Ceat investors should be prepared for a few more quarters of weak margins

Management expects raw material prices to increase by 4% on a sequential basis in Q3FY22. To protect margins, the company has hiked prices in the two-wheeler and farm equipment segment by 2% during the first 20 days of October and further hikes will be made by the end of October. Management highlighted that the company needs to increase prices by 1.5-2% to offset the impact of raw material inflation.

Analysts cautioned that despite these gradual price hikes, margins are unlikely to improve in a hurry. They expect only a full pass of commodity cost inflation by next year.

“Contrary to our earlier expectation, cost inflation is expected to persist in H2FY22, leading to improvement in Ceat’s margins till H1FY23. Therefore, we have revised our FY22E/FY23E EPS estimates to approximately 42 per cent to factor in raw material cost inflation. %/13%, higher depreciation and interest cost,” analysts at Motilal Oswal Financial Services Ltd said in a report.

Sharing similar concerns, analysts at Nirmal Bang Securities Ltd said, “We note that with an aim to increase our market share in CEAT PCR and TBR segment, OEM presence and our capacity through expanded distribution network and new product We are increasing our offerings in the replacement market. However, we continue to put pressure on profits due to rising commodity costs and higher interest and depreciation expenses.”

Meanwhile, shares of the company fell nearly 2 per cent on the NSE in early trade on Wednesday.