CEAT Limited (500878) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the CEAT Limited Q2 FY '21 Earnings Conference Call, hosted by Elara Securities Private Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jay Kale from Elara Securities Private Limited. Thank you and over to you, sir.

Yes, thank you. Good evening, everyone. On behalf of Elara Securities, I welcome you all to the Q2 FY '21 results conference call of CEAT Limited. On behalf of the management, we have with us Mr. Anant Kumar, Managing Director; and Mr. Kumar Subbiah, our CFO. Thanks for giving us the opportunity. If you can just give your opening remarks, and then we can open up for the question-and-answer session.

Thank you, Jay. Good afternoon, everyone. Very warm welcome to CEAT's quarter 2 FY '21 earnings call, and thank you for joining us today. I'm Anant Goenka, and we have with us Mr. Kumar Subbiah on call with us. I hope all of you and your families are all safe in these challenging times. I'll start with brief set of remarks from my side, after which Kumar will share his update, and then we'll be happy to take some questions. As we exited the first quarter of this fiscal, we started seeing some green shoots in the replacement segment. This demand largely persisted in the subsequent months and every month was better than the previous. This quarter, we also completed the CEAT and CSTL merger in the current quarter. Hence, all our Q2 FY '21 and all comparable period's stand-alone financials have been restated to reflect this. The off-highway tire segment is quite different from other tire segments with respect to the high number of SKUs they have with lower volumes and longer gestation period. Hence, the sales process cycle of this business is also different. That is why we have set up a separate entity to manage this business back in 2015. However, we have now decided to merge the 2 entities because we feel there are some operational efficiencies that we may be able to derive through this merger, though from a business and sales point of view, CSTL will continue to act as an independent trader. On a stand-alone basis, our revenue for the full quarter stood at INR 1,965 crores, a year-on-year growth of 16.5%. This growth was driven by volume gains across segments, especially in the farm, CV and PCUV replacement segment. With the ongoing weakness in the OEM market, our OEM business declined year-on-year in single digits, with replacement showing strong demand of over 30% growth and exports, on the other hand, grew in low single digits. As a result, for the first half of this year, replacement accounted for 71% of our revenues against the usual approximately 60%, while OEM and exports accounted for 17% and 12%, respectively. On a quarter-on-quarter basis, given the weakness of quarter 1 FY '21, revenue growth was 76.1%. Our raw material cost came off about 5% sequentially. We also commissioned Phase 2 of our Nagpur plant during the quarter. And as a result of this commissioning and ongoing ramp-up of our Halol and Chennai facilities, our employee cost went up by about 31% year-on-year. As business picked up, our other expenses also returned to earlier levels. As a result of higher production, our other expenses were up by about 16% on a year-on-year basis. Despite higher expenses, our stand-alone EBITDA margin expanded by 4.7% on a year-on-year basis to 14.8% on account of operating leverage, product and market mix. We ended the quarter with a stand-alone PAT of INR 170 crores. With respect to our plants, our plants have been operational throughout the quarter and picked up on a gradual basis. We have adhered to all such prescribed social distancing norms by ramping up our production and have ensured timely delivery of products all across the country. We also took this opportunity to further focus on strengthening our supply chain and adding more dealers and distributors. During the quarter, we added about 200 new outlets across categories and regions. OEMs are gearing up for the festive season in anticipation of demand revisal. This quarter, we announced our association with Mahindra for the launch of their all new Mahindra Thar. The Thar was launched in 2 models with 16-inch and 18-inch tire sizes and we will be supplying our CZAR tires for both the models. Many of the OEM launches late in the first half of the year have been pushed back to later parts. On the advertising front, during quarter 2, Amir Khan joined the CEAT tire family as our brand ambassador. You may have seen some of the advertisements that we launched for Securadrive. We wanted to rope in a celebrity to specifically focus on our premium offerings, and Amir was always our first choice. This association will be for a period of 2 years. We continued our association with IPL as a strategic timeout partner. And we have extended our partnership with the Torino Football Club. Torino is one of the historic and prestigious clubs in Italian football, and we are happy to continue this partnership further. Overall, our advertising expenses were up by about 20% on a year-on-year basis. With the start of IPL 2020, we also launched a new avatar of the CEAT website. It's focused on providing easy access of information to end customer assistance. The website reflects the customer and employee-friendly culture of our company and furthers our vision of making mobility safer and smarter every day. At CEAT, we are constantly working to ensuring that our customers have an enriching and safe experience while interacting across touch points. Keeping this in mind, we have launched CEAT doorstep services wherein customers can avail various services like vehicle pickup and drop, tire replacement, wheel balancing, et cetera, anytime, anywhere. We have recently partnered with ReadyAssist as part of our roadside instance program to offer 24/7 roadside services. We also launched products like neck gaiters and sanitization kits for customer safety in the current times. With this, I will now hand over the call to Kumar.

Thank you, Anant. Good afternoon, ladies and gentlemen. And thank you for joining our call for quarter 2 FY '21. In the earnings call today, I'll share some further financial data points, which you all -- post which we can enter Q&A session. As Anant mentioned, with effect from 1st of September 2020, we have merged the 2 entities, CEAT and our 100% subsidiary, CEAT Specialty Limited. And all our financial numbers of stand-alone CEAT now would include CSTL for the current quarter and also for the comparable periods. Now let me briefly explain about our revenues for the quarter. Our consolidated net revenue for the quarter stood at INR 1,978 crores, a growth of about 17% versus the same quarter last year, and the growth was mostly driven by volume gains. Let me explain now about gross margin. Our consolidated gross margin for the quarter was about 46.5%, an expansion of about 530 basis points versus the same quarter last year. Our gross margin improvement was on account of various things, including lower raw material costs, favorable business and product mix, and effective cost control measures that we have undertaken during the quarter. As regards to our capital expenditure and cash flow, we continued our effort to minimize our capital expenditure during the quarter that helped to manage our total cash flows relating to CapEx within about INR 138 crores during the quarter, which compares favorably with the corresponding period of last year. Further, we also continued our monitoring and efficient management of working capital during the quarter. Our overall working capital for the quarter came down by about INR 55 crores, which is over and above INR 134 crores of reduction that we achieved in quarter 1. In the first half of the year, we've managed to bring our operating working capital down by about INR 189 crores. As a result of significant improvement in operational efficiencies, and also working capital and CapEx management, our debt for -- as of 30th September came down by about INR 190 crores versus 30th June, 2020, largely supported by operating cash flows and efficiencies in working capital and CapEx. We ended the quarter with a consolidated net debt-to-equity ratio of 0.6 versus 0.69 as of quarter 1 FY '21. For the full year, we expect our CapEx to be in the range of INR 550 crores to INR 600 crores relating to projects. Over and above that, we also would be incurring some capital expenditure for our specialty business. As regards our operational expenses, our employee costs went up by about 33% versus the same period of last year. This was primarily on account of commissioning and ramping up of Chennai, Halol and Nagpur plants. Further, in the quarter 2 of last year, we had a onetime reversal of certain provisions. And therefore, the quarter 2 of previous year's number was understated to the extent of around INR 20 crores, INR 21 crores. With production ramping up across all our facilities, our consolidated other expenses went up by about 15% year-on-year, primarily due to higher level of activities and also costs relating to advertisement and research and development expenses. Now let me briefly touch upon the impact of merger of CSTL. During the quarter, we merged our 100% subsidiary, CEAT Specialties Limited, operationally from 1st of September 2020 and effectively from 1st of April 2019, as per the order passed by NCLT. We are happy to inform you that we have successfully completed all the formalities relating to merger, and therefore, we were able to commission all our operations activities from 1st of September for our specialty business. The effective date of merger though it is on 1st of April 2019, the impact of income tax on accumulated losses is reported in quarter 2 results. And consequent to the merger and the accumulated losses in the books of CEAT Specialties Limited, our income tax was lower for the quarter to the extent of about INR 55 crores. During the quarter, as we commissioned our Nagpur plants and progressive commissioning of Chennai plant would also have some impact on our depreciation and interest costs. So overall, we ended the quarter with a consolidated profit of INR 182 crores and a stand-alone profit of about INR 172 crores. Our EBITDA for the quarter stood at 14.8% on a stand-alone basis, and 15.6% on a consolidated basis, an expansion of about 470 to 500 basis points for just stand-alone and consolidated. Now let's open the floor for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.

Last quarter, you had been cautious...

Sir, request you to repeat your question, please.

Yes. Am I audible now, clearly?

Yes. Now you're audible, sir.

Yes. Yes. So 2 questions, one to Anant and one to Kumar. So Anant, question to you is about demand outlook across segments, given that now we are largely into normal fee as far as business environment is concerned. So do you expect the momentum which you have seen in second quarter to sustain and replacing demand, particularly? That is one. And secondly, question to Kumar is with respect to the tax rate or other -- the committed losses of CSTL, have they been fully absorbed in 2Q? Or we can see some further benefit coming in coming quarters?

Okay. So I'd say that with respect to demand outlook, demand continues to remain strong going into this quarter. So OEM demand, particularly in the month of October and November is looking strong. The good is that, yes, revenues look to be continuing to be growing well. On the other hand, with strong OE demand, there can be a little bit of adverse mix relative to the last quarter because we had to fulfill our requirements to the OEMs. So overall, for the near term, demand outlook is good. I'd say, Jan, Feb, March, we will have to wait and watch as to what will happen around that time. But as of now, looking good.

But on the replacement side?

On the replacement side as well.

Okay. Okay.

As regards to income tax benefits, see, this is a onetime income tax benefit that we have accrued in quarter 2, okay? And from here on the normal rate of tax would be applicable. So there's no additional income tax benefit that -- which we have not accrued. Everything has been accrued and, yes, from quarter 3 onwards, the normal rate of tax would be applicable.

Got it. And if I may ask one more question. Would you be able to share RM cost details in terms of your blended cost and how it how has changed in this quarter? And what is the expectation for coming quarter considering the natural reverse spike, which has happened?

So with respect to raw material, as I said, about -- we've seen a 5% drop on a quarter-on-quarter basis. Year-on-year would be about 9% to 10% kind of levels shift. Largely, the drop has come in Carbon Black, which has come down quite considerably because of -- it's all indexed to crude and crude derivatives Platts index, et cetera, whereas all others have also come down by approximately 10% between natural rubber, synthetic rubber, fabric on a year-on-year basis. So that's the approximate shift in terms of raw material costs that we are seeing. With respect to going forward, crude is quite stable today at about $43 or so, whereas natural rubber has gone up. Pre-COVID levels, NR was at about INR 132 per kg. It came down to about INR 118, INR 120 per kg post-COVID. And now it has climbed up to about INR 150 per kg ex Cochin. So to that extent, we do expect our raw material prices to go up by 2, 3 percent points in quarter 3 and then again further in quarter 4.

The next question is from the line of Siddhartha Bera from Nomura.

Sir, my first question is on the replacement segment. So if you can just highlight broadly across segments how has been the growth. And how is the current month like September, October looking? If some color on that would be really helpful.

Yes. The replacement segment has been -- has seen growth across categories. Farm has shown the highest growth of 70%, 80% plus kind of levels. Even the commercial vehicle segment has seen very strong growth, passenger vehicle, motorcycle. The reason we were not able to grow higher was because of constrained capacity more than anything else. So there's no single category that has shown really less than single-digit -- I mean, single-digit growth. Everything has been double-digit plus kind of growth in the replacement segment. Demand continues, as I said, to be good in the months of October, November. The challenge will be more on supply constraint at this point. So as I said, OEM demand is going up. So you have to allocate capacities between OEM and replacement. And with OEM demand being high pre Diwali, we will have to allocate higher volumes to OEM. And therefore, replacement, while demand is good, we may have to allocate a little less to replacement demand, but it's a sign that demand is quite positive at this point of time.

Got it, sir. And second, sir, if you can help with the capacity levels with this Halol plant now coming on stream, is the entire TBR capacity now on stream? Or it will still move up further going ahead? So could you just help us the capacity across TBR, PCR currently and the utilization levels?

Yes. So truck radial is still -- while we've commissioned the plant, there's still downstream equipment that is getting commissioned over the course of the coming, say, 6 months to 9 months' time. So that capacity will keep going up. Utilization levels there are at about 50% of terminal capacity of the entire plant kind of level. So say it's about 120,000 tires per month will be the overall capacity, including Phase 1 and include -- the total truck radial capacity, we'll be at about between 60,000, 70,000 kind of tire production levels today. With respect to passenger car, Chennai facility, there, we are at very early stages of ramp up. So eventually, this will be a 20,000 tire capacity per day plus another 10,000 tires coming in the next phase. Out of 20,000, we will be somewhere -- under 5,000 tires per day capacity at this point of time. And that's more because of during COVID times, we had to slow down the ramp up because we didn't know how demand will turn out. Now we are going all out in terms of recruiting people and trying to ramp up our capacities at a faster pace. So there's a lot of high -- upper capability in terms of the passenger car space.

Got it. Got it. Okay, sir. Last question, if I may take. If you can help us also the market share, which given the strong growth we are seeing across segments. So how has the market share moved in the TBR and PCR segments? And do you think, I mean, we can move that up further given the outlook? That would be my last question.

Yes. So we don't have data to comment on market share. I -- also, the first 4, 5 months of the year was very much kind of supply capability game. So because of COVID situation, some people had to cut capacity, some people had to shut down their plants. So it was more on capability to supply. I believe we did a good job, and we would have gained market share during the first 4, 5 months of the year. Now that supplies have stabilized, I think the market share levels will -- may not sustain at the same levels that they are. Overall, I believe we would gain more in the passenger car space and a little bit less on the truck space. But we don't have data to specifically say what's happened in, say, at least the months of August and September.

The next question is from the line of Gaurav Khandelwal from Mirae Asset.

Congratulations on great set of results. Sir, just a few questions on margin side. So your raw material cost has been very volatile, obviously, for the reasons that you have alluded. Now, sir, is there any kind of target or range that you can guide going forward in a normalized mixed environment at the current commodity prices? What can be your gross margin level going forward?

At current means today's commodity prices, which we are procuring and will come in about, say, 3, 4 months' time. I think, there will certainly be a contraction of [Technical Difficulty] On average, if you look at the last 1 year or so, our margins have been around 10%, 11%. This quarter was at around 15%. Approximately, margins will be between these 2 numbers, somewhere there. I don't think we can give specific guidance on a number, but I do believe margins will come down a little bit from quarter 2 because the mix will not remain so much skewed towards replacement and raw materials will also go up. So these are the 2 factors that will cause a little bit of reduction in margins relative to quarter 2.

Okay. So when we say that there will be 2 to 3 percentage point increase in the subsequent 2 quarters. I mean, these are 2% to 3% each for Q3 and Q4, right?

Yes Q3, there will be about 2%, 3% increase because we know what's been purchased, and we also have bought some lower-cost raw material early on, which will be coming in, in October and November. But from, say, December, January onwards, we will start experiencing the entire higher cost of raw material that we will be buying. So yes, quarter 4 would be a little bit higher than quarter 3 as well. And Kumar, would you like to add anything there?

No. Anant. So there has been a spike in the natural rubber and synthetic rubber prices, okay? So -- and therefore, quarter 3, around 2%, 3% is a reasonable estimate. Quarter 4, it all depends on when this would settle down, okay? Whether this -- if it remains at the current level or whether it will come down would determine, okay? So our -- not guidance, but our estimate of 3% should be confined only to quarter 3.

Okay. And on top of that, you are implying there will be a mix impact, normalization of mix. That will -- within this 2% to 3%, you have included the normalization of mix?

No. 2% to 3% is only raw materials. And in addition to that, what Anant indicated was that mix in quarter 2 was more in favor of replacement, okay, when we may go back to a little normal level of BU mix in quarter 3. So that may have some minor impact, but it won't be very significant, some small impact.

Okay. And sir, just one last question, if I may, on your employee cost and other expenses, like you said, you are ramping a plant. So is the current level of employee cost and other expenses corroborates with the revenue that you are doing? Or you can do higher revenue with the current employee and other expenses -- employee costs and other expenses? That will be all from my side.

Kumar, would you like to take that?

Yes. Yes. Okay. See, other expenses, I think, from current level, what we have in quarter 2, it's possible to sustain it in quarter 3 and quarter 4. Because you would have seen increase -- substantial increase in quarter 2 versus quarter 1 because it's largely relating to the level of activity and marketing costs that Anant also mentioned. As far as employee costs are concerned, I think it will go up in quarter 3 and quarter 4. As we are ramping up, more people would be added. So there would be some increase over quarter 2 and quarter 3 and also in quarter 4.

Sir, what I wanted to check was that whether the INR 466 crores of other expenses and INR 160 crores odd of employee expenses that is there in the P&L, does that represent the current level of revenue that you can do or you can do higher? Because there is much -- I mean, my understanding is that what you are implying that you have done some upfronting of cost because of commissioning of plant and ramping of our plant. Is that understanding correct?

Your understanding is right with respect to other expenses. With respect to employee cost, you always recruit people a little ahead of times, ahead of requirement. Okay. So assuming that we sustain similar level of revenues in quarter 3 and quarter 4, we may still incur little more employee costs.

No. I think just to add more that what we are doing, for example, is in our Chennai plant and our Nagpur plants, where capacity is going up, we -- you recruit say another 20, 30, 50 more people, and we expect further ramp-up of capacity. So based on the current cost that we are incurring, yes, there will be some additional revenue that we can earn on top because we are recruiting those people about 3 to 4 months in advance. They will undergo training, and then we will realize the benefits of that additional cost about 4 to 5 months later.

Correct. Yes.

The next question is from the line of Vivek Ramakrishnan from DSP Mutual Fund.

Congrats on great set of numbers. I had only one question, which is regarding to your debt levels and your CapEx. You guided about INR 500 crores of CapEx on your expansion this year, and about INR 100 crores of other CapEx. And given the strong cash flows, you have managed the debt levels very conservatively. If I go into the year after to finish your entire CapEx, it's INR 3,500 crores CapEx. How much more is leftover, and where we expect the debt levels to be?

Okay. Shall I take that question, Anant?

Yes. Yes, Kumar, go ahead.

Okay. What we have indicated, the CapEx for the current year is say INR 550 crores to INR 600 crores on normal CapEx, project CapEx. And in the normal course, we spent about INR 150-odd crores of routine CapEx. So these two, plus we also need to spend some CapEx for our specialty business, and that is linked to milestones. So that CapEx -- so in the first 6 months, approximately, we have only spent INR 260 crores, including all routine project CapEx. Our expected CapEx in the second half of the year is likely to be more if you add up all of that. So -- and while first half, we managed to bring our debt level down, okay? We expect our debt level to move up in line with the increase in CapEx, plus the efficiencies that we achieved in working capital in the first 6 months, it's about INR 190 crores or so. That would also helped in bringing our debt levels down. We may have to go back to a normal level of working capital from here on. For example, our finished goods inventory is quite low today. Our ability to service at the current level of inventories is not very high. So therefore, approximately about INR 100-odd crores of working capital, we expect it to go up in the coming months, and it will get normalized at that level. So if you add all of that, there will be some increase in debt. I'm not able to exactly tell you what is the level of -- extent of increase in debt, but the debt will go up, taking into consideration an increase in CapEx and working capital.

Fair enough, sir. And just on the balance CapEx after the current year, how much you have to achieve your targeted 3 expansion projects that you had?

See total CapEx plan was INR 3,500 crores. Out of that, approximately about INR 2,300 crores is what we have spent till date, okay? As of 30th September. So we have INR 1,200 crores left, okay? That we'll spend this year, next year and the following year. This is only CEAT plus our specialty business.

The next question is from the line of Sachin Kasera from [indiscernible] Investments.

Congrats for a good set of numbers. Just a follow-up to this previous question. While you mentioned that INR 3,500 crores is only the CapEx for CEAT, how much would be the additional CapEx pending in specialty, sir?

INR 500 crores is the estimate for us to take it to 100-odd tonnes of capacity. But that INR 500 crores would be spent subject to business achieving milestones. So out of INR 500 crores, we expect to spend around INR 100 crores this year. And for the moment, business achieves the next milestone, something more would be spent in the coming year.

Sure. So basically, if we achieve the milestones, assuming [Technical Difficulty] in that case, the pending CapEx is roughly around INR 1,800 crores, including specialty as on date.

Yes. Yes. True. True.

Okay. So in that case, and while you did mention also on the debt, but is it that the debt levels could go up a little bit from here? Or we could see a significant increase in debt before it peaks out? And then once these capacities get utilized, the net debt starts to come down sharply after maybe 6, 8 quarters, if you could just comment broadly, directionally, whether this INR 1,800 crores of debt can go up significantly because of this pending CapEx in the next 4, 6 quarters?

Okay. No. Balance CapEx is INR 1,700 crores. So INR 1,200 crores balance in CEAT and say a little less than INR 500 crores for CSTL. It all depends on when you spend, okay? The debt is always a function of total CapEx after adjusting for your operating cash flows, okay? So if we continue to exercise caution with respect to CSTL, the specialty business, and we keep spending not INR 500 crores in one go, INR 100 crores and INR 200 crores, okay, the increase in debt or increased CapEx requirement can be largely funded through internal accruals, once we finish our first INR 3,500 crores cycle, okay? It should go up. But it depends on operating cash flows also. So I expect the debt level to increase after you add normal CapEx plus working capital. We don't fix it on a debt level number because it's a derived number, okay, and...

Sure. I understand that. So let me put it differently, sir. Will you recalibrate your CapEx so that your debt-to-EBITDA doesn't say go beyond 3. Accordingly, you will -- so you will recalibrate the CapEx depending on where you want to spend in the next 18 months or 36 months, depending on the demand outlook and the EBITDA, so that this net debt-to-EBITDA, at least, remains below 3?

Yes. Net debt-to-EBITDA continues to be -- good news is that it is closer to 2 than closer to 3 as of today, based on -- if you convert first half EBITDA multiplied by 2 and take an annualized number. So I think the internal threshold is 3. Anant personally reviews and monitors. And maybe there could be a short period that could go up, but we are trying our best to make sure that it is within our internal threshold.

Sure, sure. And sir, if you could just update on what is happening on the specialty side. You mentioned that it is linked to certain milestones and all. So now this is a merged entity, if you could just update how is that business done last 2, 3 years? And how are you seeing the performance going in?

Yes. So on the specialty tire business, the business is of a nature where the product life cycle is very long. So -- and it is very seasonal. So the life of a tire can be 6 years, 7 years kind of period of time. So the trial period, therefore, for a customer to know that it is a good quality tire can be a little longer. The second is, it is quite -- it is a very seasonal demand. So there are certain, what they call, a string dating and high demand periods, which also has some impact, which makes the gestation period of this business a little bit on the longer side. The third is building an entire range of tires is very important, which also takes 2 to 3 years' time. We have gone through all of this. Our product has been well established, and we are seeing good growth in this segment. We are nearly fully capacity utilized, nearly at about 85%, 90%, while this a small capacity. And we plan to take up this capacity in modules of somewhere around 15 to 20 tonnes per day over time. It is about 30-, 35-tonne per day capacity today. This will go up, say, to about 50, 55 and then again another 15, 20 tonnes based on demand. So the CapEx will be low. And the expansion also will be measured based on utilization. So the moment we reach 80%, 90%, we'll kick off another, say, INR 60 crores, INR 70 crores, INR 80 crores CapEx plan. Again, take up capacities to the next level and so on, so fourth. So that's how we planned to look at this business. And we're seeing very good feedback on the product. This is primarily for Europe and U.S. markets.

The next question is from the line of Ashutosh Tiwari from Equirus.

Congrats on the good set of numbers. So firstly, we are seeing that there's almost 2%, 3% kind of RM price increase will happen in third quarter. So is there any thought process to increase prices? Or have you taken anything so far?

We haven't taken anything yet. Going forward, also, on the OEM side, there is anyways linkage to raw material prices that happens. Rest of the business will really depend on what is the competitive pressures that are there, demand, supply at that point of time. And difficult to give an answer as to whether there will be or not price increases yet. I think we'll only be able to take a call after about a couple of months' time.

But as you said that right now, the supply issue in the market and probably other players are also not able to meet demand. So in such a scenario also, you don't think that it is conducive to take price increases or you will really follow when competition takes in?

No. Right now, we are not planning to take any price increases. We'll take a call over some time. We may take some tactical price increases. For example, if we have new product launch like in the truck radial, we launched some new tires. In the farm segment, we launched some new tires, new range of farm tires. So with some of these launches, these tires are priced higher than our -- the 3 kind of version of the tire. But -- so that's how we are taking up net realization a little bit. But on the base existing products, no plans at this point of time.

Okay. And secondly, on the receivables, which have dropped in first half. So is it because of maybe the supply situation is tied in the basic market, or probably terms are better with dealers right now and probably when thing normalize, it will change, the receivables can increase. And also it is because of OEMs being lower, that's why it's lower right now and probably increase in the second half?

No. Largely, the collections have been good at this point of time. There are no changes in terms with dealers. It's just that overdues have come down. Kumar, would you like to add anything?

Yes. Yes. True. True. Yes, it's largely -- I think the quality of debtness has improved, okay? We have not changed the credit period. So as of 31st of March, because it happened during a COVID period, lockdown period, okay, there were -- in the second half of March, I think, our collections slowed down due to lockdown. And 30th of September, I think, overdues is at a very good level. So other than that, there's no change in payment terms, okay? And the higher level of activities, higher level of sales also would have some impact in absolute value. But overall, nothing else other than -- no change. Our collection efficiency has improved substantially in the last 6 months. Quality of receivables has improved, but no change in credit terms.

Okay. And lastly, in CWIP, it is around INR 950-odd crores currently. So it probably will incur roughly maybe a INR 500 crore CapEx in the second half. So will see -- will that see a substantial drop by March? Or it will be adjusted like the CapEx that you're doing currently?

Okay. No, I just want to clarify, that INR 550 crores to INR 600 crores is the total amount, okay? Out of that, close to about INR 200 crores, we have already incurred in the first half, okay? Second...

But you also mentioned about maintenance CapEx?

Yes. Yes. Okay. Okay. Maintenance normally it gets capitalized mostly. Very small amount remains in work in progress -- sorry, if you have included that. Second, I think we commissioned our Nagpur facility towards the end of August, okay? And Chennai, we keep commissioning assets every month, okay? And so therefore, you would see that capital working progress amount coming down from INR 960 crores, progressively, in the next 6 months time. It will keep coming down...

Okay [indiscernible] This is the same question basically on CWIP.

Yes. It will keep coming down in the next 6 months' time as we keep commissioning Nagpur and the Chennai.

The next question is from the line of from Bharat Sheth from Quest Investment Advisors.

Congratulations of good set of numbers. Anant, did you said, I mean, that we are just commissioned this Nagpur plant and where we can, I mean, ramp up the capacity slowly as well as Chennai is also ramping up slowly. Currently, we are less than 25% utilization. So in that scenario, do we see, I mean, incrementally, I mean, and demand driven where we are -- still we phase the capacity constraint?

Yes. So what happens is that if you look at quarter 1, was, of course, a complete washout quarter for the entire industry.

Correct.

Lot of uncertainty at that point of time. So at that time, whatever expansion plans we had, we had kept on hold. By June and July onwards, things started to get better. And we then decided, okay, whatever CapEx that we have planned, let's start now going ahead and deploying people because demand is looking a little bit better. So what happens is when you -- while we've done the CapEx, you need to get people trained on how to use the machines. And that is about a 3-4 month training period. It also happens in groups. So you can't get, say, if it's 1,000 people in the factory, all 1,000 and training them because the capacity also doesn't go up vertically, or demand doesn't go up vertically. So we generally plan, for example, if Chennai was at -- just started off in February, we've now taken it up to about 3,000, 4,000 tires per day. We want to take this up to 8,000, 9,000, 10,000 tires per day. But to take it up to this kind of number, it will take about 6 months' time for us to reach that because these people need to be trained, machines need to be tested and taken up to full cycle times, et cetera. So that takes a period of time. So that's why it's not slow ramp up, but that's the process of tire ramp up. With so much uncertainty being there, we ourselves had slowed down the process as of April, May.

And this Nagpur plant, how do we see, I mean, will start contributing really meaningfully?

The Nagpur plant, this is Phase 2 of Nagpur plant, which we commissioned just in this quarter. And this too will start -- is ramping up just the way any other factory. So it will start seeing higher volumes as we speak. I mean, every month, we start seeing larger volumes from, say, next month onwards.

Okay. Sir, do you mean -- I mean, by end of Q4, we will be, again, I mean, this -- I mean, out of this capacity constrained, what we are seeing today?

Yes, we will be.

Okay. And in specialty tires since we have been a merger entity, sir, has been contributing at EBITDA level or -- sorry EBIT level?

It is positive EBIT as of last quarter.

Okay. And slowly, with this ramp-up, I mean, now, do we expect, I mean, it will start, I mean, some kind of a margin positive? And EBITDA margin is normal at company level? Or it's a little higher once it becomes, I mean, say, we reached to 50, 55 tonnes capacity?

There are 2 parts of the business. One is the domestic farm business, which has always been there with us. That is a relatively lower-margin business. On average, lower than the company average, historically. Whereas you have your international farm business, which is where the new business has been set up, where this Ambernath factory has been set up for Europe and U.S. There the EBITDA margins are considerably higher. So if the company average margin may be around 11%, 12%, say, over the past year kind of period, this will be substantially higher. If you look at other competitors, they are at 20% plus kind of level. So EBITDA will be good. Right now, being a very small capacity in plant, your interest depreciation is quite high. So PBT will be a little bit lower, but as it ramps up, the overall margin profile will be better than average of the company.

Okay. And there is, I mean -- okay. Sorry.

[Operator Instructions] The next question is from the line of Bhaskar Bukrediwala from ASK Investments.

Anant, couple of questions. One, what would be your market share in the passenger vehicle segment, particularly in the replacement category?

So historically, it would have been at around 10%, 11% kind of level. If you were to look in the last 6 months, there's too much of volatility in terms of demand supply across the board. But post-COVID or I think our market share should settle at least 3% to 4% -- 3 point -- percentage points higher. So maybe around 13%, 14% is what I would expect.

Okay. But that [indiscernible] probably could also be a factor of your ability to handle supply chain better than others. And therefore...

No, I'm saying if you look at it temporarily in the month of April, May, June, July, our market shares have gone up quite substantially. So that would be substantially higher based on some production data that we have of tire companies. But we expect this to come down as everyone's production, and it will come down to about maybe 13%, 14% levels rather than lower. So in my view, today's market share in the passenger car segment would be even higher than that.

So, yes, is that...

So what I'm saying is if you look at supply demand situation at this point of time, for the last 6 months, our market share would be higher than around the 15% kind of level, from an average of 10%, 11%. This will come down as everyone's supplies stabilize. But it will come down to about 3% or so higher than is what I expect than everyone else because we've also added a fair amount of capacity.

[Operator Instructions] The next question is from the line of Hitesh Goel from Kotak Securities.

Congratulations for good set of results. My question is more [indiscernible] question, basically. First question is related to the replacement segment. We've seen a strong growth after first quarter, with understandable given the people -- trucks have started to move now. What -- but if you look at the full year estimate, according to your guidance, it looks like you're looking at a 10% kind of growth in replacement because OEMs will be down by around at least 30%, 35%. Is my estimate right from a full year perspective on a Y-o-Y basis?

I can tell you, right now, for the current quarter, broadly we will see -- continue to see, at an overall demand level, good demand. I -- the challenge on the replacement side we see can be that of allocation. So your replacement supplies may be coming down relative to quarter 2 and quarter 3 just because of allocation of -- but overall volumes may be at around similar, maybe marginal drop because we're starting off with very low inventory levels. And therefore -- whereas we started off quarter 2 with slightly higher inventory level. So it's more on the production capacity constraints that we are facing that is going to cause a little bit of challenge. But quarter 4 will be difficult to predict. What will happen post festive season. On the other -- while we are seeing all this personal mobility channel filling, et cetera, happening, what will stop by Jan, Feb, is the question coming in. On the OEM side, I think things will only get a little bit better. So that is one. And on the export side, similarly, things will get better. So relatively, at an overall basis, I think things should continue to be okay. The mix may become a little bit lesser on the replacement side.

And my second question is on the cost. Basically, in the last quarter, you had guided for a 15% reduction in costs. But we are seeing now costs going up as the business is ramping up and may reach last year's levels in terms of when I see other expenses, employee costs will be even higher from last year expense. So what is the -- why is such a -- the increase in costs, increased advertising expense, when there is more pent-up demand? Can you shed some light on that?

No. So advertising, one is we are going to continue to invest in advertising. Advertising generally will be at about 2.5%-ish to revenues. So if revenues go up higher than expected, we may even take up our absolute advertising costs. Also this quarter, IPL got shifted from quarter 1 to quarter 2. So on a year-on-year basis, you'll be seeing larger advertising costs. We've signed Amir Khan as our brand ambassador, we are there -- visible there. And that is something we will continue to do. So if you look at advertising as a percentage of sales, it will be even higher as a percentage in this quarter. So it's a little bit more bunched up at this point of time. On the employee cost, as we shared, the increase in cost is a lot related to production increase. So to that extent, you need to pay outsourcing partners more, you need to invest a little bit more in people, et cetera, that's going on. Our cost reduction program that we are working on, that is still underway. We are aiming for about INR 100 crores reduction. As -- so some of it has started giving fruits, but it takes about 6 to 9 months for a lot of this to happen. Some require a little bit of investments, et cetera. And by the time the benefits come in, it takes about 6, 9 months' time.

And what are these costs, which you're working on, if I may ask?

Yes, so they will include things like utility cost reduction, power, fuel, network redesign, if we have to look at redesigning our CFAs and DCs, which are our depots, et cetera, to reducing costs towards direct delivery. Some of these are just some examples, employee cost reduction.

The next question is from the line of Kashyap Jhaveri from Emkay Investment Managers.

Congratulations on great set of numbers. I have 3 questions. One, you mentioned about expense in the opening remarks. What's the growth for H1 or decline for the H1 of the year -- of this year? Second, in terms of volume growth for the quarter, how much was the volume growth? I probably missed in the opening comments. And third is that in terms of your passenger vehicle plant in Chennai, besides Thar, any other new model wins that probably you could highlight?

Can I -- so on -- volume growth would be very similar to our value growth, not much different. Only in the OEM segment, there will be just a little bit of difference to that extent because OEM prices have come down. But largely, realizations have been very similar. So the net-net volume and value would be -- would be nearly the same. Sorry, what was your first question?

In terms of ad spend, was the number that you mentioned was for the H1 or for the quarter 2? If it was for quarter 2, what was the H1 ad spend growth or decline?

No. H1, so quarter 1, our ad spend was 0. We cut all costs to 0 level. Quarter 2, ad spend would be INR 50 crores-plus, which would be more -- may be more than 3% of our revenues.

Okay. Okay. Right. And any new model wins in OE for passenger vehicles?

Yes, there would be. There are various other nominations that we have received. If it's okay, I can take it offline with you. I don't have all the details of the OEMs that we were there with.

The next question is from the line of Ronak Sarda from Systematix.

Sir, just first a follow-up. I mean, when you said the RM cost is up 2% to 3% -- will be up 2% to 3% in next quarter. This is you're saying on a year-on-year basis? Or this is from the current Q2 -- on a Q2 level?

Quarter-on-quarter. Q2 to Q3 and Q3 to Q4.

Okay. So -- and that's not much after this 10% dip then. Okay. And the other question was on the replacement demand. Now I understand, if it's gone at 30% in the quarter, there will be some bunching up happening because of lower demand in Q1. But I mean, seeing similar growth in Q3, I mean, what reason would you ascribe this to? Because over -- I mean, on a long-term basis, we usually see growth in that 8% to 10% range.

Yes. I think one is because of import tire restrictions that have been imposed. Second is rural economy generally doing very well with a good output. And third is possibly a move towards -- more towards personal mobility, which is causing good demand for cars and 2-wheelers.

Sure. Okay. Okay. And this import restriction, so how has been the China imports now? I mean, have they completely gone down to 0? Or are they coming back in the system?

No. They've come down nearly to 0. I believe the OEMs are able to import. So today if a car manufacturer or a commercial vehicle manufacturer wants to buy, they are largely permitted, whereas traders need to get a license from DGFT. And that's where I think it has come down to near 0 levels.

Okay. So then this kind of growth on the TBR side, on the CV side, we can say, at least for the next 3 quarters until that comes in the base. So I mean, if you can just highlight how much was the large available import data, if you have the numbers? And how much was the -- kind of imports which are happening or as a percentage of the demand, if any, in that?

So it, I think, varies category wise. Largely, the highest import was happening on the passenger car space, followed by commercial vehicles and 2-wheelers. So passenger vehicle may see the highest impact on this space. Also, there have been increased import duties gradually whether it is anti-dumping duty or whether it is regular import duties that were imposed over the last 3 years. So gradually, commercial vehicles, say, for example, there was at onetime 1.5 lakh tires per month were coming in. This came down to about 50,000. This will be, again, back to much lower levels even now. So that's on commercial vehicles. On passenger vehicles, also, there would be a substantial reduction on -- in terms of the purchase -- imports that are happening.

Okay. But would that be like 10% of the after replacement demand? Or that could be a large number?

I think it would be a little bit less than 10%.

The next question is from the line of Akshay Satija from Alpha Invesco.

Sir, what is our general capacity in terms of -- I mean, segment wise after all this expansion stuff? And what would it be after we commission our Nagpur and the Chennai plant completely?

Okay. So our capacity for truck radial will be about 120,000 tires per month. Our capacity for Chennai, let's assume Phase 1 of 20,000 tires per day and Halol is also just out around 20,000 tires per day. So passenger car will be -- and SUV will be about 40,000 tires per day capacity. And our 2-wheeler capacities will be about around 30 lakh to 35 lakh tires per month. 3.5 million approximately.

Okay. And sir, one last question. Could you -- so our current trade for the entire tire industry is roughly approximately $80 billion kind. We've seen lots of imports in U.S. from China, Thailand and imports from India are very low. So total export volume is lower than [indiscernible] So do we see a huge opportunity in that side? Are we looking forward to export a lot because we've seen lots of capacity going up in the entire industry, lots of players coming up with lots of capacity. So if you could just give us some info.

Yes. So there's been a fair amount of exports that were done from China. Now over the past year, 1.5 years, there have been anti-dump in China and the U.S. There is a very good opportunity to export to the U.S. However, if you do not have the range of tires for the U.S. or you're not making -- the range is completely different, you can't take an Indian passenger car radial tire and sell that in the U.S. The road conditions there are very different. Driving habits are different. Speeds are different. So you have to -- even weather patterns are different. So you have to create a specific product range, test it out and then supply to those markets, which can take about 1.5 years to 2 years' time.

Okay. So currently, we are not looking forward to such export.

No. We do sell to the Europe. And there, we are looking at it strategically. We have been there for some time. We have a R&D office located in Frankfurt, particularly for the European markets. And to that extent, Europe is very important. Also CEAT was an erstwhile Italian brand. So to that extent, Europe, Italy, Spain, Germany, all of these countries are important. And we've been growing very well in these countries. U.S. is something which we don't have the range yet. It will take us some time to enter the U.S. even if we decide to.

Okay. Sir, final question. If you could just give us some ballpark realization numbers for the entire industry per kg in terms of different segments. I'm not asking for CEAT, I know you don't share that data. But if you could give me just a broad number, segment wise?

No, no, I won't have that data for the industry. So if I can't share CEAT, industry also I'll not have that data.

The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.

Very strong performance. Congratulations on that. So on the PCR side, specifically in the aftermarket, you did mention the -- given the higher level of imports, which has now come to almost a negligible levels. And these tires will largely be in the smaller radial size, 12 and 13 inches. And the -- are the customers here largely the fleet -- the taxi customers or personal buyers also there? Any -- some sense on that, sir? And we would have substantially gained more than the market leaders, given the supply chain challenges that others would have faced during this first 6 months?

Yes. So the imports that are coming in are actually across the board. It is not only the taxi users that use imported tires, but you will also have a lot of premium tires that are used get imported. So to that extent, it is across the board that we think imports have largely been stopped. Also now the 14, 15-inch is the new 12, 13-inch. So these are -- over time as well [indiscernible] is increasing, the key sizes in India, inch size is also going up. So that is one on the imports? Sorry, what was your second question?

And we would have substantially gained more than the domestic other market leaders within the PCR segment, given the supply chain challenges that others would have faced, sir, from this PCR import ban -- imports restrictions.

Yes. Overall, with demand having gone up during this period, we think we have gained more in terms of market share. However, the market share that we feel we have gained is not securely sustainable. It will go up. But as I said, it will come down as everyone else's capacity has also come back. But overall, volumes will not come down.

The next question is from the line of Nishit Jalan from Axis Capital.

Congratulations on the good set of numbers.

Mr. Jalan, can you speak closed to the handset, please.

Can you hear me?

Yes, sir.

Sir, my question was on the replacement segment. I understand you mentioned that replacement volume grew by 30% in second quarter. I would understand that it will be partly to build up channel inventories as well. And when you say that replacement demand is sustaining well, what kind of growth levels are they actually talking about in terms of sustenance of growth in the placement market?

So last quarter, we were at over 30% growth. I think right now, demand is such that we are also seeing similar levels of sales that we saw also in the month of -- in the previous quarter. So percentage growth at this point of time is -- demand wise is looking pretty good. Again, as I said earlier, the allocation is the question where OEM demand has picked up quite a bit, particularly in the passenger car and 2-wheeler segments. So to that extent, while our absolute numbers may come down in the replacement in October and November, but demand continues to be strong. Whether it is sustainable, is a big question. I don't have an answer to whether this will continue in Jan, Feb, March. I mean there are a lot of headwinds also that are there with unemployment generally going up, negative GDP growth, those kind of challenges. But on the other hand, my view is that demand is looking good because of the 2, 3 reasons I highlighted earlier. Tires having -- imports having got restricted and rural economy generally doing well.

And then just a follow-up on this. Is the demand at the retail level also equally strong? Or this is -- this includes a bit of channel filling as well?

No. In our case, it is -- there's no channel filling. This is completely -- channel filling would be happening maybe on the OEM side because they are preparing for Diwali time. But replacement, that there is no channel filling, really that happens. People don't keep too much inventory or very little channel filling impact that would be happening.

The next question is from the line of Nishant Vass from ICICI Securities.

Anant, the question I had was on the import restriction, taking it forward for the CV side. So where do you see the market swinging on the CV side? Is it benefiting the TBB segment more than TBR? Or is it equally split between the two? That is my first question. And associated, what is your TBB kind of utilization levels that you're seeing in the industry level? If you have any sense on that? And my second question is, could you actually break down, quantify your gross margining benefits that you had 3 key levers to gross margins in terms of lower RM, product mix and cost control. Can you break them down individually?

Okay. So on the commercial vehicle side, we are seeing full utilization of our truck bias capacity, which is quite surprising. I mean, this is a category which has continuously seen negative growth. So to that extent, it's pleasant the TBB going up. In part, this is because customers are down-trading to lower cost TBB as well. But overall growth on TBR also has been very high. So overall, commercial vehicle demand is looking to be good. A little bit higher on the truck bias in absolute terms, but radial has also seen very strong growth. So both are seeing good traction.

This quarter -- sorry to interject. So this quarter, you would have seen actually radialization for the industry come off on a Q-on-Q basis?

Tough to say whether it would have come off to that extent. I don't think so. I think the percentage may remain largely similar.

Okay. And the second question.

With respect to the gross margin, you said on raw material, product mix, and what was your third, net realization. Is it?

Yes. As Kumar mentioned the 3 key levers for the gross margin improvement, just if you could highlight the quantification of each of these levers for the gross margin improvement?

Yes. So as the raw material prices have come up by about 5%, whereas net realization has been largely flat, except for the case of OEM, which is indexed, so it would have down by approximately a similar kind of amount. And mix, as I said, replacement has gone up from about 60% to 70% of our revenues. So that would be the big reason for change in terms of our gross margin. Kumar, anything you would like to add on that?

No. Yes, right, Anant. Yes, that's right. Broadly, realization per kg has remained the same quarter for the -- year-on-year basis, okay? And so as you indicated, the entire raw material cost that approximately that 5% has flown through, okay? Mix impact is small. That's all. And all other costs, saying that we mentioned, it flows in EBITDA, not in gross margin. Since your question was on gross margin, where do we calculate gross margin is selling price minus our material cost, so the margin has to come either from raw material or realization or mix. So it's raw material and a little bit of mix.

Sorry, Kumar. I just got little confused, because Anant mentioned that the big benefit came from the replacement mix going up, and you're mentioning that mix didn't play much of an impact. So can you just clarify which actually is the big driver?

No, he mentioned to you that raw material is the biggest contributor here. And the second one is that other cost-saving initiatives will not help in gross margin, but it helps in EBITDA. The mix impact, last year versus this year, is relatively lower compared to raw material. That is what we are trying to see.

Ladies and gentlemen, due to time constraint, that was the last question. Participants in the question queue, we may request you to please take your questions offline. I now hand the conference over to the management for closing comments.

Great. Thank you all for your time and interest in CEAT. I hope you all stay safe. And look forward to catching up once again around the same time next quarter. Thank you.

Thank you. Ladies and gentlemen, on behalf of Elara Securities, that concludes this conference. Thank you all for joining us, and you may now disconnect your lines.