We are getting into categories where the margins are higher than what we are earning today, Kumar Subbiah, CFO, CEAT, tells ET Now.
Edited excerpts:
How are you tackling the rise in raw material costs that has been pulling margins down? What is the outlook for rubber prices and how are you mitigating the risk on margins?
The outlook is we expect about 2-3% increase in raw material prices in the current quarter versus last quarter. Assuming that crude sustains at the current level of $75 to $80 per barrel, there may be another 2-2.5% impact on overall raw material basket in the next quarter.
The analyst community believes that a higher share of OEMs in the sales mix along with capacity rampup is also impacting your margins and can be a source of contention going forward. Please give us timelines for this expansion that is underway and how you will manage those expectations?
First let me talk about our current capacity utilization. Capacity utilization is high in commercial categories, particularly in truck and bus radial and in case of passenger car radial also it is high but there is an opportunity for us to debottleneck the existing plant so that should take care of our requirement for the next 12 months or so.
The new plant producing two-wheeler tyres at Nagpur is ramping up nicely. Our capacity utilization is approximately around 70% now. Going forward, we are increasing our capacities broadly in three categories; one is in truck and bus radials which is coming up at Halol and we expect the first tyre rollout to happen sometime in Q3 of the current financial year.
The second one is a greenfield project for passenger car radial tyres in south India. We expect the plant to start commercial production towards the end of the second quarter of next financial year.
The Third one is at the speciality tyres which is our 100% subsidiary. The first phase of the investment was for about 40 tons, now we intend to take that up to 100 tons in due course of time. So, these are the three capacity expansion plans that we have.
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What is the overall revenue growth expected once all the capacity constraints are addressed and how much of it will come from exports?
In the current year, the only plant that is going to be commissioned is the truck and bus radials and we would start utilizing that capacity from fourth quarter onwards. So, it will have some favourable impact on our growth starting from Q4. We are almost running at full capacity in case of passenger cars subject to this debottlenecking. We have some capacity available in two¬-wheelers. Overall, we need to find out how the industry is going to grow. There is an opportunity for growth of about 7-10% in the current year.
How are you currently performing in the TBR segment vis-à-vis passenger cars and two-wheelers?
Our capacity utilization is full in TBR. The market has grown very well in the last six to nine months. However, we have not participated in that growth fully because of the capacity constraint. Going forward, once our new capacity comes up, we expect our share of the business to increase. As the market grows, we would get that benefit from Q3.
In case of commercials, we have a large presence in truck and bus bias tyres. There is a shift happening from bias to radial and we are working towards maintaining the current share of business in the truck and bus radials where our share is very low. It is in rage of 2-3% or so. There is an opportunity for us to grow in market share in that segment.
How is the pricing pressure in the two-wheeler space according to you?
The two-wheeler category was impacted post demonetisation and also during the GST transition period. We see some recovery in two-wheelers, particularly in the last two quarters that is Q4 of last financial year and Q1 of the current year. We hope it sustains and once it comes back to normal growth levels, we would be able to participate in their growth as we have available capacity.
In terms of demand and long-term growth prospects, where are you seeing the potential or the opportunity unfolding?
As far as Ceat is concerned, our focus area continues to remain in the passenger segment. That consists of two-wheelers as well as passenger car and UV segments. We will continue to focus on those two categories. In addition to that, we also expect commercials predominantly truck and bus radial to grow as the economy is recovering, the mining sector is opening up etc.
The introduction of antidumping duty on commercial category, that is on truck and bus radial tyres imported from China, has also helped in utilisation of the local capacities better. Therefore, it should lead to improved utilisation of existing capacities and new capacities being worked on by the existing tyre players, including us.
What about your plans for other segments like off-the-road tyres, volumes and margins? What are you hoping to clock in?
The Ambernath plant was commissioned in October last year and the capacity is slowly ramping up. Our plan is to set up a 100-tons capacity plant and in phase one, we have set up a 40-ton kind of a capacity. We expect the ramp up to happen over the next 12 to 18 months.
It has been very clearly a phase of very high capacity commitment for you. A big concern apart from margins across the street is also the rising debt levels. Could you update us on that front when can we see margins move in an upward trajectory?
We have improved our debt equity and debt EBITDA ratios in the last 15-18 months. Our current debt equity ratio on consolidated basis is around 0.32 as of 31st March and it is an improvement of about 0.08 over the same period last year. In March 2017 we were around 0.4. Even on a standalone basis, we have seen a similar improvement on debt equity which means that we have headroom to invest on capacities.
With respect to your second question on EBITDA margins, we had low EBITDA margins in Q1 of the current year and also Q4 of the previous year arising out of significant increase in raw material prices and lower demand just before GST impelementation.
We have recoverd EBITDA margins significantly in the subsequent quarters. Our average EBITDA margin in the last three quarters of the last financial year is approximately about 12%, which is very healthy. In the future, we are getting into categories where the EBITDA margins are reasonable, passenger car radials or speciality sector which is off highway should also help in terms of healthy EBITDA margins.
In terms of business mix, we had a higher share of original equipment manufacturers that may bring down our average EBITDA to the extent of incremental exposure to it. Overall, we are very happy that we are getting into categories where the margins are higher than what we are earning today.
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ET Markets
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