Sep 27, 2012|
1992 batch of Sensex stocks: Ceat Ltd.
If one had invested Rs 100 in the stock of Ceat Ltd at the start of 1991, his investment would currently be up by about 78% in absolute terms. This translates to a compounded average growth rate (CAGR) of a mere 3%. If you compare this to the CAGR of nearly 14% that you would have earned by simply investing that Rs 100 in the Sensex, the returns seem even more dismal. Considering the strong brand value that Ceat enjoys, the obvious question that comes to mind is what did the company do wrong?
What went wrong?
Incorporated in 1958, Ceat was initially established in collaboration with the Tata Group. It was sold to its current promoter, the RPG group in 1962. The company had always been a big name in tyres for leading Original Equipment Manufacturers.
However, the quote that seemed to apply perfectly to the tyre industry was "Too much of a good thing can be bad". Immediately following the epic reforms in 1991, the industry players started setting up capacities. What they were hoping for is that there would be a surge in demand with new entrants in the auto sector. To add to this, they expected demand to get a boost on the export front as well. But what they did not keep in mind was that liberalization would also lead to competition in their own sector. It would translate to new entrants in the tyre industry as well.
What happened was that the companies struggled to keep their bottomlines in pace with the expanding capacities. Things got worse when the industry was hit with the depressed macro conditions surrounding the recession of 1997. This led to a reversal of fortunes for the tyre companies in the years that followed. And this is what happened with Ceat Ltd. Since those troubled times, tyre manufacturers have come a long way. Though Ceat's products still hold value in terms of brand, the company's financials unfortunately have been all over the place. Volatile margins and losses have been common thing when we look at the past financials.
Packed away from Sensex
After seeing its pathetic financial history, one would wonder can such a stock ever be used to represent an index Well truth be told, it was once a part of the Sensex. But it was ousted from the index in 1996.
This is where the mystery lies. The performance of the company was bad but not really terrible back then. In fact, things took a turn towards the worse only after 1996. So were the index makers predicting a bad performance which led them to oust the stock? Though one can never really tell what exactly went on at that time, however one possibility could have been the growing auto sector. With other companies in the auto space growing at a much faster pace as compared to the tyre industry, they probably represented the auto sector better in the index. Companies like Bajaj Auto were gaining grounds and were undoubtedly better choices of representation in the index.
But whatever the exact reason was, one cannot rule out the bad performance of Ceat. Interestingly, its peer Apollo Tyres has financially outperformed the company even during the worst of the times. Even Goodyear India Ltd has doled out a better performance since 2003 (standalone performance for all the three companies). Though Ceat's financials have become better than what they were in 1990s, performance has still remained volatile. We can blame raw material prices or overall economic slowdown for this but when compared to peers, these excuses become just that. Excuses.
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