CEAT Limited analyst Q&A

Sure. Thank you very much. We will now begin the question -and-answer session. The first question is from the line of Aashin Modi from Equirus Securities. Please go ahead.

Congratulations for a great set of numbers. Sir, my first question is regarding volumes. So could you please give us some understanding in the replacement 4% year -on-year growth, which we have talked about in flattish quarter -on-quarter. If you could give segment -wise how replacement market performed and what is the outlook of different segments in the replacement market? Arnab Banerjee So in replacement market, Q2 is a seasonal quarter, seasonal downturn quarter, as you would know. Y-o-Y truck/bus view at single -digit kind of growt h, low single digits. We had a very good growth in farm tyres in replacement market. And 2, 3 -wheelers as well as PC/UV grew around mid-single digits by volume in replacement Y-o-Y.

Okay. And secondly, sir, on the export side, if you could provide us more color on how Europe and off-highway is performing? And what is the sequential recovery we are seeing over there? And what is the outlook on the export side?

In export, in Europe, there is some kind of headwind because of slowdown in the economy. We have felt this headwind primarily in the Agri radial which is not growing in Europe. However, on passenger car radial and truck/bus radial, where our base is small , market share wise, but in the context of our volume, the base is pretty big because as I mentioned, about 1 million tyre is the run rate of passenger car tyres in Europe. So in these two segments, we are not really experiencing the headwind because we continue to grow as we keep developing our channel in Europe. Overall, Latin America, there has been some kind of headwind because of duties on TBR tyres, but now the market is adjusting to that new reality, and we expect to come back in the second half of the year in Latin America. The nearby markets of Africa and Asia are normalizing vis -a-vis last year and would -- are already doing better than last year in the first half and will continue to do well in half 2.

Okay. And sir, my last question i s, so you mentioned that there has been some changing in pricing during the quarter. Could you please give us more color which segments were they? And any more pricing changes expected going forward?

In quarter 2, I mentioned there's a relative price positioning change, so I'll explain. In passenger category, there was a straight price increase of 2% roughly in quarter 2. And in truck/bus radial segment, there was a relative price change of 1%, which means there was a downward revision by competition, whereas we didn't revise the price. So in relative terms, these two categories were most impacted. And there were other changes also in light commercial vehicle tyres to the extent of about 1%. So that was quarter 2. Quarter 3, we will watch the situation, how the raw material moves. And given an opportunity now that our products are very well accepted across categories in terms of being superior by way of tyre life and fuel efficiency, etcetera, we will have opportunities, we'll wait and see what to do.

Thank you. The next question is from the line of Raghunandhan NL from Nuvama Research. Please go ahead.

Congratulations, sir, on stellar numbers and also on the Deming prize. Sir, just wanted to better understand on the pricing situation. On the truck and bus you indicated that competition reduced price by 1%, so just wanted to understand, is it a one-off case where in certain categories, some discounting or price reduction is happening? Or are you concerned about compet ition intensity increasing in the market?

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 seaso nal 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.

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?

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 marke t 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.

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

Electric vehicle, the market shares are relevant for OEMs only because in replacement, t he 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.

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?

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.

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

So overall, it's improved to nearly about 80%. The outliers here are truck/bus radial w here 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%.

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

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

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

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?

Yes, Kumar, would you like to share the breakup?

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.

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

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.

Okay. And our strategy of this w ide 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?

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 in terms of going outside that particular location, as and when we add, we'll add it in the existing locations. So truck and bus radial is more a brownfield. And in case of two -wheelers, it's more about downstream. So another two years, I don't think we would need any greenfield outside the existing locations. So we don't expect any new greenfield investment required based on our long- term demand and supply plan for FY '25 and FY '26. And brownfield upstream capacity addition you are aware of, Ambernath is one and then second is truck and bus radial is another one. Other than that, we are not adding any other -- we don't expect to add any upstream capacity in the brownfield for the next two years.

Got it. And this TBR INR100 crores is for upstream or that's the downstream?

Yes. It's a new project, we are adding about 45,000 tyres of capacity per day (note: please read corrected as 45,000 tyres per month) . It's an upstream and downstream. It's a brownfield in an existing PCR location at Chennai.

Okay. Got it. And in that context, if I look at our debt evolution, so from where we are today at close to INR1,900 crores, we should be easily able to reduce this well below INR1,000 crores by end of next financial year based on our current plan, would that be a fair expectation?

No. See, we have reduced the debt to the extent of about INR450 crores in the last three quarters. But we do n't have a plan to bring it down to INR1,000 crores. We are currently at a healthy level. And our debt -EBITDA is currently hovering around 1.1, 1.2. So this is a very healthy level. And we would like to utilize the cash that we generate beyond capex plan that we have to reduce the debt. So which would be like INR100 crores, INR100 crores is what we have done in the last two quarters. If the performance sustains and if you maintain the capex level, that is the kind of a direction in which we'd like to move d ebt to. But we don't have any plans to bring it down to INR1,000 crores. We would like to utilize that cash through productively invest.

Fair enough. And lastly, given the expectation of increase in commodity basket by 3 to 4 percentage points. Do you see market being conditioned up to absorb that kind of price increases of, say, over two quarters or so and in turn, maintain our margins above 14%. Is that a likelihood which we're looking at? Or given that you talked about competitive intensity being higher, there could be some risk to margins going forward?

So Kumar, I'll answer that.

Yes, Arnab.

What we are realizing is as the situation is evolving more towards the passenger side where we -- over two-third of our sale is non-truck, there the pricing is increasingly getting detached from the underlying raw material movement, not completely, but it is much more than, let's say, five years back. So there is some pricing freedom there, if I may call s o and say so, and it is not so much available on the commercial vehicle side. So we'll wait and see how the raw material behaves. And 2/3 of our portfolio we have demonstrated that we can take some calls. So we will see if it -- if the market can absorb at least for our brand, we will evaluate it should the RMC play up in quarter 3.

Got it. Thanks and all the best.

Thank you. The next question is from the line of Siddhartha Bera from Nomura. Please go ahead.

Hi, sir. Thanks for the opportunity. And congrats, again, on the prize and good set of numbers. Sir, my first question is on this export plan, which you plan to sort of push from the last quarter of this year. Will it be fair to assume, we might see a pickup or an improvement on the exports as early as Q4 of this year, so that it's visible for the entire next year? Or do you think, some of the entry into US, the benefits from that in terms of the revenues might take longer to sort of be visible? So some more thoughts on that.

Yes. So the entry into US should happen by end of quarter 4 or early quarter 1 next year. So the impact of ramp-up in US will be available throughout FY '25, that's one. Secondly, there was a lot of inventory with th e trade and in the smaller and bigger OEMs as well in Europe for Agri radial stocks, which should come down. And though at lower levels, but normal procurement will start by end of quarter 3 or quarter 4. So Europe should also be better even if the market situation doesn't change throughout FY '25 or FY '24. And as I said, Latin America, we are taking some steps to broad base our network there. So that market should as well improve. And some markets in the near vicinity have already normalized to a great ex tent. So we can expect to see a step-up in exports next year.

Got it, sir. And one question on the cost side. So if you see the other cost, line items are also steadily inched up even in this quarter despite any sort of major events. And i n the current quarter, we have a few events also. So first, some thoughts on why it has inched up? And can we see a bigger jump in the current quarter given that the events are there?

Yes. Kumar?

Yes. See, largely, if you look at other expenses, mostly, it consists -- as far as we are concerned, one is our marketing -related expenses; second is the supply chain -related expenses; third is outsourcing related costs; and fourth, broad heads all our operating expenses like travel. If you look at this, there was some drop in marketing costs in quarter 2 versus quarter 1, as we had spent a little more money in quarter 1 on IPL and related marketing costs. Where it went up in quarter 2 versus quarter 1 were broadly in three different a reas. Our quantum of outsourcing volume in quarter 2 was higher than quarter 1, particularly in two -wheeler tyres. And number two is, we moved the tyres from a factory location to the distribution location, we had incurred our SVC cost. It wouldn't have a profit and loss impact, but on a line item wise, it will show other expenses, but it is normally part of the closing inventory. Third, our travel costs were a little higher. Our conferences happened in quarter 2. People started traveling more. So we had incurred little higher level of travel cost. Coming to your question, whether we'll see a higher level of other expenses in quarter 3 and quarter 4. I think other expenses will go up in the event activity increase. If there is a quantum jump in volume in quarter 3 versus quarter 2 or quarter 4. However, otherwise, it should not go up from this level of base into quarter 3 and quarter 4.

Got it, sir. Sir, lastly, on the working capital also in the -- as we started the year, you had told about that, it might go up in the year, and we don't expect any sort of decline there. But in the first half, we have managed quite well. So do you think in the second half given the demand, how it is -- the working capital levels can still go up or we believe i t may continue to remain where they are?

See, we continue to exercise tight control in quarter 1, quarter 2. Normally, quarter 4 is when our working capital would be at its best because of higher level of sales in quarter 4. And our debtors come down, we end up normally with a little lower level of inventory. We maintain that discipline coming into quarter 1 and quarter 2, both on our raw materials and finished goods. So that really helped, it is lower than what we had originally envisaged, keeping in mind the service levels. Our endeavour is to maintain at this level, and in the event that we want to improve our service level or if you see some delay in the transit of materials, particularly in the case of international business, we may have a little higher level of inventory. Otherwise, our endeavour is to keep it closer to our current levels.

Got it, sir. Thanks again. I will come again in the queue.

Thank you. The next question is from the line of Chirag Shah from White Pine. Please go ahead.

Yes. Thanks for the opportunity. Sir, first question is -- actually, I was disconnected in between, so apologies for repetition. So volume growth for the quarter?

Yes. Volume growth Y-o-Y is about 7%.

And sir, this is in standalone or this is including the Sri Lanka at consolidated level?

Yes, it is stand-alone.

Standalone. Okay. And sir, second question is just a clarification on this OTR side. So you explained, what's happening on the US, how we are looking at it . But if you look at '25 and maybe '26, how should one look at the geography mix for the OTR between -- on the export side?

Can you please repeat your question?

Sir, on the OTR, if you take '26 as a year, how one should look at the geography mix between, say, Europe and US? How do you envisage that playing out for you? '25 being the year of feeding the US market, that's why -- so how should one look at the mix between US and Europe for your OTR business?

Yes. So OTR and Agri radial business, we are already in the US market. When I said, we'll launch in the US, it is passenger radial and truck/bus radial. In US, we have already started growing, creating the network. We have a team of local team there in the US already. We have started getting to the OEMs. But in Europe, we are ahead of US. So we have to see, how these two geographies behave. We are quite bullish on US market as well.

Okay. But is it possible -- so internally, are you looking at kind of an equal split between the two geographies or one geography could have a higher share for next two years, three years?

Both are very big markets in their own ways. The product ranges are different. We are catching up on the product range on the US side because we enter ed that market later. But both will be equally big. I mean not exactly equal, but both will be of equal dimensions going forward.

Okay. Thank you and all the best.

Thank you. The next question is from the line of Disha Sheth from Anvil Shares & Stock. Please go ahead.

Sir, good afternoon. Sir, you mentioned that OEM demand has been varied in Q3. So can you - - if you can just thro w a light on segment -wise? As you said, replacement is stable over Q2 in terms of outlook. Hello?

Yes. So I mentioned about OEM demand in Q2 actually. Yes, it was varied. So just to give you some description category -wise, two-wheeler, the OEM demand was flat to slight de -growth. The OEM volumes grew only in the month of September, and still they are far, far below the FY '19 peak pre-COVID, so that's two-wheeler. Four-wheeler is doing well, growing well. They have topped an all-time high of 2 million tyres in half 1, and this industry is slated to cross 4 million cars in that entire year. So that's doing very well. The truck segment dipped very unexpectedly in the month of June, but it has recovered in quarter 2, and it is growing at single digit. So that's the kind of lay of the land in OEM in Q2.

Yes, sorry. So the outlook remains on the similar lines for Q3 and the year in terms of your order book?

See, Q3 is usually people are -- OEMs are very optimistic because of the festi ve demand in October and November. So retail offtakes are reported to be good in the month of September. We also track their retail offtakes. We have to see how that production comes up because that's what decides our demand. So optimistic in the first two months, but then December is a winter month where, again, demand slows down, and it picks up again by Feb and March. So it's a cyclical seasonal thing. Q3 may be good if the festival thing works out well and if the monsoon effect is good.

And sir, in Europe in terms of off roader , the demand is still bleak or there are signs of improvement?

No, the trade and the OEM destocking is -- has still happened over Q2. We expect the demand to improve by end of Q3 and Q4. That's the current expectation.

Thank you. The next question is from the line of Rishi Vora from Kotak Securities. Please go ahead.

Thank you, sir for giving the opportunity and congratulations on good set of numbers. Just one thing on the natural rubber procurement, can you just give us a sense on how much of the natural rubber requirement is met through domestic market? And how much is imported? And also, lately, we have seen that international price -- rubber prices have surged quite significantly. So what is the reason behind it? And do you expect that domestic natural rubber prices because of the higher international rubber prices can inch-up? Like how has been the historical trend of the commodities, that would be helpful?

Yes. Kumar?

Yes. See, there are broadly two grades of rubber that go into tyres. One is called a block rubber and another one is called us sheet rubber. Indian production is largely sheet rubber. Almost 95% plus is sheet rubber, and that is what we buy from the local market. And almost all of our sheet rubber we buy locally. And block rubber is what we import from the international m arkets. So our overall -- if you look at the split between block rubber and sheet rubber, okay, approximately 60% of our rubber would be block and 40% of that would be sheet. So that's normally the average distribution between block and sheet. You are right, the international prices have moved up in the last two to three months. And in the previous three months, actually, international prices were lower than the local market . So therefore, there's always been a commodity, an arbitrage between the two sources of similar kind of materials. There are three possibilities. One is that the natural rubber prices move towards international prices or international prices come down and natural prices move up and they strike a balance. Or there's always a difference of about INR2, INR3 per kg between two sources of rubbers. So being a consumer of natural rubber, we would prefer international prices to come down rather than expecting local prices to go up. So only time will tell. There are no strong fundamental reasons for the international rubber to go up, except the fact that sometimes there's a sympathy towards crude oil prices, and therefore, it has a rub -off effect on block rubber. And last, is the reason for international prices to be higher than local rubber is als o because of the fact that currency, Indian rupee, which was around INR81 to $1 is now on INR83.20, INR83.50. That itself has had about 3%, 3.5% kind of an impact. So it's possible that could be a midpoint between local and international rubber and that's the way the market could unfold. And that midpoint could be local rubber going up, if international prices remain to -- remain at the same level.

Understood. And sir, what would be the difference between the current landed cost of international rubber and the domestic rubber prices today? Like any sense you have?

Understood, sir. And just lastly, on this -- on the volume growth and the revenue growth. So on a Y-o-Y basis, I know you indicated the volume growth is 7% and revenue growth is a little bit lower. So there has been an ASP decline. And my understanding was that over the last one year, we would have taken price increases. So what is the reason behind ASP decline on a Y -o-Y basis? Is it just a mix or is there any other reason?

Arnab, you want me to take?

Yes, you can.

Yes. Okay. I'll take part of it, maybe Arnab will be able to substantiate even more. As was explained, the realization from our -- one of the three segments, which is original equipment manufacturers is linked to the movement in the raw material prices. So in a scenario where if raw material prices come down, our realization also comes down with the lag of three months and the reverse is also true. So that's one of the main contributors for a little bit of a higher level of volume growth on the total value growth and maybe a marginal decline in the price growth at the company level. Yes, because of the OEM mix impact on the total realization.

Understood, understood. Thank you and all the best.

Thank you. The next question is from the line of Akshay Karwa from Anand Rathi.

Hi, sir. Good evening and thank you so much for the opportunity. Just one question on the margin side. Sir, now that we have stopped manufacturing those smaller rim tyres and we will be focusing on the larger tyres, how do we see the margins going forward in the next two years by '26? I mean this quarter; we did a 14.9% adjusted EBITDA margin. So where do you see that trend shaping up, sir?

Yes. So when I said we are exiting small rim size to higher rim size, it is for passenger segment and in OEMs. So in the OEM segment, as it is the margin is low across rim sizes, the impact will come from higher replacement demand of higher rim sizes, where the margins are definitely high. And the impact of passenger, the saliency of passenger car tyre in our overall business is let's say, around 20% or so. So the impact will take time to come. It will come gradually, but it will be positive as things now stand. Now, the higher rim size margins are significantly superior to the smaller rim size margins.

So I mean can we -- like in order to model, so can we assume that something like 17% margins going forward, like in the next -- after like two, three years or something like that? Or...

Yes, yes, it will take at least two years to translate into significant improvements.

Got it, sir. That's all from my side, sir. Wish you all the best.

Thank you. The next question is from the line of Vishal from Svan Investments. Please go ahead.

Yes. So as the RM price creeks up, we are already seeing -- over the last two years, we are focusing on the non -truck side, which is two, three -wheeler, four-wheelers, and off -highway tyres. So the saliency of this is going up and it will continue to go up quarter -on-quarter as we speak. So that is one. Plus, there are some micromanagements of product market mix, whic h we'll also be focusing on. The last resort and definitely a good option also if there's a significant rise in RMC, we'll look at pricing because as I mentioned a while earlier, on the passenger side, there's a little bit more pricing freedom than the commercial side. So we'll look at that as well to mitigate the RMC hike, which looks like inevitable. That's going to happen.

Okay. Okay. Sir, my next question is regarding what kind of peak revenue you can get from the current capacity which you have?

Yes, Kumar, would you like to comment on that?

We had shared this in the earlier calls. Based on 31st March situation, based on the assets that we had commissioned without taking into consideration this truck and bus radial addition and OTR Ambernath addition, I think our revenue potential is a little in excess of INR14,000 crores. So that was a kind of a headroom without taking into consideration what we are adding this year and next year. So that is the level after which we can go.

Okay. So suppose that in FY'25 and '26, the kind of capacity expansion we are taking, you shared the debottlenecking plan, so what kind of peak revenue you can generate from -- once those capacities come in line?

See, we are adding about -- this year -- last year, we added about INR900 crores of capex, okay, only to the extent of assets commissioned, we've taken into consideration and we said the commissioned assets would give us a revenue potential of INR14,000 cr ores. Approximately, without going into specific details, depending on how we commission assets, whatever we are going to add this year, what we added last year but not commissioned and what we are going to add next year another INR2,000 crores kind of a p lus kind of a revenue opportunity is there by FY'26 plus INR2,000 crores plus kind of an opportunity, should we use all the assets to a 90% - plus kind of a capacity utilization.

Great, sir. Great. Great. Sir, one small question regarding the OTR ram p-up, you said that 160 tons will be completed by FY'24 end?

Yes, it will be in quarter one or quarter two of next financial year. It is likely to be there at that time.

Okay. Sir, post that in FY'25 and '26, what kind of expansion we are planning for this segment?

Arnab, would you like to respond?

Yes. So right now, we are at 105 tons, which is completed, which we intend to ramp up and fill by quarter one of next financial year. In the meantime, 105 itself is getting expanded to 160. So we are evaluating at what point of time we will run it up to 85%, 90% capacity and then take up the next expansion. So we are waiting and evaluating at this point of time, 160 is visible.

Okay. Okay. Sir, how much the gross margin improvement happened in Q2 was because of this mix improvement maybe in product, geography, or channel?

Yes. So the overall improvement is 2.2% roughly. About half of that would have come from product market fit improvement.

Okay. Sir, my last question regarding what kind of internally you are targeting ROC improvement by next two years, FY'25 and '26?

Yes. Kumar?

I think we had broadly explained our logic . Our endeavour is to be somew here in the range of 14% to 16% kind of ROC. Eventually when we cut down our investments, when we commissioned all of the assets, I mean the commodity environment is stable, that's the kind of a range at which we would like to reach. Most of our new invest ments that we have made in the last three years or so, and we had a visibility to that. For example, we always looked at capital investments or capex, which gave us a payback of five, six years and that translated to this kind of ROC. So that is the direction in which we are moving. I think we are not looking at destination as of now, we are looking at many milestones at which we would like to cross in this journey and then keep moving towards that particular direction.

Fantastic, sir. Thank you. Thank you and all the best, sir.

Thank you very much. We'll take that as the last question. I would now like to hand the conference back to the management team for closing comments.

So thank you very much, and I wish you all the best for the festivities coming up in quarter three and see you next quarter. Thank you.

Thank you very much. On behalf of DAM Capital Advisors Limited, that concludes this conference. Thank you for joining us. Ladies and gentlemen, you may now di sconnect your lines.