Ceat’s on the right track, but risk to margins is rising

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Tyremaker Balkrishna's stock in top gear, but beware the bumps The company will focus on bite-size capital expenditure (capex) and maintaining a double-digit return on capital employed. Previously, Ceat had undertaken multiple capex programmes simultaneously, which made it harder to manage cash flows and debt. Its capex guidance is ₹1,000 crore for FY25 and ₹1,100 crore for FY26, and the company does not feel the need for greenfield capex in the next couple of years.

Potential revenue at the company’s current capacity is ₹15,000 crore. Its consolidated revenue in FY24 was ₹11,944 crore. Also read: Gold loan NBFCs shine, Muthoot more than Manappuram Nomura analysts believe Ceat’s strategy of exploring several growth avenues — gaining domestic market share, expanding in the off-highway segment where margins are better, and making a stronger export push with new products (radial tyres for passenger cars, trucks, and buses) and geographies (the US) — is a step in the right direction.

So far, so good. But there are worries about how profit margins will shape up from here. Ceat’s raw-material basket price is expected to rise 3-4% sequentially in the June quarter (Q1 FY25).

The price of rubber, a key raw material, has also been climbing recently, and if the trend persists, it could hurt the margin in Q2 FY25. Rubber prices are currently around ₹193 a kg, compared to an average of about ₹150 a kg in Q4 FY24. Note that FY24 was a strong year for the company’s margins as it benefitted immensely from the drop in input costs.