MUMBAI: Tyre producer Ceat Ltd experienced an aggressive capex lined up for FY19-23, aimed at boosting production capacities by virtually 50%. With demand headed south, it’s now time to go a little bit gradual on these designs.
Of course, a massive portion of the capex has already been incurred and it makes perception to wait for demand to catch up.
With its greenfield plant in Chennai operational in the March quarter of fiscal 2020, the business is effectively poised to cater to incremental demand. Nonetheless, the coronavirus disaster will delay the ramp up of these new capacities as demand revival could get time.
“At entire capacity, the plant (Chennai) can create 28,500 passenger vehicle radial tyres for each day (TPD) and 2,500 two-wheeler TPD. Specified new capacities, CEAT is now nicely positioned to capture the revival of the two-wheeler/ passenger automobiles/industrial autos market from FY22,” analysts at Dolat Capital Market Pvt Ltd said on 31 July.
In the June quarter, replacement demand arrived to the rescue of Ceat. It compensated for the lacklustre tyre demand from the authentic equipment maker (OEM) segment. However, the management expects replacement demand to weaken likely in advance. Ceat has four-five new OEM launches prepared and is optimistic about strengthening its existence in the section and expects restoration from Q4FY21, the management has mentioned.
Secondly, a large component of this capex is financial debt-funded. Specified weak demand, a extremely levered balance sheet would mean amplified stress on return ratios and profitability. Ceat’s gross financial debt at the conclude of June quarter stood at ₹1,998 crore, an boost of ₹70 crore sequentially.
According to brokerage residence Prabhudas Lilladher, Ceat’s cumulative capex of ₹1,200 crore in FY22/23 compares with ₹2,600 crore in FY19/20. So, with lessened capex depth, the company is possible to convert free cash flow positive from FY22/23, it stated in a report on 30 July.
In short, in the latest condition, a waning capex depth is optimistic for Ceat as it would greater its free cash flow position. But analysts assume the stock’s valuations to strengthen only soon after capex-led rewards start out coming in. Heading by Bloomberg’s estimates, Ceat is investing at a just one-year forward price to earnings many of 19 occasions, which is a discount to some of its friends.
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