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MUMBAI: Tyre producer Ceat Ltd had an aggressive capex lined up for FY19-23, aimed at boosting manufacturing capacities by practically 50%. With demand headed south, it’s now time to go a bit gradual on these plans.
Of course, a big a part of the capex has already been incurred and it is smart to watch for demand to catch up.
With its greenfield plant in Chennai operational within the March quarter of fiscal 2020, the corporate is effectively poised to cater to incremental demand. However, the coronavirus disaster will delay the ramp up of those new capacities as demand revival may take time.
“At full capacity, the plant (Chennai) can produce 28,500 passenger car radial tyres per day (TPD) and 2,500 two-wheeler TPD. Given new capacities, CEAT is now well positioned to capture the revival of the two-wheeler/ passenger vehicles/commercial vehicles market from FY22,” analysts at Dolat Capital Market Pvt Ltd stated on 31 July.
In the June quarter, substitute demand got here to the rescue of Ceat. It compensated for the lacklustre tyre demand from the unique gear producer (OEM) phase. However, the administration expects substitute demand to weaken going forward. Ceat has four-five new OEM launches deliberate and is optimistic about strengthening its presence within the phase and expects restoration from Q4FY21, the administration has stated.
Secondly, a big a part of this capex is debt-funded. Given weak demand, a extremely levered steadiness sheet would imply elevated strain on return ratios and profitability. Ceat’s gross debt at the tip of June quarter stood at ₹1,998 crore, a rise of ₹70 crore sequentially.
According to brokerage home Prabhudas Lilladher, Ceat’s cumulative capex of ₹1,200 crore in FY22/23 compares with ₹2,600 crore in FY19/20. So, with lowered capex depth, the corporate is probably going to flip free cash move constructive from FY22/23, it stated in a report on 30 July.
In brief, within the present scenario, a waning capex depth is constructive for Ceat as it might higher its free cash move place. But analysts anticipate the inventory’s valuations to improve solely after capex-led advantages begin coming in. Going by Bloomberg’s estimates, Ceat is buying and selling at a one-year ahead value to earnings a number of of 19 occasions, which is a reduction to a few of its friends.
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