Nuvama Institutional Equities downgraded CEAT Ltd shares to 'Hold' from 'Buy', citing limited upside potential despite a strong operational performance in the March quarter.

The company's revenue surged 23 per cent year-on-year (YoY) to Rs 4,220 crore, ahead of the brokerage's estimate of Rs 4,160 crore. EBITDA jumped 53 per cent YoY to Rs 590 crore, also beating the estimated Rs 560 crore, driven by lower outsourcing expenses and cost efficiencies.

However, Nuvama flagged concerns over rising input costs, particularly natural rubber and crude-linked derivatives, which are expected to weigh on margins going forward. Factoring in these pressures, the brokerage has cut its FY27E and FY28E earnings per share (EPS) estimates by 9 per cent and 1 per cent, respectively. It now expects FY27E EPS to decline 4 per cent.

"In FY27E, we reckon EPS shall fall 4 per cent, led by a delay in pass-through of input inflation and adverse currency. The raw material basket saw an increase of around 15 per cent in Q1 FY27, necessitating a steep price hike of about 10 per cent," the brokerage noted.

Despite near-term challenges, CEAT is expected to deliver steady growth over the medium term. Nuvama projects a revenue and EPS CAGR of 15 per cent and 13 per cent, respectively, over FY26–FY28E, supported by growth in its core business, contribution from the Camso acquisition, and improved pricing.

That said, elevated leverage remains a concern. Net debt is expected to stay high at around Rs 2,940 crore by FY28E, primarily due to ongoing capital expenditure at both standalone and Camso divisions.

Valuing the stock at 16 times FY28E EPS, Nuvama has set a target price of Rs 3,900. The brokerage noted that CEAT is currently trading at FY26/FY27E/FY28E price-to-earnings multiples of 19x/20x/15x.