Ceat Ltd has scope to manufacture up to 3,000 truck and bus radial (TBR) tires per day at its Chennai plant. There is also room to increase production capacity for radial tires for passenger cars, which currently stands at 20,000 tires per day. But the tire maker’s path forward is likely to be driven by digital and technology efforts.
Ceat Ltd has scope to manufacture up to 3,000 truck and bus radial (TBR) tires per day at its Chennai plant. There is also room to increase production capacity for radial tires for passenger cars, which currently stands at 20,000 tires per day. But the tire maker’s path forward is likely to be driven by digital and technology efforts.
Analysts who recently visited the tire maker’s factory in Chennai came away satisfied with the relatively advanced level of automation and digitization at the factory. For reference, this factory is equipped with a tandem mixer based on new silica mixing technology. Nomura Financial Advisory and Securities (India) says the mixer is the first of its kind across his Ceat factories and only his second in the country. This allowed us to meet international market standards.
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Analysts who recently visited the tire maker’s factory in Chennai came away satisfied with the relatively advanced level of automation and digitization at the factory. For reference, this factory is equipped with a tandem mixer based on new silica mixing technology. Nomura Financial Advisory and Securities (India) says the mixer is the first of its kind across his Ceat factories and only his second in the country. This allowed us to meet international market standards.
Analysts at Motilal Oswal Financial Services said in a March 4 note that “the company’s (digital) initiatives offer a payback period of two to three years and can be similarly implemented at other Ceat plants.” Stated.
On the demand side, this quarter has seen strong seasonal replacement demand. Ceat points out that his OEM demand in the two-wheeler segment is recovering well.
In the TBR replacement segment, despite weak industry demand, Ceat expects double-digit growth in FY25 driven by market share expansion.
The export market will be supported by the expansion of its product portfolio in the US. Ceat expects exports to account for more than 25% of sales, compared to his current 18% over the next two to three years.
An increase in export contribution portends an increase in the profit margin of the business. However, investors will be keeping an eye on trends in profit margins given the sharp rise in the cost of raw materials such as rubber. Ceat expects its raw material basket to grow 1-1.5% quarter-on-quarter in the March quarter (Q4FY24). Further impacts are expected to be reflected in the first quarter of 2025.
Meanwhile, Ceat has no plans for greenfield expansion for the next two years. Capacity expansion will be done through brownfield expansion, with approximately 40% lower capital investment intensity. This can help companies improve their return rates.
In greenfield investing, a company builds its own facility from scratch, while in brownfield investing, a company purchases or leases an existing facility.
So far, Ceat investors have enjoyed handsome gains, with the stock up 95% over the past year, driven primarily by healthy margin performance. But there may be limits to further meaningful upside. The company’s stock trades at 16 times estimated FY2025 earnings, according to Bloomberg data.