CEAT’s announcement to acquire Michelin tyre’s Camso brand signifies a move to establish itself as a leading global player in the off-highway tyre segment. While this transaction demonstrates strategic intent, its ultimate success will hinge on the meticulous execution of the acquisition program.
The “Good”…
- TAM expansion: This transaction expands CEAT’s product portfolio in favor of Off-Highway Tyres (OHT), currently reported at 15% of total business.
- Profitability trigger: The OHT tyre is a comparatively more profitable segment of the market. Therefore, assuming all other factors remain unchanged, CEAT’s long-term EBITDA would experience a positive impact.
- Network expansion: This acquisition would add to CEAT’s current tally of ~50 OEM relationships and an installed base of international OHT distributors.
- Unleash disruption: CEAT, as a technology leader, could disrupt the OHT market further with the application of IoT, telematics, and cloud technologies.
Questions
- Is this acquisition value accretive from the perspective of CEAT’s share holders: CEAT’s last 3 years’ average Return on Equity (RoE) is <10% against the industry median of >13%. But the off-highway tyres are a profitable segment of the market. Hence, how this transaction changes CEAT’s game remains to be seen.
- Will it change the FII sentiments about CEAT: The Foreign Institutional Investors (FII) holding in CEAT has dropped from ~24% in Sep 2022 to ~16% in Sep 2024. Nothing puts the FIIs off more than unclear guidance and an extended period of value realization from M&A initiatives.
The potential benefits of this acquisition are compelling; however, the transaction’s true measure of success will depend on its ability to address key challenges. Stakeholders will closely monitor how quickly the acquisition becomes value-accretive.
Data Source: CEAT fillings with the Exchanges, www.screener.in Disclaimer: This analysis does not constitute financial advice. Consult your financial advisor before taking any investment decision.