Camso Inc. (500878) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the CEAT-CAMSO acquisition update call hosted by Anand Rathi Share and Stock Brokers Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Mumuksh Mandlesha. Thank you, and over to you, sir.

Thank you, Alaric. Good morning, everyone. On behalf of Anand Rathi Share and Stock Brokers, I would like to welcome you all to CEAT's CAMSO acquisition update call. I thank the management for taking time out for this call. To represent the management, today, we have with us Mr. Arnab Banerjee, Managing Director and CEO; Mr. Kumar Subbiah, CFO, and Mr. Amit Tolani, Chief Executive, CEAT Specialty. We'll begin the call with the opening remarks from the management, post which we'll open the floor for the Q&A. Over to you, sir.

Yes. Hi, good afternoon, and welcome to CEAT's CAMSO acquisition update call. I'm joined today by Kumar Subbiah, our CFO; and Amit Tolani, who heads our Specialty business. I would like to thank all of you for taking the time and joining us today. I'll take you through a short update on transaction, after which Kumar shall share the key financial implications and Amit is also around for answering specific business-related questions during the Q&A. As you know, last December, CEAT has entered into a definitive agreement to acquire CAMSO brands of highway construction equipment, bias tyres and rubber tracks business from Michelin Group in a deal valued at USD 225 million. Following our guidance in the last earnings call, it gives us immense pleasure to inform you that we have closed the acquisition transaction with effect from 1st September 2025, and all the regulatory approvals are in place. Our investment in CAMSO marks one of the largest FDI or ForEx inflows into Sri Lanka's manufacturing and export sector. This acquisition is significant for CEAT, granting us global access of a premium brand, along with 2 manufacturing facilities in Sri Lanka. For CEAT, this acquisition reiterates our commitment towards the 3 pillars of our growth strategy: premiumization, globalization and investment in the high-margin specialty segment. We stay with our outlook that in the medium term, once everything stabilizes, this business should be margin accretive and could deliver high teen to 20% operating margin. CAMSO gives CEAT the ability to considerably widen its product base into construction tyres and tracks. With its strong presence in Europe and North America, CEAT stands to gain access to 40-plus global OEMs and 200-plus premium OHT distributors, accelerating its vision to be a significant player in Off Highway mobility segment. CEAT's OHT business now has 900-plus products. To start with, there is very good complementarity between CEAT and CAMSO. At CEAT, we also have a long history of successfully operating in Sri Lanka through our JV with Kelani Tyres over the last 26 years. Hence, we are well positioned to enhance the operational activity in Sri Lanka for the CAMSO plants. We know the ecosystem, regulations and people well. The capacity is roughly 250 metric tonnes per day and split equally almost between tyres and rubber tracks. The CAMSO facilities have been operational in Sri Lanka for the last 3 decades, servicing global demand in -- and is in world-class shape under Michelin patronage for the last 7 years. Current utilization of the plant is about 50%, thus leaving a significant upside in terms of plant capacity. As we have closed the deal for ensuring business continuity, we shall sell the products in the interim to Michelin team, who shall continue to service all the customers on our behalf. We endeavor to take over direct relationship with all customers as soon as possible. At the other end, since the plant is a carve-out from a complex Michelin supply chain, we have to continue buying semifinished goods from Michelin till we set up our own upstream equipments, namely the mixer and the calender. This will take up to 18 months approximately. Hence, for the next 4 to 6 quarters, our turnover and margins will be lower in this transition phase where we have a supply and offtake arrangement in place with Michelin. As we take over the business from Michelin, there will be a geography and customer-wise phase transition, as I mentioned, to take over the entire value chain. About 1,500 plus highly skilled workforce encompassing manufacturing, R&D have been added to our team. We are putting in place a strong global sales structure to ensure smooth customer transition. We also see a strong cultural and operational fit between CAMSO and CEAT, including high emphasis on customer experience and employee experience, which is close to CEAT's total quality management culture and people management approach. Michelin Group and CEAT have worked very closely in transiting this business to us across value chains and will continue to do so in the coming quarters. As we begin this chapter, I sincerely thank you for your continued trust and support. With this, I'll pause here and hand over the call to Kumar for his remarks.

Thank you, Arnab. Good morning, ladies and gentlemen and thank you for joining the call on this very important moment. We are happy to inform you that we have taken possession of the physical assets and also the operations effective 1st of September. We have signed final asset purchase agreement, supply agreement and also related agreements towards transfer of intellectual and physical properties with Michelin Group entities. As shared with you earlier, the total deal value of this transaction is about $225 million. That deal value has largely 3 components: one physical assets, inventories, that is raw materials and finished goods, and also intangibles like brand, patents, trademarks, et cetera. Considering the structure of the deal is in the nature of asset purchase route, in order to carry out operations at Sri Lanka, we have formed 2 companies, namely CEAT OHT Lanka Private Limited to carry our manufacturing operations and CEAT OHT Lanka Ventures Private Limited to enable ownership of land and building structure. We would like to inform you that we have obtained key regulatory approvals like antitrust approval in relevant countries. We also signed an agreement with Board of Investment of Sri Lanka in the month of August that would enable us to carry out our export operations smoothly. In our agreement with Board of investments, Sri Lanka, we have indicated an investment of $171 million that not only includes the purchase of assets towards this particular transaction, but also includes future capital expenditure in that unit and also our working capital related requirement. In addition to BOI, that is Board of Investment related agreement, we also obtained necessary approvals from VAT authorities, customs, income tax authority in the form of TIN and local other approvals for us to carry out our operations and all of them are effective 1st of September. The acquisition is in line with our capital allocation principles, which gives higher priority for our OHT and our international business. As you are aware that our balance sheet has strengthened over the last few years significantly, and that covers our leverage ratios, hence, we are comfortable with respect to this acquisition. We have so far paid about USD 138 million to different Michelin Group entities. In addition to the above, we would also be making payment for purchase of finished goods inventory at different locations in the next 12 to 18 months. And it would also involve about $44 million of payment after 3 years towards the brand once the CAMSO brand is formally transferred to us. The consideration for the purchase of assets, inventories and some tangible assets in Sri Lanka were routed through our 100% entity, which is CEAT OHT Lanka Limited. In this entity, we have infused both equity and debt as appropriate. We would also form a supervisory board for both the entities and created for the purpose of overseeing the function of the business. As you are aware that the balance sheet strengthening is also being vetted by credit rating agencies. As part of this exercise, we went through credit surveillance with 2 of our existing credit rating agencies, India Ratings and CARE, and we were happy to inform you that they maintain A1+ for short-term and AA with positive outlook, taking into consideration cash outflows relating to CAMSO. We would like to thank banks, financial institutions and various regulatory agencies for providing overwhelming support to carry out these transactions. The CAMSO financials would be reflected in our consolidated profit and loss account from current quarter onwards and balance sheet too from the end of this month onwards. Profit and loss account impact would be for a month as far as quarter 2 is concerned, from quarter 3 onwards fully, it will be reflected. We remain committed to drive CEAT's growth journey and are excited about the opportunity that CAMSO brings. Thank you. Now we can open the floor for Q&A.

[Operator Instructions] The first question comes from the line of Siddhartha Bera from Nomura.

Sir, my first question is now on CAMSO regarding the transition which you have indicated and given the tariff issues globally also, demand being also a bit soft. So where do you see the run rates now sort of settling in for CAMSO in terms of annualized revenue or margins, say, for the next 6 months or for the next 1 year, whatever data you can sort of share? So that will give us some clarity of where is the starting point, and then we can build in some improvement like you are indicating. So if you have some thoughts there, it will be really helpful.

First, let me address the tariff situation. The tariff situation in Sri Lanka has settled at about 20% -- at 20% impact, and it is as competitive as earlier in the pre-tariff situation vis-à-vis any other country which manufacture this product. So we don't expect the tariff thing to be impacting demand to any great extent. So that's number one. Number two, the plant is utilized up to 50%. So if -- as and when we take over the customer relationships, we expect to enhance the utilization of the plant and thereby impair the fixed cost impact on the margins. That's number two. Number three, the run rate, if you had asked, it's around USD 150 million to USD 130 million per annum, the overall run rate. But of course, revenue recognition will be slightly lower until we operate in the supply and offtake arrangements as explained to you. So the turnover accounted by us will be lower than this for next maybe up to 3 to 4 quarters. And the margins also will be thereby lower for about 6 quarters because we have to also set up the upstream equipments.

So probably by FY '28, we should target to go towards mid to high teens or you think that may take a bit longer?

By FY '28, we should have a stable business scenario. So we should see the normal turnover and margins by then.

Understood. And sir, second question is on the CapEx now. So given that you need to make some more investments also on the machinery side, how much CapEx do you think you need to do in the Sri Lanka's -- in the CAMSO's plants in Sri Lanka at least in the next -- this year and next year?

So over the next 2 years, it will be around USD 30 million.

Per annum?

Over 2 years.

[Operator Instructions] The next question comes from the line of Raghunandhan N. L. from Nuvama Research.

Sir, firstly, to Subbiah sir. Sir, if you can give some numbers in terms of how much would be the gross block of the company. And currently, within the revenue, how would be the share of various geographies, if you can remind that how much is U.S. currently? And -- that was the first part. And second question is, in terms of that 20% tariff of U.S. on Sri Lanka, would it be like partly passed on and partly absorbed. How much are you able to pass on?

Okay. See, approximate gross block is estimated to be around close to about $90 million to $100 million, okay. That is the expectation. Gross block means asset -- fixed asset value that will come. I think as we mentioned, this -- the total consideration includes, okay, some intangible, it includes finished goods inventory in different parts of the world and also some raw material and semi-finished goods. So that is a gross block approximate estimate. The gross block means whatever is the value at which it comes into our books, it will become gross block from here onwards, okay. So with respect to U.S., I think Amit will be able to...

Yes, Amit will share the sales breakup.

So the exposure to U.S. is around 50% to 55% of the revenue. And you asked a question about the tariff. Eventually, everything will be passed on to the customer in terms of tariff.

But trying to understand more. Would there be competitors in U.S. who are locally manufacturing who may not need to take a 20% kind of a price increase, and if we are eventually passing on the entire 20%, how do you see the impact on our competitiveness? So that is what I was trying to understand.

In this segment, there are no manufacturers in the U.S., that's number one. And the competitiveness, as Arnab mentioned earlier, is as competitive as it was before.

Got it. And fair to understand that our position will be relatively better compared to exporters from other geographies because Sri Lanka relatively is at 20%, which is either in line or favorable compared to other exporting countries.

Yes, it is definitely better than countries like China. Otherwise, you should read it as same as it was previously.

Got it. And can you also share the revenue mix for Europe, South Africa and rest of the world -- I mean South America and rest of the world?

So as I said, North America would be roughly 55%. Europe would be another 36% -- 35% to 37%, whereas South Africa and Australia, Middle East form the remainder of the pie.

Got it, sir. And to Subbiah, sir, because there is some part of the payment, which is getting deferred like some payment is happening over the next 12 to 18 months and some payment of $44 million you said is happening over after 3 years. So in FY '26, how much would be the debt increase on CEAT's balance sheet?

See, so far, approximately about $138 million is what we have paid, okay? And beyond this, we do not expect much payment to happen during the current financial year. So it translates to about INR 1,200 crores kind of overall payment. At consolidated level, look, we would also like to maintain about INR 1,000 crores of CapEx for the company during the year. So overall, I think about 70% of that relating to this could be an incremental debt relating to these operations. And similarly, there could be some portion of the debt that may arise on account of CapEx plan that we have within the entity. So about INR 1,000 crores, INR 1,200 crores kind of a debt impact could be there for the current year.

Does that answer your question, Mihir? Mihir, are you there?

Hello?

Yes, does that answer your question?

Actually, I am yet to ask the question. It was Raghu's question. Can I go ahead?

Yes, please go ahead.

Sir, so I had one clarification question, that previously in the call, you had mentioned that on the tracks, the tariff would be lesser than tyres. So is it true that in the current situation also 20% would be for tyres and tracks would be at a lesser tariff? Or how is it?

So 20% applies to both tyres and tracks because it's a reciprocal tariff. So it applies at the same level for both.

Okay. So it will both beyond 20%. And basically, out of the total revenues in U.S., how much would be the tracks and tyres breakup?

It's similar. So as I shared it earlier, it's similar. You can refer to those numbers. The split of the business is 50-50.

All right. And currently, are we seeing some kind of slowdown into the U.S. imports right now as an industry on the OHT segment?

So it's too early to comment. And as we've been saying that competitively for Sri Lanka, nothing has changed. So that's where we are.

[Operator Instructions] The next question comes from the line of Basudeb Banerjee from CLSA.

Sir, just to understand with India tariff at 50% for the similar portfolio, which you have been -- or the normal OHT portfolio you've been building from Ambernath. So will it be possible to route it via Lanka to U.S. now? Or is that not possible as such, so that from you can benefit from the lower tariff in Lanka and operate your India operations without much of an impact because of tariffs?

So theoretically, it is possible, but it all depends on what kind of equipments are there, what sizes can be transferred, how fast it can transfer. There's also a negotiation that is going on between India and U.S. as we understand. So how long will this 50% stay, that is also a factor. So we are waiting and watching the situation but also acting to explore what can be transferred to Sri Lanka.

Sure. And second thing, sir, like where, again, after last few years where debt reduction was happening well, now again debt moving up. Will there be any plans of raising secondary equity to -- of the debt and have a much leaner balance sheet as such?

See, look, we continue to even after infusion of money into Sri Lankan part of the entity at overall level, our balance sheet will continue to remain healthy. So you are aware, as of June, our debt-EBITDA was about 1.25 around that. So even with this INR 1,200 crores of outflow for this in the current year and assuming we spend about INR 1,000 crores towards CapEx, our leverage ratios would remain well within our thresholds. So at this point in time, we are not seeing any need for us to raise any money.

Sure. And as you said, this USD 44 million after 3 years. So by then that the radial portfolio under CAMSO you can also make and sell. That will be the key thing after the 3-year period?

Yes. After a 3-year period, many more categories will be accessible to us. But before 3 years, it's only compact construction tyres and tracks. You're right.

And brand CAMSO as such will be -- can be used even now or after 3 years only?

After 3 years. Right now, we can use it only for compact construction and tracks.

The portfolio, what you will be producing now?

Yes.

And last thing, from a normal CEAT perspective, the last few weeks, we have seen some kind of reduction in natural rubber prices. So how do you see that? Is it moving favorably, by when it can be benefiting you as such other than crude being favorable?

Ladies and gentlemen, the management has been disconnected. Please stay online while I get them reconnected. Thank you. Ladies and gentlemen, the management has reconnected. Please go ahead, sir.

Yes, hello?

Hi.

Yes, sir, I was just asking last few weeks saw some domestic natural rubber prices finally have started correcting. So for your core India business, do you see some better sourcing rates? Are you seeing that? And second thing is similar to the other OHT listed player in India where raw material sensitivity in the P&L is relatively lesser. So is it similar for CAMSO also? These are the 2 questions.

See, the local natural rubber prices are currently hovering around 190, 192 in that range in Kerala, okay? So therefore, it was hovering around 200 to 205 maybe a month back. So -- but the international prices are at $1,750, maybe about $50, $60 increase is there. And currency Indian rupee also depreciated. So overall, as far as the current quarter is concerned, any movement in natural rubber prices in the last couple of weeks is unlikely to have any impact for the current quarter, okay? But we are happy that local prices have come closer to international. It was at a premium to international prices, largely on account of lower availability of natural rubber inventory in India arising out of increase in lead times. Now that the import arrivals have normalized. So the local prices may not be at a premium to international prices in the short term, that's what we feel. And coming to Sri Lanka, I think Sri Lanka is also a producer of natural rubber and based on overall supply/demand situation, the natural rubber for that entity would be bought locally or produced or imported depending on the requirement.

No sir, I was just trying to understand the raw material sensitivity, RM to sales ratio in P&L for the other listed OHT player in India is far lower than the typical automotive tyre makers. So is it similar for CAMSO also? Or RM to sales is similar to your CEAT's stand-alone operations?

No, I think at the gross margin level, which is selling price minus raw material, there is a similar difference between a non-OHT category and the normal category. In terms of India -- CEAT India versus that entity, that is likely to be similar to what you are seeing in Indian OHT entities in terms of gross.

[Operator Instructions] The next question comes from the line of Mumuksh Mandlesha from Anand Rathi.

Sir, just your take on the recent GST announcement, government has rationalized the rates for the tyres as well. How do you see impacting the demand, the premiumization happening because the costs have come down? And also, do you see the impact on the margins?

So the rate reduction is definite positive, especially for the commuter segment in the rural markets, 2-wheeler and farm will see better traction is what we believe. Farm tyres rate has come down to 5% lowest slab; 2-wheelers, 18%; 4-wheelers, truck tyres also 18%. For truck tyres, which is price sensitive, we can see better traction. The 4-wheeler market was seeing some demand slowdown in terms of low single-digit kind of growth. So we have to wait and see what happens there because there's a structural change in that market where consumers are moving towards bigger vehicles and bigger rim size tyres. That may not be that price sensitive, so we'll have to wait and watch that segment. So overall, very positive development, I can say.

Got it, sir. And just on the CAMSO side, if possible, in near term, next 6 months, any broader margin we can expect, sir, if you can share some range, sir, there?

Yes, it's difficult to share anything at all because as you understand, we have taken over the running of the business on just 1st of September, so we have to understand the exact situation. It's also all tyre, margins are dependent on also the throughput of the plant, which is running at 50%, as I mentioned, so we will just take control, maybe wait for some more consolidation of the results before we have a fix on what kind of margins we'll have, and we can share thereafter.

[Operator Instructions] The next question comes from the line of Joseph George.

I have 2 questions. One is, if I look at the purchase consideration, you mentioned that $225 million, of which $44 million is to be paid after 3 years, the remaining is $171 million, of which we've paid $138 million. So when is the remaining $33 million due, is that not this year?

See, remainder is $181 million, so $225 million minus $44 million. We have paid about $38 million. Balance is largely relating to inventory. So our estimate is in the current financial year, we may not have any payment relating to that. It could be some time in the next year.

Understood. The second question was on the gross block that you quoted at $90 million to $100 million. I wanted a clarification. Is this the gross block or is it the value of all the physical assets that you're taking over? Because you mentioned gross block, you mentioned asset value, you mentioned inventory, all of that. So I just wanted to be sure what you're referring to.

See, since the question was on gross block, I indicated. See, once we take over, for us, it will become a gross block. And so we carried out a proper valuation of these assets through reported external agency to -- and accordingly, we assigned that value. Taking into consideration the life of the -- remainder life of the assets, the actual age of the assets, condition of the assets and things like that. So approximately $90 million is the amount attributed towards that. So from here onwards, it will be a gross block in our books, okay, but it is based on our external valuation.

So this is basically the net block or for you now it's a gross block, or fixed asset, doesn't include inventory, right, this $90 million?

No, it doesn't include inventory. Inventories, it doesn't include finished goods inventory. It doesn't include raw material inventory. And it doesn't include some spares, engineering spares and all of those. It doesn't include.

[Operator Instructions] The next question comes from the line of Siddhartha Bera from Nomura Holdings.

Sir, on this initial duration when you will be operating, you mentioned that you will be selling to the Michelin team. And -- so just wanted to understand a bit more here. I mean, will we be free to set up our own pricing and also explore other markets during this period or by when do you plan to take full control of the operations in CAMSO?

So in the front end, which is the customer relationship, we would like to do it as soon as possible. But it could stretch to maybe 4 quarters from now. Earlier is better for us. We are putting in place our sales team and structure at this point of time. And as and when geographies come over to us in terms of the adequacy of our sales system, we'll be taking over the full customer relationship. So it could stretch up to 4 quarters, maybe earlier.

And in this period, will we be able to explore or sell in other markets like ASEAN or other regions also or that will also take some more time?

So it will be in a phased manner. Certain geographies would be available earlier. We would take over certain geographies earlier. But as we said earlier, that expect a 4-quarter period for the complete takeover.

Understood. And sir, lastly, I think since we had started this acquisition of close to $200 million revenue, there has been a lot of change in what we are finally able to see. So do you see during this period, the numbers can have sort of more downside risk to what we are expecting? Or do you believe this can only improve from where we are starting now at $130 million?

So right now, we feel that the market is -- and again, it's a volatile market. But we feel that the market is at its bottom, so things should only look up from now on.

[Operator Instructions] Ladies and gentlemen, as there are no further questions, I would now like to hand the conference over to the management for the closing remarks.

So thanks all of you for joining us today and for discussing the closure of the transaction and see you soon on the other side of quarter 2 results. Thank you.

Thank you, sir. Ladies and gentlemen, on behalf of CEAT and Anand Rathi Brokers, that concludes this conference. Thank you for joining us. You may now disconnect your lines.