In its latest research coverage, Motilal Oswal has reiterated a BUY rating on CEAT Ltd., assigning a revised target price of Rs 3,818, indicating a 15% upside from the current levels. The recommendation hinges on CEAT’s strategic orientation toward high-margin segments, cost efficiencies, and a broadened export footprint. Despite macro challenges, the company reported a resilient fourth quarter, aided by operating leverage and improved pricing. With the Camso integration expected to accelerate overseas growth and replacement demand holding firm, CEAT is positioning itself as a formidable long-term player in the tyre industry.

Robust Q4 Performance Defies Expectations

CEAT’s Q4FY25 earnings beat estimates as the company delivered a 100bps QoQ jump in EBITDA margin to 11.3%, outperforming street expectations of 10.5%. This expansion was fueled by moderating input costs and strategic price hikes in the 2W and PV segments.

Net revenue for the quarter stood at Rs 34.2 billion, marking a 14.3% YoY growth.

Replacement and OEM segments remained strong, while exports faced global headwinds.

The segmental revenue mix was led by truck/bus tyres (30%), followed by 2/3W (27%) and PV (21%).

International Expansion and Camso Synergies

Management remains optimistic about the Camso acquisition, which is set to enhance CEAT’s revenue mix:

Post-integration, international business contribution is projected to rise to 25% from the current 19%.

Camso, with 90% of its sales from North America and Europe, brings exposure to high-value OHT products.

Despite concerns over a 44% tariff from Sri Lanka to the US, management expects regulatory relief and notes that 50% of Camso’s revenue comes from lower-duty track products.

Domestic Growth Anchored by Replacement Demand

CEAT continues to draw strength from the domestic market:

The replacement segment accounts for 53% of the company’s sales and remains a key growth engine.

Management anticipates steady volume growth in 2W and TBR replacement categories, supported by an expanding rural footprint.

In FY25, volume growth stood at 7%, led by high single-digit gains in replacement tyres.

Forward-Looking Capex Strategy and Balance Sheet

Prudent investments remain a cornerstone of CEAT’s growth strategy:

The company spent Rs 9.5 billion on capex in FY25 and plans Rs 9-10 billion for FY26.

A Rs 4 billion investment in Nagpur is aimed at raising capacity by 30% by FY28.

Gross debt stood at Rs 19.3 billion, with a D/E ratio of 0.44x and D/EBITDA at 1.3x. Management expects leverage to rise near Rs 30 billion post-Camso deal closure.

Cost Tailwinds Expected from Raw Material Softening

A significant decline in raw material prices could further improve profitability:

Global rubber prices have dropped by USD 200/MT, now trading at a discount to Indian rates.

Crude has also corrected to around USD 65 per barrel, benefitting derivative-linked raw materials.

If this trend continues, CEAT anticipates improved gross margins in the coming quarters.

Strategic Shift Toward High-Margin Segments

CEAT is actively reshaping its portfolio mix to focus on high-value categories:

Revenue contribution from strategic segments (2W, PV, OHT) rose to 63% in FY25 from 20% in FY10.

The company introduced premium Z-rated radial tyres, EV-focused Calm tech, and run-flat tyres—marking a shift toward higher ASP products.

CEAT is also capitalizing on EV growth with 30% share in 2W EVs and 20% in PV EVs.

Financial Snapshot and Earnings Outlook

Motilal Oswal has revised its earnings estimates upward for FY26 and FY27, citing better-than-expected margin outlook:

Key Risks and Considerations

While the long-term outlook is positive, investors should monitor a few uncertainties:

Tariff exposure in the US market through Camso’s Sri Lankan base could pressure margins if unresolved.

Rising debt post-acquisition may elevate risk metrics unless EBITDA scales proportionately.

Export headwinds from Latin America and US remain a near-term drag.

Long Term Investor View: Tactical Buy with Strategic Long-Term Upside

CEAT offers a compelling investment case backed by margin tailwinds, strategic export diversification, and a disciplined capex approach. Its leadership in the 2W and growing presence in PV and OHT segments, coupled with improving operating leverage, supports valuation re-rating. Motilal Oswal’s fair value of Rs 3,818 is derived using an 18x multiple on FY27E EPS, reinforcing the stock’s upside potential for long-term investors.