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Background
The company is 50% equity investor in CEAT-Kelani Joint Venture which manufactures and sells CEAT brand tyres in Sri Lanka and overseas. The JV is the no.1 player in Truck/Bus, 3 wheeler, Agriculral tyres and passenger car/van tyres and no.2 in Motor Cycle tyres in Sri Lanka
Operations of the JV
Production stood at 15,440 MT in FY 2014/15 with a 1% annual compounded growth rate from 2010/11 FY.The company maintained an annual compounded growth rate of 6% for the the same period recording total sales of Rs9.4bn in FY 2014/15. The company embarked on significant operational efficiencies coupled with favourable raw material prices during the same period which has resulted in an improvement in gross margin from 21% in 2010/11 to 34% in 2014/15. The same efficiencies has doubled the JV PAT margin to record 16% in FY 2014/15. Further the borrowings have been reduced by a significant amount to record arround 200mn in FY2014/15 from a high of over Rs1.4bn in FY2011/12 which has significantly reduced the interest cost over the years.
Company Performance
Company recorded a PAT of Rs717mn for FY 2014/15 and a PAT of Rs617mn for 9 months ended 31st Dec 2015. The company has generated an impressive ROE of 24% for FY 2014/15 as well as 9 months ended 31st December 15. The company's balance sheet is near 'zero' debt where 99% of the total assets have been financed through equity.
Future Outlook - Opportunities & Challenges
The CEAT brand has rooted strongly in the domestic market due to its reliability and durability together with relatively lower price compared to other imported brands in Sri Lanka so that domestic volumes will continue to rise.
The global outlook for tyres from sources of origin such as Sri Lanka will be bleak due to substantial supply over demand. Further the prohibitive duties imposed by US Government on chinese tyre imports wil lead China start dumping tyres to alternate markets including Sri Lanka. However the effect of this challenge will be managed through strong domestic volumes coupled with SL Government backing to restrict imports through taxes.
Valuations
The company is likely to record a PAT in excess of Rs850mn for FY 2015/16 (E) and surpass a PAT of Rs1bn in FY 2016/17 (E) with a forward PE of 6.4x based on 2015/16 earnings and a forward PE of 5.4x based on 2016/17 earnings @ the current market price of Rs70. if you value the stock even for a 50% discount to the PE of manufacturing sector this stock should be worth a minimum of Rs120/- by next year. Further with their policy of paying 20% of their profits as dividends the shareholders can expect an annual dividend in excess of 2 rupees for the next two financial years.
Recommendation
Strong BUY @ current price levels and take advantage from the current depressed market sentiments.
Thanks
The company is 50% equity investor in CEAT-Kelani Joint Venture which manufactures and sells CEAT brand tyres in Sri Lanka and overseas. The JV is the no.1 player in Truck/Bus, 3 wheeler, Agriculral tyres and passenger car/van tyres and no.2 in Motor Cycle tyres in Sri Lanka
Operations of the JV
Production stood at 15,440 MT in FY 2014/15 with a 1% annual compounded growth rate from 2010/11 FY.The company maintained an annual compounded growth rate of 6% for the the same period recording total sales of Rs9.4bn in FY 2014/15. The company embarked on significant operational efficiencies coupled with favourable raw material prices during the same period which has resulted in an improvement in gross margin from 21% in 2010/11 to 34% in 2014/15. The same efficiencies has doubled the JV PAT margin to record 16% in FY 2014/15. Further the borrowings have been reduced by a significant amount to record arround 200mn in FY2014/15 from a high of over Rs1.4bn in FY2011/12 which has significantly reduced the interest cost over the years.
Company Performance
Company recorded a PAT of Rs717mn for FY 2014/15 and a PAT of Rs617mn for 9 months ended 31st Dec 2015. The company has generated an impressive ROE of 24% for FY 2014/15 as well as 9 months ended 31st December 15. The company's balance sheet is near 'zero' debt where 99% of the total assets have been financed through equity.
Future Outlook - Opportunities & Challenges
The CEAT brand has rooted strongly in the domestic market due to its reliability and durability together with relatively lower price compared to other imported brands in Sri Lanka so that domestic volumes will continue to rise.
The global outlook for tyres from sources of origin such as Sri Lanka will be bleak due to substantial supply over demand. Further the prohibitive duties imposed by US Government on chinese tyre imports wil lead China start dumping tyres to alternate markets including Sri Lanka. However the effect of this challenge will be managed through strong domestic volumes coupled with SL Government backing to restrict imports through taxes.
Valuations
The company is likely to record a PAT in excess of Rs850mn for FY 2015/16 (E) and surpass a PAT of Rs1bn in FY 2016/17 (E) with a forward PE of 6.4x based on 2015/16 earnings and a forward PE of 5.4x based on 2016/17 earnings @ the current market price of Rs70. if you value the stock even for a 50% discount to the PE of manufacturing sector this stock should be worth a minimum of Rs120/- by next year. Further with their policy of paying 20% of their profits as dividends the shareholders can expect an annual dividend in excess of 2 rupees for the next two financial years.
Recommendation
Strong BUY @ current price levels and take advantage from the current depressed market sentiments.
Thanks
