CEAT Ltd : Back to profits!

What a year it has been for CEAT! CEAT had a very eventful year 2008. Starting from the relisting of the company in early 2008, CEAT first posted a profit of around Rs. 76 crores, owing to sale of property, with the price of the share skyrocketing to levels of Rs. 175. It declared dividend of Rs. 4 per share, and then the recession effects started. The auto industry was hit, demand was down, rubber prices spiked, and all hell broke loose. Orders from OEMs (Original Equipment Manufacturers) slumped.

Meanwhile, CEAT had opted for a makeover, focusing on the youth to trigger growth at a period when exports were taking the big hit. It took the route of advertising in cricket tournaments, reality TV shows (Roadies), and what not - to engrave the impression of a tyre maker for the youth; a clear attempt to boost sales in a new market. Betting on rapid truck radialisation in India, it is also pacing up the setting up of a radial tyre plant at Vadodara. Slogging through Layoffs on two occasions, CEAT came of age in the last quarter where it finally posted profit before exceptional items of Rs 36.5 crores in Q408, an increase of 70 % over the same quarter last year, and an operating profit increase of 42% YoY.

Hopefully, this should be a sign for a good, new beginning for CEAT tyres. According to the recent press release, high efficiency and exemplary working capital management has yielded to high profitability. EBIDTA margin to net sales surged to 9.2% from 7% up by 220 basis points. As far as the Baroda plant is concerned, it is expected to start production in 18 months. Keeping thrust on exports and increasing focus on domesting markets is what is needed out of a tyre manufacturing company of such size ideally. I suggest a long term investment into CEAT, entering at the current level (or waiting for Rs 30-35 levels if you foresee a market crash).

The negatives for this company are in the form of the volatility of the rubber markets, death of the big US automakers (Chrysler, GM), and the recession as a whole. But, at the same time I am opinionating big time on the exports and domestic (new tyre segments) prospects of the company in any case. This may just prove to be a multibagger!

Kudos! And Happy Earnings!