CEAT Limited (500878) Earnings Call Transcript

ladies and gentlemen, good day, and welcome to the CEAT Limited Q1 FY '27 Earnings Conference Call, hosted by NemmelBank Equities Private Limited. [Operator Instructions]. Please note that this conference has been recorded. I now hand the conference over to Mr. [ Yashakadwal] from NemmelBank Limited. Thank you, and over to you, sir.

Thank you, Sumali. Good evening. On behalf of Lebanese Equities, I welcome you all to 1Q FY '27 Earnings Conference Call of [indiscernible]. The management is represented by Mr. Arnab Banerjee, Managing Director and CEO; and Mr. Kumar Subbiah, Chief Financial Officer. I will now hand over to the management for their opening remarks, after which we will open the closer Q&A. Over to you, sir.

Good evening, everybody, and thanks for coming to this call. I'll take you through the business updates for the quarter, and then I shall hand it over to Kumar for his remarks on financial performance. Post that, we'll have the Q&A. The structural consumption tailwinds triggered by last year's GST reform continued to boost domestic volumes. However, Q1 also saw a sharp escalation in input costs driven by natural rubber prices, both international and local and also prices of crude-linked derivatives. Raw material cost increase was about 15% to 16% vis-a-vis the average of last quarter. Demand outlook, near-term expectation primarily hinges on monsoon bridging its rainfall deficit. [indiscernible] poses a risk to rural demand and on account of reduced farm income and also supply chain disruptions following the West Asia crisis. Some moderation in demand may happen in Q2, but we don't expect demand to fall off a cliff. In the near term, we expect replacement demand for TCV to be mid-single digit. In 2-wheeler growth is expected to be in high single digits where consumption levels have surpassed already pre-COVID levels passenger tire demand is expected to be mid-single digits. Overall, rural demand has been very, very strong right through quarter. In the OEM segment, demand has been very robust in some categories even in the mid-20s. We expect demand for MHCV to grow in mid or high single-digit while OEM 2-wheeler and passenger car tire demand is expected to grow in double digits. In the international business, we have a strong order base despite disruption in Middle East sales at quarter 1 results, the growth aspect. Q1 continued C growth journey with strong revenue growth of 18.3% Y-o-Y on a stand-alone basis. While stand-alone EBITDA stood at INR 380 crores. This is on the back of strong growth in Q3 of last year and Q4 of last year as well. Overall performance, as I mentioned, 18.3% value growth in quarter 1. Replacement grew in mid-teens, whereas -- and demand has been strong over the last 3 quarters OEM grew in low teens and international business has been growing very strongly almost in the 30s. Volume performance, replacement overall volume growth was robust wheel continues to do well backed by strong rural growth. [indiscernible] also have done growth in double digit, and farm has grown in high teens as well. replacement passenger car tire segments grew in healthy double digits during Q1. In OEM, we recorded the highest volume in passenger car tires. Of course, our base was smaller. And most of the growth has come from 17-inch-plus segments, which is the premium segment in OEM. In 2-wheelers, we registered a mid-single-digit growth in this quarter. Farm growth in OEM has been pretty robust, strong single digit and [indiscernible] growth was flattish. International growth -- international business growth across segments was strong, particularly strong in passenger car tire 2, 3 wheeler as well as the agriculture segment. In Truck Bus segment, we had a single-digit growth in international markets. Margin scenario. Q1 stand-alone gross margin witnessed a contraction of 55 basis points Q-o-Q. Our stand-alone EBITDA margin for Q1 stood at 9.1%. Raw material costs continue to be high entering into quarter 2, and we have been taking price increase right through April, May and June. About 7% to 8% in replacement, about 3% to 4% in OE and about 4% to 5% in IP has already been taken. We have had a strong price increase on first June and right through June and June on first July and in July and August will continue this year. Stand-alone profit was INR 98 crores, and in consolidated accounts, it was INR 4 crores. This disparity or gap between the two is high in Q1, primarily because of a nearly INR 48 crore impact from depreciation in Srilanka rupees, LKR, on the $80 million denominated debt at the overseas entity [indiscernible]. And also higher costs in our cancer business arising from initial investments in new warehouses, new offices, startup costs new hirings there without commensurate growth in revenue because it just happened in a quarter 1. Our top line in cancer is trending at USD 10 million at customer prices. This is not what we are realizing because we are selling to [indiscernible] as explained in earlier calls. Part of the realization goes to cover the cost and marginal profit in the hands of Michelin. We are about to change the capital structure of CHT Lake to reduce the interest burden as well as to reduce the risk of currency fluctuations. Overall transition is happening as per plan. About 60% of the customers have transited to see it by end of Q1, and we expect to complete the customer transition by end of Q2. The transition of -- from buying semifinished goods from Michelin to buying our own raw material will take some more time. It will be completed by end of quarter 4 of FY '26. Hence, FY '28 is the first full year when we'll have control of the entire value chain. However, in second half of this financial year, we have control of all our customers and therefore, we'll start -- we'll start growing our volumes across replacement and OEM segments when we handle our customers directly. Overall, on the 4 trends which we keep talking about, electrification, International business, premiumization and digital AI, I'd like to cover a few points. On electrification, our trend in owning share in OEMs continued consistently. We have about 25 share each in OEM passenger TVs and in 2-wheeler TVs, we continue to get nominated to significant new OEM launches in both 2-wheeler and 4-wheeler. Our international turnover, including Camso was around 23% on stand-alone basis was about 20%. Despite geopolitical issues and freight rates and delivery time line reductions, OHT business delivered a strong quarter growing sequentially as well as on a Y-o-Y basis. We added about 10-plus new SKUs. And we got several new nominations in marquee OEMs in the OHT segment. In the online segment, growth was robust as well, as I mentioned earlier, in all segments, including 4 wheelers as well as the Truck Bus radial segments. Middle East performance was, of course, subdued, but other geographies came back strongly and our order base is pretty robust. Premiumization, we got some good nominations in premium vehicles and our volume and share continue to grow in the premium segment in OEM as well as in replacement market. Our brand finance rankings where we found ourselves the top 10 in the brand finance ranking, which is a good indicator. Overall sales volume of premium pass, which is 17-inch plus inside star grew by 100% in replacement, 2-wheeler premium portfolio comprising of radials and as it is on to 250 cc plus bikes also grew handsomely. On digital and AI, CF, we are scaling across the enterprise and embedding it into our business processes. In Q1, we continued to expand our Agency Care initiative to drive productivity accelerated automation across the value chain. In parallel, we are making steady progress on our enterprise data lake program, creating a unified data foundation for AI and advanced analytics while our SAP rise transformation remains on track. Our premium sales through lead generation grew 2x in quarter 1, while overall 4-wheeler sales through lead generation grew 32% over the same period last year. implementation of Agent websites increased traffic from home products by 14%, positive sentiments of brand moved up 36%, with 16% increase in average interactions per post Y-o-Y. U.S. tariffs, short mentioned, the applicable duty of auto components remains at 25% in addition to the original 4%, so total 29% on on-road tire including TBR and PCR this 39% applies off-highway tires are subject to a lower 10% global tariff and on Srilanka, exports also the same 10% applies. In tax, which is coming out of Srilanka, the same 10% applies. However, for the metal component of track, which is primarily steel, it continues to attract a 25% tariff. On the sustainability front, we achieved Coatis gold rating, which places us in the top 5 percentile of the companies globally for sustainability performance. had received best practices in corporate governance and compliance about 26 some will cycle and ISO 27001 certification from for its head office, Halol, Chennai and Avana facilities reinforcing our commit meant to best-in-class governance. Our focus on people and transparency has resulted in employee happiness core to move up to 87% from 85% previous year. And as we move forward in Q2, we expect margin pressure to continue, and we expect demand to moderate a little bit. But as I mentioned, it's not going to fall off its [indiscernible]. With this, I would like to hand over to Kumar for his remarks.

Thank you, Arnab. Good afternoon, ladies and gentlemen, and thank you for joining our Q1 FY '27 earnings call. I'll share some further financial data points with you all. post which we can enter the Q&A session. First, on overall financial performance. Our consolidated revenue for the quarter stood at INR 4,318 crores, with a year-on-year growth of about 2.3%. As we did not have the numbers of our Camso business or as we did not have the Camso business in the corresponding period of last year, I would like to keep sharing our stand-alone numbers alongside consolidated numbers so that the numbers are more comparable. Our stand-alone revenue stood at INR 463 crores with year-on-year growth of 18.2% and quarter-on-quarter growth of 3.2%. On a year-on-year basis, 2/3 of the stand-alone revenue growth came from volumes and balance 1/3 of the growth came from price and mix. Pricing impact was positive across all segments during the quarter 1 with replacement and International business segments, leading with price increase. So far, replacement has been receptive to our pricing actions where demand has been robust. We have affected approximately a 7% increase in our price and replacement and about 5% in international business. and our OEMs approximately 3%. Considering our pricing model of quarterly pricing with a large percentage of our OEMs, the price increase on OEM segment is expected to be there in quarter 2. Coming to operating margins. Our consolidated EBITDA for quarter 1 stood at INR 370 crores, translating to 8.6% EBITDA margin. It's a contraction of about 552 basis points sequentially and 238 basis points year-on-year. Our stand-alone EBITDA for quarter 1 stood at INR 380 crores versus INR 391 crores in quarter 1 of last year and INR 587 crores in quarter 4. The EBITDA of INR 3861 crores of stand-alone translates to 9.1% of margins. Our consolidated gross margin stood at 33.9%, a contraction of about 575 basis points sequentially in the face of unfavorable raw material costs and rupee depreciation during the quarter. Coming to raw materials. During quarter 1, crude oil prices remained at high levels. Average price of crude surged past $100 per barrel in the beginning of the quarter in April and May. Although the June average was a little lower, supply chain disruptions remained heightened throughout the quarter. Coming to natural rubber, the international benchmark Scan started in quarter 1 at around $1,950 per tonne and has since moved higher month-on-month. Prices averaged approximately about $250 in April, $2,200 in May and around $2,240 inch. We are currently hovering around $2,200 per tonne, which remains elevated and represent a significant increase from the levels that we saw in quarter 4 and all of previous year. In line with this movement and prevailing parity dynamics, dramatic rubber prices have also remained elevated and currently hovering around INR 280 per kg, which is more than a 15-year high mode the last 15 years and beyond. And domestic prices are currently at a premium to international prices in the range of INR 15 per kg to INR 20 per kg. The rupee continued to weaken and we can in the quarter 1 from about 93, 94 level to around INR 96.5 to a dollar level. The depreciation also added to a cost pressure in quarter 1 and would continue to have an impact in quarter 2. So overall, as shared with you all, raw material costs search in the high teens in the range of 16% to 18% in quarter 1 compared to quarter 4. And moving into quarter 2, despite some recent correction in the crude oil prices, the cost pressure is likely to continue as we do not have the benefit of lower cost raw material inventory in the beginning of the quarter as we had in quarter 1. And further spike in the prices of natural rubber and currency depreciation is expected to have an impact of about 8% to 10% in quarter 2 versus quarter 1. The commodity market continues to be volatile which is also impacting the currency and ocean freight rates. We expect the commodity prices to stabilize once the West ratio war comes to an end, which may lead to some stability in the commodity prices, hopefully, in the second half of the year. While we have taken pricing increases across all segments in quarter 1 and some more in July, there is a lag between the cost increase and our product price increase, which will have an impact on our margins as we go into -- coming to capital expenditure, working capital and debt. We spent about INR 293 crores of CapEx in the stand-alone entity during the quarter. We prioritized capacity diluted CapEx over normal routine CapEx during the quarter 1. Our capacity utilization has remained high on most of the categories across all our plants in quarter 1 and we would continue to invest in adding capacities and scale them up faster to support the demand growth. As shared earlier, we intend to incur CapEx in the range of INR 1,300 crores to INR 1,400 crores during FY '21. and we would like to stick to the above plants as of now. On a consolidated level, our working capital moved up by about INR 138 crores as compared to quarter 4 and stand-alone working capital increased by about INR 15 crores. And the primary reason for the increase was on account of higher raw material inventory, both in volume and value. We operated with higher physical inventory during the quarter to manage the supply-related challenges and also to ensure that supply securities for our factories. We look forward to normalizing this in quarter 2. Further, there has been some accumulation in our balances arising out of some mismatch between GST on inputs versus output, which we hope to unlock it in the next 2 quarters. Our consolidated debt stood at INR 3,243 crores, an increase of about INR 232 crores over quarter 4. Our debt EBITDA on a consolidated basis stood at a comfortable level of about 1.6% and marginally higher over quarter 4 level of about 1.46 and our debt equity ratio remained healthy at 0.65. Coming to operational expenses, our stand-alone employee cost in quarter 1 was similar to quarter 4 around INR 248 crores level. In order to mitigate the impact of increase in raw material costs, we exercised strong control over all discretionary costs through various steps, including cutting down our discretionary expenses like travel, conferences, consulting and factory related, et cetera, which helped in keeping our consolidated other expenses at 18.6% level, similar to previous quarter despite higher marketing costs due to IPL and infrastructure cost that Arnab was talking about in overseas operations. Overall, we kept tight control on cost between the gross margin and EBITDA lines during quarter 4, despite an overall inflationary scenario beyond just directed food cost. Coming to depreciation and interest costs, depreciation of a consolidated level for the quarter remained at similar levels as that of the previous quarter. However, consolidated finance costs during the quarter increased by about INR 61 crores. Arnab already explained the 1 quarter which is about INR 48 crores was attributed to the depreciation of steel and concurrency versus dollars And on $80 million loan that we had that they received from parent entities such India, the impact of that was reflected as finance costs during quarter 4 -- quarter 1. The Board, in order to ensure that the steel infant entity is adequately capitalized, approved us to convert part of the debt into equity to the extent of about $24.5 million. and to ensure that adequate capitalization of the entity at ready equity level. Overall, the consolidated profit after the quarter stood at INR 4 crores compared to about INR 112 crores during the same quarter of last year and INR 244 crores in the previous quarter. Our stand-alone profit after tax is more relatable 1 could -- or influence from that better compared to consolidated number. Our stand-alone profit stood at about INR 98 crores for the quarter versus about INR 283 crores in quarter 4 and INR 135 crores in the same period last year. Our quarter 1 profit of profit after tax was after adjusting about INR 7 crores of exceptional costs towards extension of our current running voluntary retirement option scheme in one other factories. We'd like to inform you that our Board of Directors in the meeting that we had yesterday, approved a CapEx of about INR 1,205 crores for setting up additional 53,000 2-wheeler tire capacity -- this is over and above the additional capacity, which is already under implementation at Napo. The company is evaluating various locational options for this additional capacity. We expect this capacity addition to be progressively implemented over a by FY '21 in stages. The CapEx would be funded with a mix of debt and internal accruals as we have been doing in the past. While executing the proposal, we continue to monitor our leverage levels and ensure that the balance sheet remains strong going into the future. During the quarter, India rating carried out an annual survey and PFM credit rating of A with a positive outlook for long-term and A1 plus, with that, thank you once again. With that, we can now open the floor for Q&A.

[Operator Instructions]. We have the first question from the line of Kapil Singh the from Nomura.

Firstly, just wanted to know what is the greater than 17-inch and EV revenue share for here? Is the market share here better than overall industry?

You mean in replacement of OE. In OE, we have an increasing share in excess of 20%, and we intend to take it up a little bit higher. It wouldn't go too much higher because of the over policies. And in replacement, it is more or less indexed to our overall market share. The market agency is about 13% and it will grow to 30%, 40% in the next 5 years.

Okay. And secondly, on the price hikes, just wanted to understand given the current commodity index, do we need to take further price hikes or the prices we have taken so far are sufficient to fully pass on the cost?

No, we have to take further price hikes. We have taken price hikes on first July also, and we have got an index by side from OEMs. We need to take further price hikes in replacement and international which we are doing through the month of July, and this will continue into August as well.

Okay. And just lastly on a -- what is the FY '28 revenue potential and operations come under our full control?

Our current run rate at customer prices is about $10 million, which is about 20-odd million. So we would expect to grow it from there in FY '28.

We will take the next question from the line of Raghunandhan N,L. from Nuvama Research.

Good evening, sir. Thank you so much for the opportunity First on the requirement of price hike, would my understanding be correct that the total commodity or raw material basket increase will be about '26 Q1 and Q2 put away. So the price hike requirement would be around 15% to 16%. And so far, you have taken about 7%, 8% price hike in replacement. So just wanted to understand from you, how do you see both for set and the industry? How is the market and competitors responding to price hike? How much more price hikes do you expect and cards, both on market acceptance and on the demand.

Yes. So as we speak, that 7%, 8% has moved up to 11% already and you're right in your estimate of about 16%. So we will endeavor to take another 4% to 6% for the month of July and August in replacement. Coming to industry, I really can't predict or say anything on behalf of industry. But so far, competition has been taking up price hikes in different measures, in different categories a little bit here and there on dates, but the price table is moving up.

Good to hear that. Secondly, on cans, you indicated that it to revenue should be better as the control of the customer transition will be completed by Q2. So 2, the growth prospects will be better. So like 2, 3 years ago, [indiscernible] a much higher revenue. How do you see the trajectory of the revenue levels going back to the previous peak, and how do you see H2 growth and FY '28, '29 trajectory in terms of going back closer to the [indiscernible] of revenue?

Yes. That's a benchmark that is there. That was a couple of years back, as you pointed out. The H2 growth will come initially because if we start handling the customer directly, whatever the customer space comes to us. So when you sell to Michelin instead, we get a much lower realization because the balance goes to cover missions distribution costs, holding costs as well as a little bit of margin is left with them transparently as per the transition agreement. So that growth in value sale will come at constant volume terms, so to say, [indiscernible]. And further, when we handle it, we have some visibility of replacement growth coming back on track, not to the highest levels of which we witnessed 2 years back, but definitely on a positive move. The OEM growth will take time to recover because we need to get into the OEM programs with NPD, et cetera. So that's the situation right now. And on both these accounts, we expect H2 to be better. I believe Amit is on call, right? So Amit, would you like to add anything more?

No. I take moment due to the faster [indiscernible] et cetera, iterating on things, and they're all [indiscernible]. So even though we are the [indiscernible], these are the oriented the plan. because what is that deal on the somebody else.

To somebody else, maybe you'll have to disconnect someone who was talking and Amit will come back during the course of the call, in case he wants to clarify. We can move to the next question.

Kumar, sir, if you can indicate for cancel, how was the margin because when I do control minus stand-alone, the EBITDA is negative. So was the one-off which was mentioned during the opening remarks, like start-up costs, new hiring. So I just wanted to clarify whether all these one-offs have led to a negative margin. And if the one-offs are over whether Q2 will revert back to 8%, 9% kind of margin.

Okay. Raghu, the margins were negative in quarter 1. And I think Arnab updated in terms of customers are coming to our fold progressively, when June, half of the customers are migrated and by September end, we expect it to be around 90%. So for us to start servicing our customers in different geographies, we have to set up our warehouses have people in overseas locations like Germany, U.K., France, Poland. So we had those infrastructure warehousing-related costs. Okay. And those costs would be absorbed as we -- once we start servicing all our customers from September. Gross margin still looks healthy. And in fact, there's a gross margin differentiated between CEAT business and Camso business. [indiscernible] we would do request is that give us 1 or 2 more quarters for us to provide more clarity because only half of the customers and that in the month of June has come, so we have to advance our expenses. So -- and setting up systems for us to meet the requirement locally, it could be supply chain systems. It could be PAD-related system. Those costs have been -- are already accounted and observed. So gross margin looks okay. Operating margins were negative, okay? But however, I think in a quarter or 2, things should become normal as the will be matching revenue.

We will take the next question from the line of Vijay Pandey from Axis Capital. Please go ahead.

Partially on the National Grupo prices. So even though the crude prices has come down slightly, national robot prices are still, especially on the domestic side, there's still remaining high. So just want to understand what is driving that dynamic? And also, I heard that [indiscernible] government is putting a minimum flow price of 250 from 200. So do you expect the natural near prices to come down below 250 or like 250 million is going to be the base scenario going forward?

Okay. I see, largely Indian prices with a lag is linked to international prices, okay, in a high demand, low inventory situations. Local rubber prices would be at a premium. And in a reverse situation, local could be either at parity or a little bit of a discount. So that's what it happens there. Today, Domestic prices of 280 is at a premium to the international prices to the extent of about INR 20 per kg. So local prices are largely driven by the international, okay? And because of supply chain-related disruptions, the transit plant increased during the intervening period and therefore, overall inventory level in the pipeline came down, particularly in physical inventory part of it. And that would have necessitated the local consumers of natural rubber to approach local market to buy more, and that has got a little bit of a premium. What we expect the local prices to happen, we expect the local prices to move in tandem with interaction prices going forward. The premium could come down once the situation becomes normal, ideally, based on the movement of other commodities, okay, it could be even aluminum or copper, even precious metals, steel, many of them reacted to correction and crude oil prices in terms of moving in the same direction, though the proportion was a little lower. But natural rubber has not happened yet. Okay. While though Shanghai market corrected about 4% or 5% on 1 or 2 days, otherwise, the international price is still at an elevated level. there's nothing commodity in the world, which will operate independently and not move in line with the crude. So therefore, with a lag. As far as the current quarter is concerned, quarter 2 is concerned, natural rubber prices are kind of a fixed for us at least, okay, because of the pipeline, physical inventory imports. We hope the prices would correct move down to the levels that you indicated as a first step. Maybe will happen during the course of the latter part of the quarter in the subsequent quarters when things normalize.

Okay. Also if I could check in terms of the flows [indiscernible]. Is it [indiscernible] by Q3 or Q4, it may come down to 250? Or do you expect because government [indiscernible]?

No, I don't know. It's difficult to comment if the local floor prices remain if it is high, and consumers where they have already seen high inflation, okay, whether they will continue -- we'll be able to afford to buy at that level only time will tell. As of now, short term because it's volatile, we should accept that quarter 2 national level prices is kind of fixed for us. We look forward to comprises coming down once the normalcy returns and then the local prices will adjust for itself.

And sir, what will be our mix in terms of domestic and natural domestic and international copayment?

Varies from category to category. Approximately 2/3 of the natural rubber currently is a block international and 1/3 of it is local sheet ruble, plus or minus 5%. That is a range in which normally our consumption is.

Okay. Okay. And sir, around the price hike. So can you just give the quantum of price hike you have taken in June and one in July.

Okay. I think Mr. [indiscernible] mentioned to you, up to June end, progressively beginning of the quarter to the end of the quarter in the replacement market, about 6.6, 6.7% kind of a price increase has happened. And he also mentioned it in response to earlier other question that has kind of become about 11% after taking into consideration price hike happened in the beginning of the quarter. Something more is also -- has been announced for the second half of the month and something more will happen. So as of now about 11% in the replacement International business, about 5% to 7% has happened on fresh supplies. And OEM in double digits, I think the number is not close. It should be in a double-digit number effective first July, in addition to some 3% that happened in April.

We will take the next question from the line of Ankur Poddar from Swan Investments.

Firstly, can you please share the overall volume growth for the quarter?

For CH standalone, it's in about 13% to 14% year-on-year.

All right. And my second question is regarding our finance cost, which has gone up, which was explained that because [indiscernible] currency had depreciated. So we got an impact of around INR 48 crores for the quarter. Now going forward, what can we expect the quarterly run rate to be for our interest expense? And do we see this loan amount getting lower?

See, look, this INR 48 crores impact is basically on the loan given by parent entity in India to our own 100% subsidiary entity called [indiscernible], which takes care of the Camso business. And if we remove that INR 48 crores, that is there would have been a normal finance cost that we would have incurred. We expect a debt level to marginally increase in the subsequent quarters at a consolidated level. And therefore, within our 5% level without that INR 48 crores of impact, would be the range in the next 1 to 2 quarters because the interest rates are stable, okay, we'd like to keep the debt level within our range. So that's kind of a number in the next 1 to 2 quarters that you can expect.

Okay. So is the understanding correct that the interest cost would be in the range of INR 100 crores to INR 110 crores going forward quarterly?