Ceat set to regain margin muscle, but rising debt may slow the ride

Mint

02-05-2025

A host of favourable factors is aligning to boost tyre maker Ceat Ltd's margins. While margins declined year-on-year in the March quarter (Q4FY25), they improved sequentially. Consolidated Ebitda margin stood at 11.3% in Q4, ahead of the consensus estimate of 10.7%, while gross margin came in at 37.5%. Easing input costs and price hikes in the two-wheeler and passenger vehicle segments during the quarter provided support.
Ceat expects further margin tailwinds in the first half of FY26, driven by softer raw material prices. International rubber prices have fallen by $200 per tonne from the Q4FY25 range of $1,900–2,000, now trading at a
₹
7-8/kg discount to domestic prices.
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Crude oil, too, has eased to $65 per barrel from $75–80 in Q4 and is expected to hover around $65-70 in the near term. Key crude derivatives such as butadiene and caprolactam were largely stable in Q4 but have declined 2-5% in April.
The company plans to retain the gains from lower input costs to support margins, while taking price hikes selectively. Management has indicated comfort at a gross margin level of over 40%. Strategically, Ceat continues to pivot towards margin-accretive segments—two-wheelers, passenger cars, and off-the-road (OTR) tyres—while reducing reliance on the truck segment. 'Revenue contribution from these focus areas has surged over the years (to 63% in FY25 from a mere 20% in FY10)," said a Motilal Oswal Financial Services report dated 30 April.
Ceat
has also increased presence in high-margin off-the-highway (OHT)/international segments with the Camso acquisition. With Camso's integration, the company expects the international mix in its product portfolio to rise to 26% from around 19%. Camso's financials will be consolidated starting Q2FY26.
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Improving profitability prospects have driven earnings upgrades.
Emkay Global Financial Services has upgraded Ceat's FY26/FY27 earnings per share estimates by 8%/5% on accelerating growth, and recent raw material price decline. 'We like Ceat given its superior growth prospects led by higher exposure to consumer-facing categories and ongoing market share gains, with potentially strong margin revival ahead if raw material (prices) sustains," said the Emkay report dated 1 May.
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Ceat shares have gained 22% over the past year, handily outperforming the Nifty500 index. However, the management has flagged a likely increase in debt, from
₹
1,928 crore currently to
₹
3,000 crore, as it completes the Camso payment and operations scale. Consequently, the debt-to-Ebitda ratio is expected to rise to around 2.5x, though still below the previous peak of 2.8x.