Ceat shares hit a 4 year high on a positive outlook; the stock has increased by 70% in 3 months.

For years Ceat has been known for its tough and rugged tyres fit to traverse any possible terrain. In the last few months, the stock price of Ceat has also exhibited a similar quality. Shares of Ceat may have fallen on Friday, but between June 2022 and September 2022, the stock price of Ceat nearly doubled from Rs980 to Rs1,785. As of date, the stock is trading at Rs1,595 and in the current rally, the stock also touched a 4-year high. What exactly has resulted in this sharp rally in the stock and is the story sustainable in the future too.

The rally in Ceat has been largely on the back of a very healthy business outlook. On the one hand the improvement in the fortunes of the auto sector has put tyre companies in a sweet spot. Ceat has benefitted from the rapid growth in the OEM market as well as the replacement market. During the current rally, the stock of Ceat actually jumped to a level last seen in May 2018, more than 4 years back. The all-time high price was recorded by the stock in January 2018, when Ceat had touched a record price of Rs2,030 on the NSE.

The rally in the stock has been quite frenetic. In the last 3 months, the stock zoomed more than 70% at a time when the overall benchmark indices gained by just about 14%. In short Ceat has outperformed the index nearly 5 times over. The tyre demand is benefit from the revenge buying post the pandemic. Among the key factors driving the interest in the CEAT stock are the gradual easing of pandemic-led curbs, strong pent-up demand from original equipment manufacturers (OEMs) and from the replacement market segment.

If the top line story has been helped by domestic markets, even the export markets have been very conducive for CEAT. For instance, export sales are expected to improve meaningfully as the US and Europe have persisted with high tariffs on imports from China. This has opened a major market for the Indian tyre companies in the export market and that has come as a blessing in disguise for Ceat. Currently, Ceat already has a leadership position in two-wheeler segment and is expanding market share in other segments too.

In a nutshell, Ceat will strive to gain more market share in Passenger Car Radial tyres (PCR) and Truck and Bus Radial (TBR). This is a market that is fast growing, lucrative and there is an opportunity for Ceat Ltd to expand its footprint and presence. It is not just the top line, but even there are bottom line triggers for the Ceat stock. With global commodity prices easing, the rapid cool off in key raw materials prices are likely to contribute to improved margins from the third quarter of FY23 also. In short a number of sweet spots in place!

The projection numbers appear to be quite optimistic at this point of time. For FY24, Ceat is looking at double digit operating margins. The company is currently trading at 6 times EV/EBITDA based on estimated FY24 numbers. That is reasonable valuations if compared with the peer group. Most brokers do expect a combination of healthy demand and commodity deflation to drive recovery from the second quarter onwards. The consensus view on the market is of further strength in the counter from the current levels.

However, there the sceptics. This is a rather margin intensive business and has been extremely cyclical in the past. Also, auto demand in India is still below the levels achieved more than 6 years back, so the saturation in demand has been quite intense. Even if one looks at the rally, it does look like the best may be in the price and upsides from here would be calibrated. The price performance from here on, may not be as exciting as the business outlook that is being painted by most of the analysts on the street.