Ceat

India | Auto Ancillary 20 October 2016
Initiating Coverage
CEAT
Mix and Match Rating: Buy
Big payoff: strategic shift toward 2W & PV to improve mix Target Price: INR 1,539
Upside: 20%
Over the past five years, CEAT (CEAT IN) has strategically shifted its
CMP: INR 1,285 (as on 19 October 2016)
focus from the low margin truck & bus segment towards two-wheelers
Global Markets Research
(2W) and passenger vehicles (passenger cars & utility vehicles). As a Key data
result, revenue contribution from the PV+2W segment has nearly Bloomberg /Reuters Code CEAT IN/CEAT BO
trebled, rising to an all-time high of 38% in FY16 from 14% in FY11, Current /Dil Shares O/S (mn) 40/40
resulting in a best-in-class, industry EBITDA CAGR of 53% over FY11- Mkt Cap (INR bn/USD mn) 53/788
16. The 2W & PV tyre segments score high on our Porters Five Forces Daily Volume (3M NSE Avg) 1,174,621
Framework, outpacing the truck & bus segment. With the focused Face Value (INR) 10
1 USD = INR 66.8
strategy bearing fruits, we believe contribution from the high margin,
Note: *as on 19 October 2016; Source: Bloomberg
high ROCE segment (2W & PV) is expected to increase to ~46% by
FY19E from the current ~38%. CEAT has successfully increased its Price & Volume
market share in UVs from <4% in FY11 to 15% as on FY16.
1,600 5
Deep inroads: strong distribution network covering 600 districts 1,350
4
CEAT has met with considerable success, given its focus on 3

1,100
penetrating the passenger segment with a strong distribution 2
network. It has set up a distribution model, involving distributors, 850
1
dealers, franchisees, shop-in-shop and dedicated CEAT Shoppe retail 600 0
outlets. Its extensive network currently comprises 4,300 dealers, 250 Oct-15 Jan-16 Apr-16 Jul-16 Oct-16
distributors, 400 franchisees and 270 exclusive outlets, covering more Vol. in mn (RHS) CEAT (LHS)
than 600 districts. Source: Bloomberg
Shareholding (%) Q3FY16 Q4FY16 Q1FY17 Q2FY17

Focused capital allocation, lucrative FCF yield
Promoter 50.8 50.8 50.8 50.8
CEAT is slated to undertake a prudent capital allocation strategy with Institutional Investor 33.3 34.0 31.4 33.4
~80% of incremental spend to be focused on the 2W & PV segment. Other Investor 5.3 4.9 6.8 6.1
The 2W asset turnover is almost double and PV is ~1.5x than that of General Public 10.6 10.3 11.1 9.8
the truck & bus segment. A large part of the capex cycle is expected to Source: BSE
end by FY17, the benefits of which are expected to accrue over FY18- Price performance (%) 3M 6M 12M
19. We therefore expect free cash flow (FCF) to grow by 8x over FY17- Sensex 0.8 8.8 3.0
19E to INR 5.8bn. This implies an FCF yield of ~5% in FY18E and ~11% CEAT 48.2 14.6 2.9
in FY19E. MRF 45.3 37.8 20.7
Apollo Tyres 33.6 25.6 8.9
Valuation Source: Bloomberg
We initiate on CEAT with a Buy rating and a TP of INR 1,539 on 11x Price performance (%)
weighted average FY18/19E EPS of INR 138. The company is slowly 120
transforming from a pure commodity play into a branding
Rebased to 100
100
powerhouse by focusing on segments with better pricing power.
While volatility of raw materials (especially natural rubber [NR]) 80
would remain a concern, given the global demand-supply scenario, 60

we believe a sustained uptick in NR prices is a low probability. We
40
forecast an EPS CAGR of 10% over FY16-19E (FY17E EPS decline: Oct-15 Jan-16 Apr-16 Jul-16 Oct-16
18%, FY18-19E CAGR of 27%). Sustained rise in NR and rapid CEAT Sensex
market share loss in 2W due to new entrants remain key risks. Source: Bloomberg
Key Financials
YE Revenue YoY EBITDA EBITDA Adj PAT YoY Fully DEPS RoE RoCE P/E EV/EBITDA
March (INR mn) (%) (INR mn) margin(%) (INR mn) (%) (INR) (%) (%) (x) (x)
FY16 54,941 (0.9) 7,899 14.4 4,639 52.1 114.7 25.8 28.7 11.2 7.3
FY17E 58,612 6.7 7,318 12.5 3,798 (18.1) 93.9 17.6 21.1 13.7 8.0
FY18E 65,794 12.3 8,960 13.6 5,080 33.8 125.6 19.9 23.1 10.2 6.3
FY19E 71,958 9.4 10,509 14.6 6,119 20.4 151.3 20.0 23.8 8.5 4.9
Note: pricing as on 19 October 2016; Source: Company, Elara Securities Estimate
Jay Kale jay.kale@elaracapital.com +91 22 6164 8507

Vijay Gyanchandani vijay.gyanchandani@elaracapital.com +91 22 6164 8511
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CEAT
Valuation trigger Investment summary

Start of Phase 2 at Contribution from 2W Strategy shifts to 2W & PV segments
the Halol plant & & PV poised to
ramping up 2W at improve to ~45%
from ~38%
with better pricing power
Nagpur by H1FY18
1,600 Strong distribution network across 600

2
districts focused on brand-building
1,400
1
Robust capital allocation in higher
1,200
ROCE segments (2W & 4W) for a 40%
1,000
increase in capacity
Better insulated than peers to China

800
imports with the lowest exposure to
600 the TBR segment.
Apr-16
Apr-17
Feb-16
Feb-17
Nov-15
Nov-16
Jul-16
Jul-17
Jan-16
Jan-17
May-16
May-17
Mar-16
Mar-17
Dec-15
Dec-16
Oct-15
Aug-16
Sep-16
Aug-17
Sep-17
Oct-16
Oct-17
Jun-16
Jun-17
EPS CAGR of 10% over FY16-19E on
the back of 9% revenue CAGR.
Source: Bloomberg, Elara Securities Estimate
Valuation trigger
Valuation overview 1. Start of Phase 2 at the Halol plant &

FY16 FY17E FY18E FY19E
ramping up 2W at Nagpur by H1FY18
Adjusted net profit (INR mn) 4,639 3,798 5,080 6,119 2. Contribution from 2W & PV poised to
Adjusted DEPS (INR) 114.7 93.9 125.6 151.3 improve to ~46% from ~38%
YoY growth (%) (18.1) 33.8 20.4 Key risks
Target P/E (x) 11.0 Sustained increase in natural rubber
Target price (INR) 1,539 prices to impact margin
CMP (INR) 1,285
Faster ramp-up and success of new
Upside (%) 20 entrants in 2W could increase pricing
Note: pricing as on 19 October 2016; Source: Elara Securities Estimate pressure
Inability to ramp-up TBR volume after
Valuation driver - Share of 2W & PV to increase in revenue mix launching new brand, and sustained
over FY16-19
increase in radial tyres from China
100 7 7 6 7 6 5 5 5 5
90 8 8 7 7 7 6 5 5 5 Our assumptions
13 13 13 13 12
80 13 14 14 14 Revenue CAGR of 9% over FY16-19E,
70 4 6 8 9 10 11 13 14 15
10 led by a volume CAGR of 11%
(%)
60 12 13
17 22 27
50 29 29 31 2W & 4W segment contribution to
40
30 58
increase to 46% over FY16-19E
53 52 46
20 42 38 36 35 33 EBITDA CAGR of 11% and a PAT CAGR
10
0 of 10% over FY16-19E
FY17E
FY18E
FY19E
FY11
FY12
FY13
FY14
FY15
FY16
Truck and Bus 2W PC/ UV LCV Speciality Farm
Source: Company, Elara Securities Estimate
2 Elara Securities (India) Private Limited

CEAT
Standalone Financials (YE March)

Income Statement (INR mn) FY16 FY17E FY18E FY19E Revenue & margin growth trend
Net Revenues 54,941 58,612 65,794 71,958 80,000 14.4 14.6 15
EBITDA 7,899 7,318 8,960 10,509
70,000 13.6 14
Add:- Non operating Income 472 400 400 400
OPBIDTA 8,370 7,718 9,360 10,909
(INR mn)
(%)
Less :- Depreciation & Amortization 1,004 1,373 1,416 1,533 60,000 12.5 13
EBIT 7,366 6,345 7,944 9,376

50,000 12
Less:- Interest Expenses 892 997 789 758
PBT 6,475 5,349 7,155 8,618
40,000 11
Less :- Taxes 1,835 1,551 2,075 2,499 FY16 FY17E FY18E FY19E
Auto Ancillary
Adjusted PAT 4,639 3,798 5,080 6,119 Net Revenues (LHS) EBITDA Margin (RHS)
Add/Less: - Extra-ordinaries (114) - - -
Reported PAT 4,525 3,798 5,080 6,119
Balance Sheet (INR mn) FY16 FY17E FY18E FY19E
Share Capital 405 405 405 405
Adjusted profit growth trend
Reserves 19,508 22,775 27,370 32,922
Net worth 19,913 23,179 27,774 33,327 8,000 80
52.1
Borrowings 6,119 7,119 7,169 7,219 6,000 60
33.8
Deferred Tax (Net) 1,474 1,547 1,625 1,706 4,000 40
20.4
(INR mn)
Other liabilities 1,132 1,079 1,079 1,079
(%)
2,000 20
Total Liabilities 28,638 32,924 37,646 43,330
0 0
Gross Block 28,665 34,965 36,965 39,965
Less:- Accumulated Depreciation 9,039 10,412 11,828 13,362 (2,000) (20)
(18.1)
Net Block 19,626 24,553 25,137 26,603 (4,000) (40)
Add:- Capital work in progress 2,135 2,135 2,135 2,135 FY16 FY17E FY18E FY19E
Adjusted PAT (LHS) PAT Growth (RHS)
Investments 2,679 2,679 2,679 2,679
Net Working Capital 1,032 201 1,477 9 Source: Company, Elara Securities Estimate
Cash and Cash Equivalents 242 467 2,538 7,391
Other Assets 2,925 2,890 3,682 4,513
Total Assets 28,638 32,924 37,646 43,330 Return ratios
Cash Flow Statement (INR mn) FY16 FY17E FY18E FY19E
30 28.7
Cash profit adjusted for non cash items 6,319 5,767 6,885 8,010
Add/Less : Working Capital Changes 377 1,226 (1,893) 831
23.8
25 23.1
Operating Cash Flow 6,696 6,992 4,992 8,841 25.8
(%)
21.1
Less:- Capex (6,585) (6,300) (2,000) (3,000)
Free Cash Flow 111 692 2,992 5,841 20
Financing Cash Flow (2,896) (433) (1,321) (1,388) 19.9 20.0
Investing Cash Flow (6,859) (5,900) (1,600) (2,600) 17.6
15
Net change in Cash (3,059) 659 2,071 4,853 FY16 FY17E FY18E FY19E
Ratio Analysis FY16 FY17E FY18E FY19E ROE (%) ROCE (%)
Income Statement Ratios (%)
Revenue Growth (0.9) 6.7 12.3 9.4
EBITDA Growth 23.7 (7.4) 22.4 17.3
PAT Growth 52.1 (18.1) 33.8 20.4
EBITDA Margin 14.4 12.5 13.6 14.6
Net Margin 8.4 6.5 7.7 8.5
Return & Liquidity Ratios
Net Debt/Equity (x) 0.3 0.3 0.2 (0.0)
ROE (%) 25.8 17.6 19.9 20.0
ROCE (%) 28.7 21.1 23.1 23.8
Per Share data & Valuation Ratios
Diluted EPS (INR/Share) 114.7 93.9 125.6 151.3
EPS Growth (%) 52.1 (18.1) 33.8 20.4
DPS (INR/Share) 11.5 9.0 12.0 14.0
P/E Ratio (x) 11.2 13.7 10.2 8.5
EV/EBITDA (x) 7.3 8.0 6.3 4.9
EV/Sales (x) 1.1 1.0 0.9 0.7
Price/Book (x) 2.6 2.2 1.9 1.6
Dividend Yield (%) 0.9 0.7 0.9 1.1
Note: pricing as on 19 October 2016; Source: Company, Elara Securities Estimate
Elara Securities (India) Private Limited 3

CEAT
CEAT
Making the right moves

Strategic focus on 2W & PV trebles this segment revenue contribution in five years
Strong distribution network and brand recall across 600 districts
Doubling of 2W & PV capacity to aid in capitalizing market growth
Big payoff from improving mix Exhibit 3: CEAT revenue contribution is the highest
in 2W & PV segment and the lowest in truck & bus
2W & PV revenue contribution grows ~3x since FY11
100 1 5 2
CEAT has shifted its focus from the truck & bus segment 8 7 12
7 9 13
to 2W & PV (passenger cars & utility vehicles), which is a 80 8 4
6
17 15
consumer-facing segment. Its revenue contribution from 27
60 38
this segment has nearly trebled, increasing to 38% in
(%)
FY16 from 14% in FY11. Further, the threat of imports 40
66 67
from China has been more on the truck & bus segment 50
20 38
than in 2W & PV. Revenue contribution from the truck &
bus segment as on FY16 is the lowest while it is the 0
MRF Apollo CEAT JK tyre
highest from 2W & PV compared to large domestic Stdalne
peers. Trucks 2W+PV Farm LCV Others
Exhibit 1: 2W & PV segment contribution increases Note: FY16; Source: Company, Elara Securities Research
2,400bp over FY11-16
UV races ahead at volume CAGR of 13% in FY11-16
100 7 6 6 5 Within PV, CEAT is focused on the fast-growing UV
8 8 6
7 7 6 8 7
80 14 13 13 space where its market share has moved from <4% in
13 14 14
FY11 to 15% in FY16. The UV segment has posted a
14 18 21
(%)
60 26 32 38 volume CAGR of 13% over FY11-16. Increased focus on

40
this segment would result in capitalizing on replacement
58 53
growth opportunity.
52 46
20 42 38
Exhibit 4: UV volume contribution to the overall PV
0 industry on an increasing trend
FY11 FY12 FY13 FY14 FY15 FY16
Truck & Buses 2W+PV LCV Farm Speciality 100
13 14 19 21 21 21
9 25
80 9
9 8 7 6 6
Source: Company, Elara Securities Research
60
(%)
Exhibit 2: leading to best-in-class industry EBITDA

40 79 77 73
CAGR of ~53% over FY11-16 72 71 72 68
20
JK Tyres 29 0
FY11
FY12
FY13
FY14
FY15
FY16
FY17YTD
TVS Srichakra 27
Apollo Tyres 24 Cars MPV UV
MRF 30 Source: Company, Elara Securities Research
CEAT 53
0 10 20 30 40 50 60
(%)

CEAT
Deep inroads via distribution network Exhibit 8: There are 270 CEAT Shoppe retail outlets
Focused increase in brand spends

With a distribution network of 4,300 dealers, 250
distributors, 400 franchisees and 270 exclusive outlets, all
of which cover 600 districts, CEAT is making deep
inroads into the domestic market. With strong branding,
CEAT commands a premium over other manufacturers,
especially in 2W where it is only second to MRF, with a
market share of ~27%.
Auto Ancillary
The company has thus embarked on an increase in its
advertisement and marketing expenses to build a strong
Source: Company annual report, 2016
brand around the consumer segments, which would
eventually result in improved pricing power. Exhibit 9: Distribution network also includes multi-
brand outlets (MBO)
Exhibit 5: CEAT focuses on brand building
1,200 2.5
2.1
1,000 1.7 2.0
800 1.3 1.4 1.3
(INR mn)
1.5
(%)
600 0.9
1.0
400
200 0.5
0 0.0
Advertisement Expense (LHS) % of sales (RHS)

Exhibit 6: CEAT dealerships see a steady rise
5,000
Exhibit 10: Shop-in-shop another popular format
4,000 4,300
(nos)
3,000 3,500
2,610
2,000
1,000
0
2012 2015 2016

Exhibit 7: CEAT tyres are available in ~600 districts
700
600
600
500
(nos)
400 464
300
200
212
100
0
2012 2015 2016

CEAT
Exhibit 11: Some of the recent new launches in FY16: 70 products launched
CEAT fuel CEAT CEAT CEAT MILAZE CEAT PRO CEAT Win
Smart (4W) CZAR (4W) MILAZE (4W) Tubeless (2W) Series (2W) Series (TBR)
Focused capital allocation Exhibit 12: New capacity expansion aims to add 340
tonnes per day of tyres by FY18
Capacity in 2W & PV to double over FY16-18
Capacity Already
Category Further expansion
CEAT is expanding capacity across its 2W, PV and OHT expansion commissioned
segments. The company is poised to grow overall Aims to achieve 120
Nagpur tonnes/day production
revenue contribution from its 2W & PV segment to ~46% plant
2W 20 tonnes/day
by Q1FY18 or 1.2mn
by FY18E from 38% in Q1FY17. It has guided for tyres per month
additional capacity, primarily in the 2W & PV space. The Aims to achieve 120
Halol
company has targeted total capex of INR 6.9bn in FY17 PV 40 tonnes/day tonnes/day or 350k-
Phase 2
400k tyres per month
where it plans to increase 2W capacity from the current
Initially commence 40
1.2mn tyres per month (outsourced) to 2.4mn tyres per tonnes/day production
Ambernath
month (additional capacity to come up at Nagpur). OHT NA by Q4FY17 eventual
Plant
ramp-up to 100 tonnes/
Similarly, in PVs company plans to increase capacity by day
350-400k from current 250-300k per month.
The company also plans to foray into the off-road Exhibit 13: CEAT OEM revenue CAGR of 23% over
highway (OHT) tyre segment by investing INR 3.3bn for FY11-16
phase 1 capacity expansion of 40 tonnes per day, which
14,000
will be ramped up to 100 tonnes per day by FY18E with
12,000
an additional investment of INR 2.7bn. The OHT segment
is again a high margin segment which depicts the 10,000
(INR mn)
companys prudent capital allocation strategy. 8,000
The 2W and PV segment enjoys higher margin, RoCE 6,000

and asset turnover ratios than the T&B segment. Further, 4,000
it contains lower natural rubber content than T&B,
2,000
which results in much more resilient margins in an event
of volatile natural rubber prices. 0
Higher OEM penetration to aid replacement demand
CEAT posted an OEM segment revenue CAGR of 23%
over FY11-16. Its presence in the OEM space has given
rise to sustained replacement demand. Our channel
checks suggest ~25-30% of customers generally replace
tyres of the same brand fitted by OEM. CEAT recently
won orders from OEMs, such as HMSI, Renault and
Suzuki Motorcycle.
Some successful models where CEAT has recently won

OEM orders include Renault Kwid, M&M TUV 300, RE
Himalayan, Honda Navi, Bajaj V15, Hero Splendor
ismart110

CEAT
Exhibit 14: 2W & PV segment scores high in Porters Five Forces Framework
Tyre type
2W PV Truck & Bus Comments
8 6 4
Herfindahl Hirschman Index of
Competitive
2W is the highest compared to PV
intensity
and truck & bus segment
7 6 4
Imports from China are the lowest
Threat of new
in 2W, followed by PV and truck &
Auto Ancillary
entrants
bus segment
9 9 9
Threat of
No substitute for a tyre in a
substitute products
vehicle
or services
7 6 3
Consumer-facing and fewer firms
Bargaining power
in a segment aid in bargaining
with customers
power
5 5 5 Raw material prices same across

Bargaining power segments; composition though
with suppliers would differ for different
segments
7 6 5
Overall rating
Imports from China bigger threat to TBR Exhibit 15: China imports surge in the TBR segment
During FY14-16, imports of truck-bus radial (TBR) tyres 25 300
surged 97%, and China held 96% of overall market share, 20 250
200
('000 nos)
(USD mn)
according to ATMA. With this, China has won a market 15

share of ~35-40% in the TBR segment in India. However, 150
10
our channel checks suggest in the brand-conscious 100
5 50
passenger car radial (PCR) tyre segment and 2W tyre
segment, imports from China make up less than 10% of 0 0
Feb-15
Feb-16
Oct-14
Oct-15
Dec-14
Apr-15
Jun-15
Dec-15
Apr-16
Jun-16
Aug-15
Aug-16
Oct 16 YTD
market share.
TBR total value (LHS) TBR total quantity (RHS)
Source: Automotive Tyre Manufacturers Association (ATMA), Elara Securities

Research

CEAT
Getting the mix right

Indias tyre market geared towards trucks while globally preference is for PV
Radialization trend in tyres picks up for MHCV
Inverted duty structure makes domestic companies less competitive
India sells more tyres for truck & bus Exhibit 18: Revenue pie of tyre manufacturers
Indias tyre space is a ~INR 530bn industry (USD 8bn) in Apollo

FY16. Of this, the truck & bus segment comprises ~55% Others, Tyres, 17%
25%
(by value) of total tyre market while PV & light
commercial vehicles (LCV) constitute 22%, according to
ATMA. However, globally the story is different: truck & JK Tyres,
12%
bus account for ~28% while PV makes up 58% of overall Goodyear
India, 4%
revenue. The others segment includes 2W (higher in TVS
India than globally), and farm & specialty tyres. Srichakra,
4%
Exhibit 16: Trucks generate the most revenue in India MRF, 27% CEAT, 11%
while PV dominate globally
70 Note: FY16; Source: Company, Elara Securities Research
60
Radialization picks up among MHCV
50
The domestic medium-to-heavy commercial vehicles
(%)
40
(MHCV) industry is nearing the tipping point of
30
radialization. The OEM segment is ~72% radialized while
20
the replacement segment is ~44%, according to industry
10 sources. Domestic PV is ~99% radialized. The TBR OEM
0 segment is expected to be ~86% radialized by FY20 and
Truck & buses PV/LCV Others the replacement segment at ~72% by FY20.
Global India
Exhibit 19: Radialization uptrend in truck & bus
Note: FY16; Source: Company, Elara Securities Research
100 84 86 88
Exhibit 17: Indias tyre industry overview 78 81
80 72
Companies (no) 39 61
(%)
51 77
Plants (no) 60 60 72
42 67
Turnover (INR bn) 530 34 34 60
40 25 53
Exports (INR bn) 105 44
20 6 33
Production (mn) 146.1 26
19 22
Exports (mn) 8.68 0 8 11 17
2017P
2018P
2019P
2020P
2021P
2009
2010
2011
2012
2013
2014
2015
2016
Imports (mn) 9.6

Source: ATMA, Elara Securities Research
OEM Replacement
Domestic manufacturers comprise 71% industry sales Source: Industry sources
The top domestic manufacturers account for ~71% of Replacement segment forms bulk of industry revenue
total tyre industry revenue as on FY16. MRF is the leader,
The replacement tyre segment makes up ~61% of
followed by Apollo Tyres, JK Tyres and CEAT. Among
industry revenue while the OEM tyre segment is 30%.
global manufacturers, Michelin, Bridgestone, Goodyear,
The rest is from exports.
Continental and Yokohama have a sizeable presence in
India.

CEAT
Exhibit 20: Tyre replacement period Exhibit 23: Raw material composition of a tyre
Vehicles Tyre replacement period Others
Chemicals 3%
MHCV 6-8 months
PBR 5%
Cars & UV 3-4 years 5%
Natural
Two-wheelers 2-3 years SBR Rubber
5% 36%
LCV 1-2 years
Tractors (front tyre) 1-2 years NTCF
11%
Tractors (back tyre) 2-3 years
Source: CRISIL, Elara Securities Research
Carbon Synthetic
Investment of INR 357bn underway in tyre industry
Auto Ancillary
Black Rubber
In line with growth in the domestic auto sector, the tyre 24% 11%
sector also has expanded capacity pan-India. With Note: FY16; Source: CRISIL, Elara Securities Research
domestic demand as well as radialization levels
Inverted duty hurts competitive
improving, several leading tyre manufacturers have
planned capacity expansion, involving cumulative positioning
investment of more than INR 357bn in recently Indias tyre industry needs imported natural rubber to
commissioned and ongoing investments. manufacture tyres for three key reasons: 1) to bridge the
demand-supply gap as domestic NR production is
Exhibit 21: Fresh capacity and investment in different
inadequate, 2) quality-specific requirement of new
segments
technology, driven by TBR tyres, and 3) maintain
Specialty
Projects TBR 2W/3W Others international competitiveness in tyre exports. However,
PCR +LT & OTR
(000) (units) (units) (tonnes)
(tonnes) the industry is further shackled by an inverted duty
Recently structure. Imported tyres attract a customs duty of just
466 1,826 450 - 8.7
commissioned
10% while imported natural rubber attracts a duty of
Greenfield 103 1,552 1,129 82 -
25% or INR 30/kg, whichever is lower. This duty is the
Brownfield 264 822 300 6.3 67
highest among any natural rubber consuming or
Total 833 3,900 1,879 89 75 producing country.
Source: ATMA, Elara Securities Research
Exhibit 24: Indias NR duty structure vs other nations
Exhibit 22: Total investments in the tyre industry
Major NR producing countries Major NR consuming countries
Projects Total investment (INR bn)
Countries Customs duty (%) Countries Customs duty (%)
Recently commissioned 125
20% or 1,200
Greenfield 102 Thailand 0 China
Yuan/tonne
Brownfield 130 Malaysia 0 US 0
Total 357 Vietnam 0 Russia 0
Source: ATMA, Elara Securities Research Indonesia 0 Japan 0
Natural rubber key raw material in tyre-making Combodia 7 Mexico 0
Around 47% of the raw material used in a tyre is made Sri Lanka 15 India
25% or INR 30/kg
whichever is lower
up of rubber out of which natural rubber is ~36% and
synthetic rubber is ~11%. Other raw materials include 25% or INR 30/kg
India
whichever is lower
carbon black, Nylon tyre cord fabric, SBR and PBR in
which prices are mainly crude oil price linked.

CEAT
Set for a long drive

Initiate with a Buy rating and a TP of INR 1,539
FCF to increase ~8x over FY17-19E; lucrative FCF yield of 11% on FY19E
Sustained uptick in natural rubber prices unlikely
Initiate with a Buy rating Sustained uptick in NR prices unlikely

CEATs sustained efforts to transition into a brand We believe a structural increase in natural rubber prices
powerhouse has started to bear fruit, with a best-in-class is unlikely, given higher production than consumption of
industry EBITDA CAGR of ~53% over FY11-16. Higher natural rubber in recent years amounting to surplus
capital allocation towards 2W & PV segment, which has stock upto ~15% of 2015 consumption. With demand in
better pricing power, would hold it in good stead in China expected to remain subdued, natural rubber prices
terms of a resilient margin and ROCE. It would be better are unlikely to move up in a sustained manner.
off than most industry peers in the event of volatile raw
Exhibit 27: Global NR production higher than
material prices. With this focused strategy starting to
consumption, leading to excess stock & benign prices
bear fruit and FCF yield upwards of 10% on FY19E, we
13,000
assign a premium multiple of 11x (vs the past five-year
median P/E of ~10x) based on a FY18-19E average EPS 12,000
(tonnes)
of INR 138. We initiate coverage with a Buy rating and a
11,000
price target of INR 1,539.
10,000
Exhibit 25: Median P/E of ~10x for past five years
9,000
2,000
30x 8,000
1,500 25x 2008 2009 2010 2011 2012 2013 2014 2015
20x Production Consumption
(INR)
1,000 15x Source: Company, Elara Securities Research

10x
500
Improved mix driving earnings growth
0 Revenue CAGR of 9% over FY16-19E
Oct-11
Oct-12
Oct-13
Oct-14
Oct-15
Oct-16
Oct-17
Apr-11
Apr-12
Apr-13
Apr-14
Apr-15
Apr-16
Apr-17
Apr-18
We expect a revenue CAGR of 9% over FY16-19E, driven

by increased contribution from the 2W & PV segment.
The 2W space is likely to post a revenue CAGR of 15%
Source: Company, Bloomberg, Elara Securities Estimate
and the PV segment is expected to report a revenue
FCF to improve sharply over FY18-19 CAGR of 20% during the same period. This would result
Most of the companys capex spend is expected to be in the PV+2W segment revenue contribution to increase
completed in FY17 through internal accruals. The to ~46% by FY19E from ~38% in FY16, improving mix.
benefits of these are expected to accrue over FY18-19 Exhibit 28: Rise in PV+2W segment revenue adds to
wherein FCF is expected to increase to INR 3bn in FY18E overall growth
and INR 5.8bn in FY19E. 80 20
Exhibit 26: FCF to improve after completion of capex 60 12.3 15
9.7 9.4
cycle in FY17
(INR bn)
40 6.7 10
7,000 3.5
(%)
20 5
6,000 0 0
(INR mn)
5,000 (20) (0.9) (5)

4,000 (40) (10)
FY14
FY15
FY16
FY17E
FY18E
FY19E
3,000
2,000
Revenues (LHS) YoY (RHS)
1,000
0
FY14 FY15 FY16 FY17E FY18E FY19E

CEAT
Exhibit 29: Share of 2W & PV to increase in revenue Exhibit 31: EBITDA margin to inch up closer to 15%
mix over FY16-19 16
14.4 14.6
100 7 7 6 7 6 5 5 5 5
8 8 7 7 7 6 5 5 5
13.6
(%)
80 13 13 13 13 12 14
13 14 14 14
4 6 8 9 10 11 13 14 15 12.5
10
(%)
60 12 13 17 22 27 11.5 11.5
29 29 31 12
40
58 53 52
20 46 42 38 36 35 33
10
FY17E
FY18E
FY19E
FY14
FY15
FY16
0
Auto Ancillary
FY11
FY12
FY13
FY14
FY15
FY16
FY17E
FY18E
FY19E
Truck and Bus 2W PC/ UV LCV Speciality Farm Source: Company, Elara Securities Estimate
Source: Company, Elara Securities Estimate Exhibit 32: EBITDA per tonne to increase over FY18-19
30,000
EBITDA CAGR of 10% over FY16-19E
29,000
We expect an EBITDA CAGR of 10% over FY16-19E. (INR) 28,000
While we expect EBITDA to contract by 7% in FY17E, it is 27,000
expected to grow by 22% in FY18E and 17% in FY19E. 26,000
Higher natural rubber prices and lower utilization in 25,000
recently commissioned plants are likely to dent EBITDA 24,000
margin in FY17. But the improving mix in the 2W & PV 23,000
segment is expected to improve EBITDA margin to 13.6% 22,000
in FY18E and 14.6% in FY19E.
FY17E
FY18E
FY19E
FY14
FY15
FY16
With the roll-out of GST, CEAT is expected to benefit from
the expected abolishment of octroi and local body tax Source: Company, Elara Securities Estimate
(LBT). This could lead to further margin expansion of
PAT CAGR of 10% over FY16-19E
~80-100bp.
We expect a PAT CAGR of 10% over FY16-19E. FY17E
Exhibit 30: EBITDA growth trend PAT is expected to decline by 18% while FY18-19E CAGR
12 80 is expected to be at 29%
9 51.6 60 Exhibit 33: PAT growth to accelerate over FY18-19

(INR bn)
8 120
6 40 96.8
(%)
23.7 22.4
17.3 6 90
3 20
3.2
(INR bn)
52.1
4 60
(%)
0 0 33.8
(7.4) 15.7 20.4
2 30
(3) (20)
0 0
EBIDTA (LHS) YoY (RHS)
(2) (18.1) (30)
PAT (LHS) YoY (RHS)

CEAT
Exhibit 34: Domestic peer financial comparison

CAGR %
(FY11-16)
Revenue (INR mn)
Apollo Tyres 54,905 81,579 85,117 87,117 89,673 87,016 9.6
Apollo Tyres (consolidated) 64,154 72,879 75,566 82,610 80,429 76,376 3.6
JK Tyres 48,301 54,796 54,308 59,511 61,252 58,804 4.0
JK Tyres (consolidated) 88,677 121,533 127,989 134,120 128,154 117,930 5.9
TVS Srichakra 10,909 14,033 14,761 16,710 18,960 20,599 13.6
CEAT 34,689 44,757 48,814 53,548 55,414 54,941 9.6
MRF 85,951 110,611 119,339 126,984 133,631 135,634 9.5
EBITDA (INR mn)
Apollo Tyres 5,252 6,724 9,082 10,337 13,191 15,642 24.4
Apollos Tyres (consolidated) 3,241 2,054 6,161 8,118 8,839 10,937 27.5
JK Tyres 2,769 2,047 4,564 5,784 7,423 9,766 28.7
TVS Srichakra 985 1,249 849 1,224 2,074 3,239 26.9
CEAT 929 2,468 4,080 6,184 6,384 7,899 53.3
MRF 8,347 9,176 15,209 17,505 23,529 28,852 29.6
PAT (INR mn)
Apollo Tyres 1,888 1,821 3,127 4,955 6,469 8,541 35.2
Apollo Tyres (consolidated) 763 774 2,182 3,155 3,755 5,085 46.1
JK Tyres 704 99 1,211 1,713 2,589 4,089 42.2
TVS Srichakra 392 398 142 475 1,038 1,860 36.5
CEAT 222 75 1,063 2,538 2,990 4,525 82.8
MRF 3,344 6,904 7,001 7,621 12,033 15,596 38.5
ROE (%)
Apollo Tyres 11.0 9.2 14.3 19.5 21.5 23.5
Apollo Tyres (consolidated) 20.2 15.7 19.7 25.2 20.3 19.5
JK Tyres 11.6 1.6 17.9 21.9 26.2 32.0
JK Tyres (consolidated) 7.7 0.0 24.6 29.3 26.0 28.8
MRF 23.2 17.5 22.2 24.7 22.0 27.4
CEAT 4.3 1.4 17.0 29.6 23.3 25.8
TVS Srichakra 39.2 31.1 9.1 25.4 43.3 56.8
ROCE (%)
Apollo Tyres 12.8 12.6 17.1 21.5 25.7 29.7
JK Tyres 11.0 7.2 12.5 14.9 16.3 19.6
MRF 23.5 14.8 19.3 23.9 22.4 28.0
CEAT 9.7 11.5 19.7 28.7 25.8 23.8
TVS Srichakra 27.7 25.1 14.5 21.0 33.5 53.0
Net debt-equity (x)
Apollo Tyres 0.8 1.0 1.0 0.7 0.4 0.3
JK Tyres 1.8 2.5 3.1 3.0 2.6 2.1
MRF 0.7 0.7 0.6 0.5 0.4 0.4
CEAT 1.3 1.7 1.6 1.3 0.7 0.4
TVS Srichakra 2.2 2.3 1.8 1.4 1.1 0.5
Note: MRF FY16 financials annualized for 12 months; Source: Elara Securities Research

CEAT
Exhibit 35: Global peer valuation

CMP M Cap. P/E (x) EV/EBITDA (x) ROE (%) EPS
India (INR)
(INR) (INR mn) FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E FY16 FY17E FY18E
Consolidated
Apollo Tyres 212 107,786 10.4 9.9 9.8 5.9 5.8 5.6 18.6 16.4 14.5 21 22 22
JK Tyre & Industries 151 34,215 7.5 6.1 3.8 4.9 4.3 3.3 24.2 23.8 27.8 20 25 39
Standalone
CEAT 1,285 51,991 11.3 13.7 10.2 7.4 8.1 6.4 25.2 17.6 19.6 112 94 123
Balkrishna Industries 1,060 102,415 17.9 16.2 13.5 10.5 9.3 8.4 18.0 18.6 18.7 59 65 79
MRF 50,518 214,256 12.8 12.4 12.3 6.2 6.7 6.3 21.0 18.7 19.0 3,582 3,957 4,066
Auto Ancillary
TVS Srichakra 3,875 29,670 15.6 13.8 13.9 9.82 8.86 7.9 53.6 34.6 30.1 243 276 274
Average 13.5 12.1 10.0 7.1 6.3 5.4 21.1 20.2 19.5
M Cap.
Europe (EUR) CMP CY15 CY16 CY17 CY15 CY16 CY17 CY15 CY16 CY17 CY15 CY16 CY17
(EUR mn)
Continental AG 173 34,601 11.7 10.6 9.9 6.2 5.8 5.4 20.8 19.4 18.0 15 16 17
Michelin 97 17,786 11.9 11.6 10.6 5.3 4.8 4.6 12.3 15.2 15.4 8 8 9
Average 11.8 11.1 10.3 5.8 5.3 5.0 16.6 17.3 16.7
M Cap.
North America (USD) CMP CY15 CY16 CY17 CY15 CY16 CY17 CY15 CY16 CY17 CY15 CY16 CY17
(USD mn)
Goodyear Tire 31 8,165 7.7 7.3 6.4 5.1 4.9 4.9 26.0 23.3 25.5 4 4 5
Average 7.7 7.3 6.4 5.1 4.9 4.9 26.0 23.3 25.5
M Cap.
Japan (JPY) CMP CY15 CY16 CY17 CY15 CY16 CY17 CY15 CY16 CY17 CY15 CY16 CY17
(JPY mn)
Bridgestone Corp 3,830 3,114,182 11.1 10.2 9.7 4.5 4.4 4.3 11.9 12.1 11.8 345 374 396
Sumitomo Rubber 1,627 427,971 8.0 9.1 8.7 5.1 4.9 4.7 12.3 10.0 9.9 203 179 187
Yokohama Rubber 1,714 290,607 12.3 9.0 8.2 5.6 4.7 4.5 6.7 9.2 9.6 139 191 210
Average 10.5 9.4 8.8 5.1 4.7 4.5 10.3 10.5 10.4
M Cap.
South Korea (WN) CMP CY15 CY16 CY17 CY15 CY16 CY17 CY15 CY16 CY17 CY15 CY16 CY17
(WN mn)
Hankook Tire 57,000 7,060,879 8.5 8.4 8.0 5.8 5.6 5.4 14.9 13.4 12.4 6,669 6,758 7,107
Sumitomo Rubber 1,627 427,971 8.0 9.1 8.7 5.1 4.9 4.7 12.3 10.0 9.9 203 179 187
Yokohama Rubber 1,714 290,607 12.3 9.0 8.2 5.6 4.7 4.5 6.7 9.2 9.6 139 191 210
Average 9.6 8.8 8.3 5.5 5.1 4.9 11.3 10.9 10.7
World average 10.6 9.7 8.8 5.7 5.3 4.9 17.1 16.4 16.6
Note: pricing as on 20 October 2016; Source: Bloomberg, Elara Securities Research

CEAT
Risks to our call

Rising natural rubber prices could drag margin China imports play havoc with the TBR segment
The tyre industry is raw materials-intensive, and RM Chinas market share of truck & bus radial tyres has risen
account for ~55% of sales. Natural rubber accounts for from 40% over FY13-14 to 70% during FY14-15. Over
~35-40% of that cost. Indias tyre industry consumes FY15-16, it reached a high of 90%. In terms of
~66% of total NR consumption globally. After hitting actual volume, imported truck & bus radial tyres from
multi-year lows of INR 91 per kg in February 2016, China rose from a monthly average of under 40,000
domestic NR and crude prices have rebounded in the units to 57,000 units, and then to 110,000 units per
past six months to a high of INR 145/kg and again month. This dumping comes at a time when the Truck
correcting to INR 115/kg. Non-availability of NR and an segment is progressing to radial tyres from cross-ply.
increase in global prices (due to concentrated supply Currently, 40% of the industry is radialized while the rest
curtailment measures by global majors) were the key is cross-ply. A China truck or bus radial tyre costs INR
drivers of recent increase in domestic NR prices. The first 13,000 in India, ~30% lower than an India-made tyre at
quarter of a financial year is generally strong for rubber INR 19,000. Hence, increase in imported radials could
prices, as tapping of rubber declines globally, leading to further dent CEATs cross ply volumes and result in
a supply deficit. However, prices tend to retreat from Q2 margin pressure.
& Q3 once output increases. Hence, we expect prices to
Increased competition, especially in 2W segment
moderate a bit in the medium term.
In the past 6-8 months, there have been a number of
Exhibit 36: Correlation between NR prices & CEATs
companies that have entered or announced plans to
EBITDA margin
service the 2W segment (Apollo Tyres, JK Tyres,
25,000 18
Bridgestone & BKT), which was largely ruled by the likes
15
20,000 of MRF, CEAT and TVS Srichakra.
12
(INR/100 kg)
15,000 9 While this ramp-up would be gradual, any faster-than-

(%)
10,000 6 expected acceptance of new entrants and price war

3 initiated by them could result in downside risk to our
5,000
0 estimates.
0 (3)
Q1FY11
Q3FY11
Q1FY12
Q3FY12
Q1FY13
Q3FY13
Q1FY14
Q3FY14
Q1FY15
Q3FY15
Q1FY16
Q3FY16
Q1FY17
Avg NR Prices (LHS) CEAT EBITDA Margin (RHS)

CEAT
Company Description
CEAT is the fourth-largest tyre manufacturer in India in terms of revenue and has been churning out differentiated
products across segments. The company has a strong global presence while the domestic market is serviced
through an extensive distribution network. Leading original equipment manufacturers (OEM) in the country are
catered to by the company directly. Manufacturing operations are carried out through in-house manufacturing
facilities and outsourcing units. A state-of-the-art research & development centre at Halol enables the company to
launch smarter products to fulfill mobility needs of end-consumers. The company has six manufacturing facilities at
Bhandup (bias tyres), Nashik (bias & radial), Halol (radial), Nagpur (2W & 3W), Ambernath (OHT) and Sri Lanka.
Auto Ancillary
Overseas Operations Exhibit 37: CEAT Sri Lanka JV posts robust margin
Sri Lanka 6 30
26.6
25.7
CEATs arm in Sri Lanka is a 50:50 joint venture between 5
22.9 25
CEAT and Kelani Holdings. With a 60 tonnes per day out 4
(INR bn)
20.0
of total market of 120 tonnes per day, it enjoys market
(%)
3 20
leadership of 50% by primarily catering to the 16.7
commercial segment. The company has a strong 2
12.2 15
presence with its distribution network. 1
Bangladesh 0 10
FY12 FY13 FY14 FY15 FY16 FY17YTD
CEAT arm in Bangladesh is a 70:30 joint venture with AK
Revenue EBIDTA EBIDTA margin (RHS)
Khan & Company, with an initial investment of INR
772mn (INR 400-500mn of which is land cost) for the Source: Company, Elara Securities Research
Greenfield manufacturing plant for bias tyres.
Exhibit 38: CEAT manufacturing facilities across India and Sri Lanka
Overall capacity: >1,000 tonnes per day
Halol
Nagpur
Nasik
Bhandup Ambernath
Hyderabad
Operational facilities
Calicut
WIP
Key outsourcing facilities
Sri Lanka
Note: Map not to scale; Source: Company presentation

CEAT
Board of Directors & Management

Anant Goenka, Managing Director Chandrashekhar Ajgaonkar, Senior Vice President
Anant Vardhan Goenka has a masters in business Chandrasekhar Ajgaonkar is the senior vice president
administration from the Kellogg School of Management QBM CEAT and Corporate Business Excellence Centre-
and bachelors in economics from Wharton School. Prior RPG Group. He joined the RPG Group in 2005 as
to joining KEC, Anant also was associated with CEAT as corporate quality head, and from 2011, he performed
head of specialty tyre business. Earlier, he worked with the dual role of Head QBM CEAT and Corporate Business
Hindustan Unilever, Accenture, Mumbai and Morgan Excellence. Under his leadership, the RPG Group and
Stanley, Hong Kong. Anant has total work experience of CEAT successfully implemented business excellence
10 years. In 2013, he was the chairman of Automotive initiatives in the past 10 years. Prior to joining RPG and
Tyre Manufacturers Association (ATMA) and is a CEAT, Chandrashekhar worked with Mahindra &
member of Young Presidents Organization and Mahindra, Crompton Greaves, Eicher Tractors and Eicher
Entrepreneurs Organization in Mumbai. Consultancy Services in the operations and TQM domain.
Arnab Banerjee, Executive Director, Operations He has 28 years of overall experience. Chandrashekhar
Arnab Banerjee is the Executive Director, Operations, at has a bachelors degree in mechanical engineering and a
CEAT. He joined the company in 2005 as vice president, masters degree in management studies from Mumbai
sales and marketing. Under his leadership, CEAT has University.
seen innovations in marketing initiatives, sales & Kumar Subbiah, Senior Vice President
Distribution strategy and seamless supply chain
Kumar Subbiah is the senior vice president materials &
processes over the past 10 years. He also oversees the
outsourcing at CEAT. He joined in February 2015 after
manufacturing plants at CEAT. Prior to joining CEAT,
spending 20 years at Unilever & Hindustan Unilever
Arnab worked at Marico and Berger Paints in various
where he handled various finance & commercial roles in
sales & marketing roles. He has more than 28 years of
India and outside India. Kumar is a chartered accountant
experience. Arnab has a bachelors degree in mechanical
and a cost accountant with professional interests in
engineering from the Indian Institute of Technology,
finance & supply chain.
Kharagpur, and has a post graduate diploma in business
management from Indian Institute of Management, Ram Dilip Modak, Senior Vice President
Kolkata, with specialization in marketing. Ram Modak currently leads the manufacturing at CEAT
Manoj Jaiswal, Chief Financial Officer with plants across four locations: Mumbai, Nashik,
Vadodara and RADO-Kochi. Also, he has led the Center
Manoj Jaiswal is the CFO of CEAT. In addition to finance,
of Excellence in manufacturing of the RPG Group
he is also responsible for information technology. Before
companies. Ram has 30 years of experience handling
joining CEAT, Manoj spent 17 years at Wipro in various
plant operations, sourcing & supply chain management,
roles where he took his first post soon after qualifying for
total quality management, human resources and various
his Chartered Accountancy and completing article-ship
manufacturing & re-engineering projects. Ram has
from Pricewaterhousecoopers. In his 17-year stint at
worked in various roles with industry leaders like
Wipro, Manoj was CFO of the BPO business, and, later
Cummins India and Mahindra & Mahindra.
headed the treasury and investor relations globally. He
has co-steered the BPO business to one of the fastest and
most profitable businesses in the BPO industry along
with the business head. During his tenure as head of
treasury and investor relations, Wipro underwent a
demerger of its non-IT Business segment, and Manoj was
a key member of that initiative.

CEAT
Exhibit 39: Illustration of the tyre manufacturing process, from mixing of RM to vulcanization
Auto Ancillary
Source: Bridgestone website

CEAT
Exhibit 40: Radial vs bias tyres

In a radial tyre, plycords run from bead to bead in a
radial manner and are protected with dual steel belts,
which make tread very stiff. But, in bias tyres, plycords
run diagonally and are protected with nylon breakers.
Source: Bridgestone
Exhibit 41: Shorter braking distance Exhibit 42: Better control
Exhibit 43: Fewer punctures Exhibit 44: Greater resistance to water
Source: Bridgestone

CEAT
Coverage History
1,600
1,400
1
1,200
1,000
Auto Ancillary
800
600
Feb-16
Oct-15
Jan-16
Mar-16
Jul-16
Oct-16
Nov-15
Dec-15
Apr-16
May-16
Jun-16
Aug-16
Sep-16
Not Covered Covered
Date Rating Target Price Closing Price

1 19-Oct-16 Buy INR 1,539 INR 1,285
Guide to Research Rating

BUY Absolute Return >+20%
ACCUMULATE Absolute Return +5% to +20%
REDUCE Absolute Return -5% to +5%
SELL Absolute Return < -5%

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The information contained in this note is of a general nature and is not intended to address the circumstances of any
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21
Disclosures for U.S. Investors

The research analyst did not receive compensation from CEAT Limited.
Elara Capital Inc.s affiliate did not manage an offering for CEAT Limited.
Elara Capital Inc.s affiliate did not receive compensation from CEAT Limited in the last 12 months.
Elara Capital Inc.s affiliate does not expect to receive compensation from CEAT Limited in the next 3 months.
Disclaimer for U.S. Investors

This material is based upon information that we consider to be reliable, but Elara Capital Inc. does not warrant its
completeness, accuracy or adequacy and it should not be relied upon as such.
This material is not intended as an offer or solicitation for the purchase or sale of any security or other financial instrument.
Securities, financial instruments or strategies mentioned herein may not be suitable for all investors. Any opinions expressed
herein are given in good faith, are subject to change without notice, and are only correct as of the stated date of their issue.
Prices, values or income from any securities or investments mentioned in this report may fall against the interests of the
investor and the investor may get back less than the amount invested. Where an investment is described as being likely to
yield income, please note that the amount of income that the investor will receive from such an investment may fluctuate.
Where an investment or security is denominated in a different currency to the investors currency of reference, changes in
rates of exchange may have an adverse effect on the value, price or income of or from that investment to the investor. The
information contained in this report does not constitute advice on the tax consequences of making any particular
investment decision. This material does not take into account your particular investment objectives, financial situations or
needs and is not intended as a recommendation of particular securities, financial instruments or strategies to you. Before
acting on any recommendation in this material, you should consider whether it is suitable for your particular circumstances
and, if necessary, seek professional advice.
Certain statements in this report, including any financial projections, may constitute forward-looking statements. These
forward-looking statements are not guarantees of future performance and are based on numerous current assumptions
that are subject to significant uncertainties and contingencies. Actual future performance could differ materially from these
forward-looking statements and financial information.
22
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India | Auto Ancillary 20 October 2016

CEAT has met with considerable success, given its focus on 3

Shareholding (%) Q3FY16 Q4FY16 Q1FY17 Q2FY17

Valuation Source: Bloomberg

would remain a concern, given the global demand-supply scenario, 60

Jay Kale jay.kale@elaracapital.com +91 22 6164 8507

Valuation trigger Investment summary

1,600 Strong distribution network across 600

Better insulated than peers to China

Valuation overview 1. Start of Phase 2 at the Halol plant &

Truck and Bus 2W PC/ UV LCV Speciality Farm

Source: Company, Elara Securities Estimate

2 Elara Securities (India) Private Limited

Standalone Financials (YE March)

EBIT 7,366 6,345 7,944 9,376

Elara Securities (India) Private Limited 3

Making the right moves

60 26 32 38 volume CAGR of 13% over FY11-16. Increased focus on

Exhibit 2: leading to best-in-class industry EBITDA

Apollo Tyres 24 Cars MPV UV

MRF 30 Source: Company, Elara Securities Research

Source: Company, Elara Securities Research

4 Elara Securities (India) Private Limited

Focused increase in brand spends

Source: Company, Elara Securities Research

Source: Company, Elara Securities Research

Source: Company, Elara Securities Research

Elara Securities (India) Private Limited 5

Source: Company, Elara Securities Research

companys prudent capital allocation strategy. 8,000

The 2W and PV segment enjoys higher margin, RoCE 6,000

Some successful models where CEAT has recently won

6 Elara Securities (India) Private Limited

5 5 5 Raw material prices same across

Source: Company, Elara Securities Research

according to ATMA. With this, China has won a market 15

TBR total value (LHS) TBR total quantity (RHS)

Source: Automotive Tyre Manufacturers Association (ATMA), Elara Securities

Elara Securities (India) Private Limited 7

Getting the mix right

Indias tyre space is a ~INR 530bn industry (USD 8bn) in Apollo

Imports (mn) 9.6

8 Elara Securities (India) Private Limited

Elara Securities (India) Private Limited 9

Set for a long drive

Initiate with a Buy rating Sustained uptick in NR prices unlikely

1,000 15x Source: Company, Elara Securities Research

We expect a revenue CAGR of 9% over FY16-19E, driven

5,000 (20) (0.9) (5)

Source: Company, Elara Securities Estimate

10 Elara Securities (India) Private Limited

9 51.6 60 Exhibit 33: PAT growth to accelerate over FY18-19

Source: Company, Elara Securities Estimate

Elara Securities (India) Private Limited 11

Exhibit 34: Domestic peer financial comparison

12 Elara Securities (India) Private Limited

Exhibit 35: Global peer valuation

Elara Securities (India) Private Limited 13

Risks to our call

15,000 9 While this ramp-up would be gradual, any faster-than-

10,000 6 expected acceptance of new entrants and price war

Avg NR Prices (LHS) CEAT EBITDA Margin (RHS)

Source: Company, Elara Securities Research

14 Elara Securities (India) Private Limited