CEAT : Earnings Call Transcript for Q2 FY24

"CEAT Limited

Q2 FY '24 Earnings Conference Call"

October 17, 2023

MANAGEMENT: MR. ARNAB BANERJEE - MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER - CEAT LIMITED

MR. KUMAR SUBBIAH - CHIEF FINANCIAL OFFICER - CEAT LIMITED

MODERATOR: MR. MITUL SHAH - DAM CAPITAL

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So let me start with the big news of CEAT winning the Deming Grand Award. As you are aware, this is one of the most prestigious quality awards presented by the union of Japanese scientists and engineers called JUSE, for excellence in total quality management. CEAT became one of the only 33 companies in the world and the only tyre company in the world to win this honour since its inception in 1969. This award points towards consistency of customer experience across the globe and consistency in market share gains and financial performance.

I'll come to the performance proper for Q2. As the base is now normalized, we are reverting to more commonly referred year-on-year comparison for volume.

Quarter 2 was a good quarter for us with an overall volume growth of 7% over last year's quarter

2. Exports are doing good and grew about 10% over the same period. Passenger car tyres had a significant uptick, followed by truck and bus tyres. Off-highway volumes were a little subdued due to a slowdown in Europe. Replacement volumes grew about 4% year-on-year. Domestic off-highway grew very well with a strong double-digit growth, followed by passenger car tyre. Two-wheeler and truck/bus tyres volume also grew in low single digits. OEM business continued to witness healthy momentum with volumes growing by about 10% over last year. Truck and bus volumes grew by more than 35% as a testimony to increasing acceptance of our truck/bus radial tyres quality-wise.Two-three-wheeler sales have also done well, indicating a gradual recovery towards the end of last quarter.

Over Q1 FY '24, volumes grew about 3.5%. And despite quarter 2 being seasonally a low quarter. Replacement was flattish, while OEM registered double-digit growth in anticipation of festival sales. Exports saw a marginal drop.

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Demand outlook, as you know, monsoon overall has been good, but the special distribution and the timing were inconsistent. This is likely to affect the Kharif crop output in some states and could also adversely impact the nascent rural recovery. So we would wait and watch the situation closely. As of now, replacement demand is stable across all categories with routine seasonal trends.

On the OEM side, vehicle sales growth has been varied across category. Two-wheeler bikes, de- grew in quarter 2. Four-wheelers are doing well, which topped 2 million cars in half 1, and truck and bus are growing in single digit in quarter 2.

Export markets are improving, especially the markets around Asia and Africa. Europe is impacted by recessionary trends. And as I said, traditional geographies for us like Middle East, Africa and SAARC are normalizing.

On margins, input prices remained benign during the quarter, the raw material basket market declined by about 2.5% to 3% vis-a-vis quarter 1. We have largely been able to maintain our selling price Q-on-Q. And there was also a relative price positioning change in aftermarket in some categories. Both these factors along with better product mix, contributed towards gross margin expansion over 200 bps quarter-on-quarter and stand-alone margin -- EBITDA margin for the quarter stands at 15% and net profit stand-alone was INR199 crores.

Capacity utilization has been improving consistently and is about 80% overall. Better margins and higher utilizations have helped improve our ROCE as well. And we will continue to focus on ROCE by improving capital productivity and efficiency.

On the margin outlook, crude prices, as you are aware, has been going up steadily. If the current prices sustain, RM basket may be going up 3% to 4% over quarter 2 base, I think we have bottomed out on RM prices. We are watching the situation closely and will take action as appropriate going forward.

CEAT is future ready. We are looking at all the megatrends with focus, like electrification going global, premiumization and digital.

As far as electrification is concerned, we continue our strong market share in OEMs in electric vehicle 2-wheeler tyres with more than 40% share of business. Recently, Oben electric e-bike,e-Sprinto, MR EV scooters were launched on CEAT tyres. In passenger market also, we are working with OEMs with several models launched or to be launched such as Mahindra XUV400, MG Comet, ZS electric vehicle, Citroen c3 and some upcoming launches like BYD Auto, Tata Punch EV, KIA couple of vehicles, Pravaig and EVA.

In commercial segment, electric vehicles such as Tata Motors, Ace Electric, Mini Pickup as well as electric buses by Tata Motors, we are participating also with OEMs like Volvo, Eicher Olectra,

I would like to continue on our international business pursuit. We have a run rate of selling more than 2 million passenger car tyres internationally with nearly half of them going to Europe.

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This business is doing well.

We are the largest imported tyre brand in Brazil in the off-highway segment. We have also got into several flagship OEMs such as John Deere, CNH, AGCO in off-highway retires, and we have added 40-plus SKUs in this vertical in quarter 2.

Truck/bus radial tyres are doing well in Europe and Latin American markets. We are getting ready for U.S. rollout by end of current financial year for both Truck/bus radial and passenger car radial. That program is going on schedule. About 200-plus SKUs will be launched across these two categories in the U.S. Sri Lanka macro situation is improving and quarter 2 has been a good quarter, both top line-wise and margin-wise in Sri Lanka.

The third major initiative is premiumization with launch of platforms such as Crossdrive, SportDrive, SecuraDrive and SecuraDrive SUV, the passenger car radial portfolio is getting premiumized, and the revenue share from these new platforms, the revenue saliency continues to improve.

CEAT has started investing in a new brand property called CEAT Trails which is about expedition. The first one happened over 22,000 kilometres from Mumbai to Siberia. This convoy went on CEAT CrossDrive and CEAT winter tyres and it was -- the entire expedition went through India, Nepal, China, Mongolia, and Russia, and it was completed successfully.

We continue to strengthen our association with cricket. The 25th addition of CEAT Cricket rating and awards were held in Mumbai in this quarter. We are proud to share that we have onboarded Shafali Verma as our brand ambassador during this quarter. And with the world -- onset of World Cup, we've launched season 2 of CEAT Timeout Series with Matthew Hayden.

As a love of riding increases across the country, CEAT is expanding its portfolio and introducing new product platforms for rally, dirt biking as well as in upmarket steel radials.

Digitalization is the third major trend where CEAT continues to remain a leader. We are implementing Industry 4.0 practices across our plants. The Chennai plant went through the assessment of Lighthouse factory in quarter 2. We are awaiting the results of the assessment. As far as end consumers are concerned, we are heavily invested in marketing CRM. We received 1.5x more searches on SUV tyres, 7.5x higher brand mentions and 12x higher interactions per month so far this year vis-a-vis FY '23. We are generating about 6% of our passenger car replacement sales from B2C channels.

Capex. Our overall capex for the year is likely to be about INR800 crores. Previously, we had mentioned INR750 crores. All expansion projects are progressing as per plans. And we want to reiterate our strategy of doing bite-sized capex every year. This will help us maintain consistency in margins as well as the return ratios.

Sustainability is an important pillar for us. We continue to reduce carbon footprint. For the half year our ton carbon emissions per metric ton of production was lower by 16% Y-o-Y. About 36% of our plant power requirement is through renewable sources and we intend to increase this

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contribution further during FY '24. Water consumption per ton of production in half 1 reduced 8% Y-o-Y. Natural rubber was sourced by an alternate source to the extent of 25%.

Leading our purpose on safe mobility, CEAT has also created kiosks, provided free tyre service on the new Samruddhi Highway, nearly 100 cars avail this service every day. This initiative was taken as the accidents on Samruddhi Highway were increasing with tyre burst cited as the major cause.

So the benign raw material situation has helped us take faster strides towards making CEAT brands stronger as well as improving our return ratios. As demand remains buoyant, we are hopeful of managing the volatility in raw material basket in coming quarters. As a Deming Grand winner company, we want to become more and more consistent in our financial performance, despite the inherent nature of our raw materials and are working on several controllables, which help us navigate this better.

With this, I would like to hand over the call to Kumar for his remarks.

Kumar Subbiah:Thank you, Arnab. Good afternoon, ladies, and gentlemen, and thank you for joining our call pertaining to quarter 2. I would like to share some further financial data points with you all, post which we can enter into Q&A session.

First, revenue. Our consolidated revenue for the quarter stood at INR3,053 crores, showing a quarter-on-quarter growth of 4% and year-on-year growth of 5.5%, largely both driven by volumes. As Arnab mentioned, our revenue crossed an important milestone of INR3,000 crores during the quarter for the first time.

Coming to gross margins, our gross margin for the quarter moved up from 41.1% to a healthy 43.3%, largely driven by lower raw material costs and better product mix. And the raw material costs were lower in quarter 2 to the extent of about 2.5% versus quarter 1.

And the better product mix helped further in improving the gross margin and which to the tune of good overall 227 basis points. Crude oil, which was hovering around $75 to $80 range in quarter 1 has been slowly now largely operating at the higher end of around $90 to $95 since middle of August. And the same has impacted the prices of feedstocks that go into making of tyres.

In general, as you are aware that any increase in crude oil prices have always had inflationary impact not only on crude derivatives, but also on many other commodities in general. International rubber prices have moved up by about $100 in the last two months. Taking further into consideration the depreciation of Indian rupee in the last three months, we expect our raw material basket to increase by about 4% in quarter 3 versus quarter 2.

As Arnab mentioned, we'll continue to remain watchful of the overall situation and take corrective actions wherever possible. Coming to debt, capex and working capital. We spent about INR170 crores of capital expenditure during the quarter. And with this, our overall capital expenditure in the first half is about INR390 crores. We expect our full year capex to be around INR800 crores, marginally higher than our earlier estimate of about INR750 crores.

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discounting or price reduction is happening? Or are you concerned about competition intensity increasing in the market?

Arnab Banerjee:Yes. So to clarify, the price reduction by competition is by way of pricing as well as by a way of discounting. Yes, there's a lot of competitive activity happening in the market. But as I mentioned that we have been able to increase volumes in a low seasonal quarter, which is Q2 over Q1. Despite RMC going down, we have changed the relative price standing of our brand in truck/bus radial and PCR. So I wouldn't say we are not concerned but this is an encouraging sign that we have been able -- the market has absorbed this kind of pricing stance by CEAT and has rewarded us with higher volumes. So that's encouraging. But the concern will stay if this continues.

Raghunandhan NL: Understood, sir. And any trends you can provide, sir, in terms of the first few months of the year, how has the market share trend has been? Have you been able to sustain share?

Arnab Banerjee:Yes. So one of the disadvantages of having this call so early in the next quarter is that we don't have the entire data of market share. But I will give you some direction on that. I think we are gaining market share in two-wheeler because the last four months to five months have been really great in terms of motorcycle and scooter sales in replacement market.

And on PCR, I would think that our market share will be steady in the sense that there will not be significant gains or significant losses. And in truck/bus bias we would have gained a little bit of market share and in truck/bus radial, it would be consistent market share. In farm, we would have gained market share in replacement is what we believe.

Raghunandhan NL: Got it, sir. And sir, on the electric vehicle, how would your market share be?

Arnab Banerjee:Electric vehicle, the market shares are relevant for OEMs only because in replacement, the demand is still not anything significant. In two-wheeler, as I mentioned, two-wheeler OEMs, our market share would be 40%-plus. We are there in almost all the leading brands of the country, big and small, traditional players as well as new players such as Ola.

In four-wheelers, I mentioned some of the models where we are working with OEMs closely. And we have a high double-digit kind of market share in four-wheeler OEM. Both these are slated to improve in the next two years.

Raghunandhan NL: Got it, sir. And one of the focus areas was discontinuation of smaller diameter tyres and focus on the larger tyres. Can you update on the efforts because of this, would we be lagging the industry growth? And going forward, do you expect volume growth to be similar to the industry?

Arnab Banerjee:So our exit from smaller rim-size tyre is complete. All that has to be -- that was on the cards has happened. Our Q2 volumes incidentally are -- in OEM are better than Q1 volumes with a better mix of higher rim-size tyres. This volume recovery will continue through Q3 and Q4. And by next year, we will be at a significant growth over a lower base, obviously, because this year, the transformation is happening. And that will be very good for growth in replacement market as well.

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Raghunandhan NL: Got it, sir. Just a last question. Can you help us with the segment-wise capacity utilization, two- wheeler, four-wheeler truck and bus?

Arnab Banerjee:So overall, it's improved to nearly about 80%. The outliers here are truck/bus radial where utilization is in excess of 90%. And in farm radial, we have just completed one round of expansion. So optically, the capacity utilization is low, but there's a big demand in US and Latin America, etcetera. So here, the capacity utilization would show as around 65-odd percent, but this is slated to go up in second half and into next year. Otherwise, it's around 80%.

Raghunandhan NL: So two-wheeler,four-wheeler would be around 80%?

Arnab Banerjee:Roughly around 80%. I'm giving you an average figure across categories.

Moderator:Thank you. The next question is from the line of Jinesh Gandhi from Motilal Oswal. Please go ahead.

Jinesh Gandhi:Congratulations on Deming grand prize as the first company on the tyre side. Quickly on the capacity question. So the expansion which we are doing this year, the INR800 crores capex, that is made predominantly towards the OTR tyre, right? Or are we also investing now for TBR?

Arnab Banerjee:Yes, Kumar, would you like to share the breakup?

Kumar Subbiah:Yes. Okay. See, approximately, the revised number of INR800 crores that was communicated includes about INR200 crores of our normal routine capex, which is R&D, IT, digital, moulds and plant-related,maintenance-related capex. So we are talking about balance INR600 crores.

And here, our truck and bus radial, we expect to spend a little over INR100 crores, we expect our OTR to be in the range of about INR250 crores. And we also are spending something on downstream of our Nagpur two-wheeler, passenger car radial two-wheeler. And in addition to that, we also have some small portion of the debottlenecking that we had undertaken in Halol factory. So these things add up to around INR800 crores.

Jinesh Gandhi:Okay. And what kind of capacity addition do we expect from this INR800 crores investment?

Kumar Subbiah:The major upstream capacity expansion is happening at Ambernath, which is specialty. There we are going up from 105 tons per day to 160 tons per day. That plant will be ready in the next year and balance all of them, except some debottlenecking at Halol are mostly downstream capacity, upstream remained constant.

Jinesh Gandhi:Okay. And our strategy of this wide size capex, how long can you sustain them before we get on to a proper brownfield or a greenfield capex? I mean what I'm trying to understand is how long can we sustain this kind of INR800 crores to INR1,000 crores of capex before we have to invest materially in large capacity?

Kumar Subbiah:See, broadly, if you look at our bias tyres capacity, truck, and bus bias we don't expect any requirement in the future. Passenger car and truck and bus radial tyres, both of them we have enough space in our Chennai factory, and therefore, we don't expect any greenfield opportunity

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