934

1,319

-1,123

1,714

7,560

-73

7,487

-2,999

4,488

-2,990

-5,989

3,934

-3,994

-1,476

-404

-1,940

-442

1,679

1,237

FY16

6,425

1,075

907

-1,822

332

6,918

-56

6,862

-7,054

-192

-1

2,929

-4,127

-927

-979

-994

-2,899

-164

1,237

1,072

FY17E

4,784

1,344

617

-1,476

-628

4,642

-5,000

-358

199

-4,801

200

-816

-483

330

-770

-928

1,072

144

FY18E

5,786

1,543

489

-1,782

314

6,350

-3,500

2,850

219

-3,281

-2,000

-708

-577

350

-2,936

134

144

278

(INR Million)

FY19E

7,685

1,683

119

-2,366

599

7,720

-3,500

4,220

241

-3,259

-3,800

-360

-754

370

-4,544

-83

278

194

16 February 2017

REPORT GALLERY

RECENT INITIATING COVERAGE REPORTS

Disclosures

This document has been prepared by Motilal Oswal Securities Limited (hereinafter referred to as Most) to provide information about the company (ies) and/sector(s), if any, covered in the report and may be distributed

CEAT

its

by it and/or

affiliated company(ies). This report is for personal information of the selected recipient/s and does not construe to be any investment, legal or taxation advice to you. This research report does not constitute an offer, invitation or

inducement to invest in securities or other investments and Motilal Oswal Securities Limited (hereinafter referred as MOSt) is not soliciting any action based upon it. This report is not for public distribution and has been furnished to

you solely for your general information and should not be reproduced or redistributed to any other person in any form. This report does not constitute a personal recommendation or take into account the particular investment

objectives, financial situations, or needs of individual clients. Before acting on any advice or recommendation in this material, investors should consider whether it is suitable for their particular circumstances and, if necessary, seek

professional advice. The price and value of the investments referred to in this material and the income from them may go down as well as up, and investors may realize losses on any investments. Past performance is not a guide for

future performance, future returns are not guaranteed and a loss of original capital may occur.

MOSt and its affiliates are a full-service, integrated investment banking, investment management, brokerage and financing group. We and our affiliates have investment banking and other business relationships with a some

companies covered by our Research Department. Our research professionals may provide input into our investment banking and other business selection processes. Investors should assume that MOSt and/or its affiliates are

seeking or will seek investment banking or other business from the company or companies that are the subject of this material and that the research professionals who were involved in preparing this material may educate investors

on investments in such business . The research professionals responsible for the preparation of this document may interact with trading desk personnel, sales personnel and other parties for the purpose of gathering, applying and

interpreting information. Our research professionals are paid on twin parameters of performance & profitability of MOSt.

MOSt generally prohibits its analysts, persons reporting to analysts, and members of their households from maintaining a financial interest in the securities or derivatives of any companies that the analysts cover. Additionally, MOSt

generally prohibits its analysts and persons reporting to analysts from serving as an officer, director, or advisory board member of any companies that the analysts cover. Our salespeople, traders, and other professionals or affiliates

may provide oral or written market commentary or trading strategies to our clients that reflect opinions that are contrary to the opinions expressed herein, and our proprietary trading and investing businesses may make investment

decisions that are inconsistent with the recommendations expressed herein. In reviewing these materials, you should be aware that any or all of the foregoing among other things, may give rise to real or potential conflicts of interest.

MOSt and its affiliated company(ies), their directors and employees and their relatives may; (a) from time to time, have a long or short position in, act as principal in, and buy or sell the securities or derivatives thereof of companies

mentioned herein. (b) be engaged in any other transaction involving such securities and earn brokerage or other compensation or act as a market maker in the financial instruments of the company(ies) discussed herein or act as an

advisor or lender/borrower to such company(ies) or may have any other potential conflict of interests with respect to any recommendation and other related information and opinions.; however the same shall have no bearing

whatsoever on the specific recommendations made by the analyst(s), as the recommendations made by the analyst(s) are completely independent of the views of the affiliates of MOSt even though there might exist an inherent

conflict of interest in some of the stocks mentioned in the research report Reports based on technical and derivative analysis center on studying charts company's price movement, outstanding positions and trading volume, as

opposed to focusing on a company's fundamentals and, as such, may not match with a report on a company's fundamental analysis. In addition MOST has different business segments / Divisions with independent research

separated by Chinese walls catering to different set of customers having various objectives, risk profiles, investment horizon, etc, and therefore may at times have different contrary views on stocks sectors and markets.

Unauthorized disclosure, use, dissemination or copying (either whole or partial) of this information, is prohibited. The person accessing this information specifically agrees to exempt MOSt or any of its affiliates or employees from,

any and all responsibility/liability arising from such misuse and agrees not to hold MOSt or any of its affiliates or employees responsible for any such misuse and further agrees to hold MOSt or any of its affiliates or employees free

and harmless from all losses, costs, damages, expenses that may be suffered by the person accessing this information due to any errors and delays. The information contained herein is based on publicly available data or other

sources believed to be reliable. Any statements contained in this report attributed to a third party represent MOSt’s interpretation of the data, information and/or opinions provided by that third party either publicly or through a

subscription service, and such use and interpretation have not been reviewed by the third party. This Report is not intended to be a complete statement or summary of the securities, markets or developments referred to in the

document. While we would endeavor to update the information herein on reasonable basis, MOSt and/or its affiliates are under no obligation to update the information. Also there may be regulatory, compliance, or other reasons that

may prevent MOSt and/or its affiliates from doing so. MOSt or any of its affiliates or employees shall not be in any way responsible and liable for any loss or damage that may arise to any person from any inadvertent error in the

information contained in this report. MOSt or any of its affiliates or employees do not provide, at any time, any express or implied warranty of any kind, regarding any matter pertaining to this report, including without limitation the

implied warranties of merchantability, fitness for a particular purpose, and non-infringement. The recipients of this report should rely on their own investigations.

This report is intended for distribution to institutional investors. Recipients who are not institutional investors should seek advice of their independent financial advisor prior to taking any investment decision based on this report or for

any necessary explanation of its contents.

Most and it’s associates may have managed or co-managed public offering of securities, may have received compensation for investment banking or merchant banking or brokerage services, may have received any compensation

for products or services other than investment banking or merchant banking or brokerage services from the subject company in the past 12 months.

Most and it’s associates have not received any compensation or other benefits from the subject company or third party in connection with the research report.

Subject Company may have been a client of Most or its associates during twelve months preceding the date of distribution of the research report

MOSt and/or its affiliates and/or employees may have interests/positions, financial or otherwise of over 1 % at the end of the month immediately preceding the date of publication of the research in the securities mentioned in this

report. To enhance transparency, MOSt has incorporated a Disclosure of Interest Statement in this document. This should, however, not be treated as endorsement of the views expressed in the report.

Motilal Oswal Securities Limited is registered as a Research Analyst under SEBI (Research Analyst) Regulations, 2014. SEBI Reg. No. INH000000412

Pending Regulatory inspections against Motilal Oswal Securities Limited:

SEBI pursuant to a complaint from client Shri C.R. Mohanraj alleging unauthorized trading, issued a letter dated 29th April 2014 to MOSL notifying appointment of an Adjudicating Officer as per SEBI regulations to hold inquiry and

adjudge violation of SEBI Regulations; MOSL replied to the Show Cause Notice whereby SEBI granted us an opportunity of Inspection of Documents. Since all the documents requested by us were not covered we have requested to

SEBI vide our letter dated June 23, 2015 to provide pending list of documents for inspection.

List of associate companies of Motilal Oswal Securities Limited -Click

here to access detailed report

Analyst Certification

The views expressed in this research report accurately reflect the personal views of the analyst(s) about the subject securities or issues, and no part of the compensation of the research analyst(s) was, is, or will be directly or

indirectly related to the specific recommendations and views expressed by research analyst(s) in this report. The research analysts, strategists, or research associates principally responsible for preparation of MOSt research receive

compensation based upon various factors, including quality of research, investor client feedback, stock picking, competitive factors and firm revenues

Disclosure of Interest Statement



Analyst ownership of the stock



Served as an officer, director or employee

CEAT

A graph of daily closing prices of securities is available at www.nseindia.com and http://economictimes.indiatimes.com/markets/stocks/stock-quotes

Regional Disclosures (outside India)

This report is not directed or intended for distribution to or use by any person or entity resident in a state, country or any jurisdiction, where such distribution, publication, availability or use would be contrary to law, regulation or which

would subject MOSt & its group companies to registration or licensing requirements within such jurisdictions.

For Hong Kong:

This report is distributed in Hong Kong by Motilal Oswal capital Markets (Hong Kong) Private Limited, a licensed corporation (CE AYY-301) licensed and regulated by the Hong Kong Securities and Futures

Commission (SFC) pursuant to the Securities and Futures Ordinance (Chapter 571 of the Laws of Hong Kong) “SFO”. As per SEBI (Research Analyst Regulations) 2014 Motilal Oswal Securities (SEBI Reg No. INH000000412) has

an agreement with Motilal Oswal capital Markets (Hong Kong) Private Limited for distribution of research report in Kong Kong. This report is intended for distribution only to “Professional Investors” as defined in Part I of Schedule 1 to

SFO. Any investment or investment activity to which this document relates is only available to professional investor and will be engaged only with professional investors.” Nothing here is an offer or solicitation of these securities,

products and services in any jurisdiction where their offer or sale is not qualified or exempt from registration. The Indian Analyst(s) who compile this report is/are not located in Hong Kong & are not conducting Research Analysis in

Hong Kong.

For U.S

Motilal Oswal Securities Limited (MOSL) is not a registered broker - dealer under the U.S. Securities Exchange Act of 1934, as amended (the"1934 act") and under applicable state laws in the United States. In addition MOSL is not a

registered investment adviser under the U.S. Investment Advisers Act of 1940, as amended (the "Advisers Act" and together with the 1934 Act, the "Acts), and under applicable state laws in the United States. Accordingly, in the

absence of specific exemption under the Acts, any brokerage and investment services provided by MOSL, including the products and services described herein are not available to or intended for U.S. persons.

This report is intended for distribution only to "Major Institutional Investors" as defined by Rule 15a-6(b)(4) of the Exchange Act and interpretations thereof by SEC (henceforth referred to as "major institutional investors"). This

document must not be acted on or relied on by persons who are not major institutional investors. Any investment or investment activity to which this document relates is only available to major institutional investors and will be

engaged in only with major institutional investors. In reliance on the exemption from registration provided by Rule 15a-6 of the U.S. Securities Exchange Act of 1934, as amended (the "Exchange Act") and interpretations thereof by

the U.S. Securities and Exchange Commission ("SEC") in order to conduct business with Institutional Investors based in the U.S., MOSL has entered into a chaperoning agreement with a U.S. registered broker-dealer, Motilal Oswal

Securities International Private Limited. ("MOSIPL"). Any business interaction pursuant to this report will have to be executed within the provisions of this chaperoning agreement.

The Research Analysts contributing to the report may not be registered /qualified as research analyst with FINRA. Such research analyst may not be associated persons of the U.S. registered broker-dealer, MOSIPL, and therefore,

may not be subject to NASD rule 2711 and NYSE Rule 472 restrictions on communication with a subject company, public appearances and trading securities held by a research analyst account.

For Singapore

Motilal Oswal Capital Markets Singapore Pte Limited is acting as an exempt financial advisor under section 23(1)(f) of the Financial Advisers Act(FAA) read with regulation 17(1)(d) of the Financial Advisors Regulations and is a

subsidiary of Motilal Oswal Securities Limited in India. This research is distributed in Singapore by Motilal Oswal Capital Markets Singapore Pte Limited and it is only directed in Singapore to accredited investors, as defined in the

Financial Advisers Regulations and the Securities and Futures Act (Chapter 289), as amended from time to time.

In respect of any matter arising from or in connection with the research you could contact the following representatives of Motilal Oswal Capital Markets Singapore Pte Limited:

Varun Kumar

Varun.kumar@motilaloswal.com

Contact : (+65) 68189232

Office Address:21 (Suite 31),16 Collyer Quay,Singapore 04931

16 February 2017

Motilal Oswal Securities Ltd

Motilal Oswal Tower, Level 9, Sayani Road, Prabhadevi, Mumbai 400 025

Phone: +91 22 3982 5500 E-mail: reports@motilaloswal.com