CEAT Limited (500878) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q3 FY '21 Earnings Conference Call Of CEAT Limited, hosted by Equirus Securities. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Ashutosh Tiwari from Equirus Securities. Thank you, and over to you, Mr. Tiwari.

Thanks, Margaret. Good afternoon, everyone. On behalf of Equirus Securities, I welcome you all on the CEAT Limited's third quarter earnings call. From the management side, we have Mr. Anant Goenka, Managing Director; and CFO, Mr. Kumar Subbiah; and also members of IR team. Without further ado, I would like to hand over the call to management for their opening remarks. Over to you, Anant.

Thank you, Ashutosh, and good afternoon, everyone. A very warm welcome to CEAT's Q3 FY '21 earnings call, and thank you for joining us today. I'm Anant Goenka; and we also have our CFO, Mr. Kumar Subbiah, on call with us. I hope all of you continue to be safe and in good health. As usual, we'll start with a brief remarks from me and Kumar, post which, we'll be happy to take some questions. As we mentioned in the last quarter, we completed the CEAT and CSDL, that CEAT Specialty Tires Limited merger in quarter 2 FY '21, hence, all our quarter 3 FY '21 and all comparable periods, stand-alone financials have been restated to reflect this. All the growth numbers that we will be indicating today both financials and volumes will reflect growth on a like-to-like basis. FY '21 has been an unprecedented year in every sense of the word. While due to the global pandemic, the first 3 months of the fiscal were a washout. As restrictions eased, we saw strong and persistent demand pick up over the next 6 months. There was strong replacement demand recovery on account of pent-up demand as well as increased preference for personal mobility in both rural and urban areas. Further, during the festive season, OEM demand for the passenger segment also picked up. Though demand for new commercial vehicles has been soft, economic activity has picked up and existing commercial vehicles are plying on roads with higher frequency, which is largely indicated by increased store collections. This has also led to increase in the replacement demand of CV tires as well. As a result, our stand-alone revenue for the quarter stood at INR 2,212 crores, a year-on-year growth of 26.4% and a sequential growth of 12.6%. The entire growth has been volume-driven. On a year-on-year basis, we saw strong growth across all channels. Both our OE and export businesses grew by over 15%, while replacement grew by over 35%. Our overall year-on-year volume growth was over 28%. From a segment perspective, we witnessed maximum growth in CV tires followed by PC/UV and 2-, 3-wheelers. Our off-highway tire business recorded a sales growth of 42% in quarter 3 on a year-on-year basis. Domestic farm and export specialty segments witnessed strong demand. Our overall raw material cost went up by about 1.5% sequentially on a per kg basis. Higher raw material price plus adverse product and channel mix led to 113 basis point contraction on our gross margin. Given the current increasing raw material trajectory, we will monitor the pricing and margins closely over the next few quarters. We took a price hike at the beginning of December and then again at the end of the month to mitigate some of this effect. On a sequential basis, our stand-alone employee cost went up by about INR 20 crores, an increase of about 12%, and this was on account of inclusion of employee cost of our recently commissioned projects. And the second was some amount of higher sales incentive payouts and provisions. We believe that the productivity benefits of these people investments will come over the next few quarters. As sales and production activity picked up, our stand-alone other expenses also went up by about 7.6% sequentially. However, despite these increased expenses, our stand-alone EBITDA margin contracted only marginally on a sequential basis and was at 15.3%. We ended the quarter with a stand-alone PAT of INR 128 crore. On plant utilization, all of our plants have been operating at very high levels of utilization throughout the quarter, and all our new capacities are ramping up well. As per our estimates over the last 2 quarters, we have been successful in improving our market share on the back of extensive distribution channels and strong supply chain management. However, we continue to be cautious and monitor the market and demand situation closely. We continue to also make inroads into OEMs while cultivating strong relationships. During the quarter, we partnered with Nissan to supply our SecuraDrive range of tires for all models of Nissan Magnite. We also partnered with Hyundai to supply tires for their i20 model. The Royal Enfield Meteor year was also launched on CEAT in the last quarter. Our focus on investing in our brand continues and our investments around this have been consistent, irrespective of the external environment. Last quarter, we had Aamir Khan can joining us as our brand ambassador. In the current quarter, we had continued to invest in its association with sports. On lines of our IPL relationship, we partnered with the JIO Women's 20-20 Challenge as their strategic time-out sponsors. Going digital is also very important for us. Our digital initiatives have been well received. For example, we have a strong integrated fleet management module, a tool to track key accounts, tire tracking and scrap tire inspection was made live. Additionally, online sales through e-commerce marketplaces for 2-wheelers and 4-wheelers have been also taken well in the last quarter. Sustainability has also emerged as an important agenda for us. As you all may know, we came out with our maiden integrated annual report in FY '20, wherein we shared details on various activities, CEAT undertakes to ensure high standards around environment, social and governance practices. We continue to make conscious decisions and investments to ensure that we promote sustainability across all our functions and processes. With this, I would like to close and hand over the rest of the comments to our CFO, Kumar Subbiah.

Thank you, Anant. Good afternoon, ladies and gentlemen, and thank you for joining our call, covering our quarter 3 results. I will share some financial data points with you all, post which, we can enter Q&A session. Let me start with revenue. Our consolidated net revenue for the quarter stood at INR 2,221 crores, a growth of 26% versus the same quarter of last year and 12.3% sequentially over the previous quarter. The growth is largely driven by volumes. Gross margins for the quarter was 45.5% on a consolidated level, an expansion of about 260 basis points versus the same quarter of last year while there is a contraction of 90 bps sequentially. The sequential gross margin decline was on account of increase in raw material costs, coupled with unfavorable channel and product mix. Despite the adverse environment, we have been able to manage our debt levels well in the last 9 months of the current financial year. We continue to exercise caution while managing all our costs and also very judicious in spending our cash. We further optimized and brought efficiencies in our working capital during the quarter. As a result, our consolidated gross debt during the quarter came down by INR 250 crores, that is to [ INR 2,557 crores ], which is after considering a total CapEx of about INR 175 crores during the quarter, which indirectly means that it was funded from our internal accruals. As a result of reduction in debt and also increase in our network, our consolidated debt-to-equity ratio improved further to 0.49 versus 0.59 as of the previous quarter. For the full year, we expect our capital expenditure to be in the range of about INR 500 crores relating to projects and additional INR 150 crores is expected to be spent on normal unrooting CapEx. Now let me move on to operational expenses. Our consolidated employee expenses increased by 12% sequentially. As explained by Anant, this was primarily on account of additional employees that we had engaged in our new facilities at Chennai and also the expanded facilities at Halol and Nagpur. And in addition to that, we also incurred some performance and related incentives and bonus that was provided during the quarter. With production ramping up across all our factories, our consolidated other expenses went up by 8% year-on-year, largely on account of higher level of activities. And during the quarter, we also incurred INR 12.3 crores towards VRS to our employees that has been classified as exceptional costs. Now that all our expanded facilities have been slowly commissioned in a phased manner. Our consolidated depreciation went up to INR 87 crores during the quarter. As a result of drop in our debt level, and also a reduction in interest rate on our borrowings. Our consolidated finance cost was down to INR 42 crores for the quarter from INR 45 crores in quarter 2. I'm also happy to inform you, during the quarter, credit rating of AA for long term and A1 plus for short term has been affirmed by both the credit rating agencies, CARE and India Rating, with a stable outlook. We ended the quarter with a consolidated profit before tax of INR 202 crore, which compares favorably with INR 82.6 crores of the same quarter of the last year and INR 132 crores of PAT versus about INR 53 crores in the same period of last year. Now let's open the floor for Q&A. Thank you.

[Operator Instructions] The first question is from the line of Jay Kale from Elara Capital.

Congrats on a good set of numbers. Sir, my first question is regarding the demand scenario, how are you seeing it? I mean your -- like this, you have probably clocked the highest over revenues for ending the year. And in that context, going forward, how do you see the sustenance of this replacement demand since OEMs are on a yearly basis, not get back to the peak level? So going forward, the sustainment of the replacement demand over the next 2 years, how are you planning for it? And in that context, how would your CapEx outlay? Any revisions in that since last 2 quarters back, you had cut the CapEx guidance, but given the current momentum, any revision in that?

Yes. So demand scenario continues to remain quite positive. I'd say that replacement demand continues to remain on the current line that we saw in the -- have been seeing in the last few months. With respect to OEM demand, there's been a slight slowdown on 2-wheeler OEM demand in the last, say, month, 1.5 months' time. But long term, we are very confident of OEM also being strong. And CV commercial demand, which has been weak, I'm sure, will pick up over the next few months' time as well. So over the next, say, 6, 9 months, we feel quite optimistic with respect to the overall demand situation for tires across categories, including exports OEM and replacement. So to that extent, we're comfortable in terms of our capacities also. I think our timing was quite good. We were a little concerned in April last year, but I think our CapExes have been timely, and we are in a good position to utilize the new plants that we set up. In terms of our plans, out of about a INR 3,500 crore to INR 4,000 crore that we had planned, we should be doing -- we finished about INR 2,200 crores, INR 2,300 crores of CapEx already. About INR 500 crore CapEx is what we expect to do this year. We've done around INR 250 crores, balance INR 250 crores will be happening over the course of the next quarter or so. And the next couple of years, we will continue with our CapEx plan of about INR 700 crores per annum, is what we are looking at. Based on whatever has been agreed, now after that, there is no decision that we have taken on any CapEx beyond that. But it will primarily involve completion of our Chennai expansion. We have a little bit of our truck radial and off-highway tires that will undergo some expansion. These are largely the downstream equipment that are pending as capacities go up.

Okay. Sure. And the second question is on the raw material side, you mentioned that the raw material market increased about 1% to 2%. We were factoring in a little higher increase. So if you can just run and down how it will shape up in the next couple of quarters? And yes, that was my second question.

Right. No, so raw material has run up quite a bit in the last quarter. Crude, which was at about INR 130 per kg, has gone up to about 100 -- sorry, not crude. rubber prices have gone up to about INR 160 per kg from INR 130. Crude has also been consistently going up from $42 to over $50 per barrel. So to that extent, both our key raw materials are going up. I think from quarter 3 to quarter 4, we can expect an average increase of about 10% on the entire raw material basket. By the end, say, if you were to look at our March end buying prices, it could be over 10%.

The next question is from the line of Basudeb Banerjee from AMBIT Capital.

Congrats on great set of numbers, both from a growth and margin perspective. Just to continue with the previous questions. So you said there were a couple of price hikes in beginning of and end of December. So if you can quantify them, sir?

Yes. They were approximately 3% between. So early December, it was about 1%; and then again, towards the latter half, it was around 2% to 3%. So slightly -- around 3% price increase across all categories, except 2-wheeler.

[Technical Difficulty] Mr. Banerjee, I would request you to please unmute yourself. There seems to be no response from the current participant, so we'll move to the next question. The next question is from the line of Siddhartha Bera from Nomura.

Yes. Can you hear me, sir?

Yes.

Hello. Can hear me? Hello?

Yes, please. Go ahead. I can hear you.

Okay, So sir, first question was on the replacement side. You indicated 35% growth, but could you help us with what will be the growth at the retail level first? That would be my first question. And do you think a similar tonnage we can do in Q4 also, given that it is usually a seasonally strong quarter? So your thoughts on these.

Yes. So for us, this is largely retail-level growth itself. We don't have any difference between retail-level growth, and there's been no inventory accumulation out here. So to that extent, I would say the retail level and [ other ] sales will be similar. Current demand situation in the market continues to be positive. So I don't see a major difference between this quarter and next quarter in terms of volume. So trend seems to continue to be positive.

Understood. Great. And inventory levels, how are there? I mean are there normal levels or still lower? And what will be that level, if you can help us?

Yes. So our FG inventory levels are very low. We've been short of tires. I mean even if we could manufacture more, we would have sold a little bit more. So inventory levels are uncomfortably low. And I guess, if we continue to sell this way, we may continue to fall short. But yes, we would like -- we'll be more comfortable with some more FG inventory, maybe INR 50 crore to INR 100 crore more.

Okay. Understood. But how many days of inventory do normally does the channel keep on a normal basis?

About 1 month.

About 1 month. So now it's slightly less than a month, is what you are indicating?

Yes.

Okay. Got it. And second, sir, is on this CapEx side again. So if I'm correct, you indicated INR 500 million plus INR 150 million, INR 650 crores of CapEx for this year, out of which we have done INR 250 crores in the first 9 months. Is it all correct?

That's right. A little bit more than INR 250 crores, I think we'll be doing maybe about INR 200 crores in the next quarter, INR 200 crores, INR 250 crores range.

But sir, if we have done INR 250 crores only, then for the next quarter, we should be doing more than about INR 350 crores. So the total CapEx is...

No, no. This is project CapEx.

Yes. Yes, total CapEx -- yes. I'm coming, INR 250 crores is against the project CapEx of INR 500 crores. And against the normal routine CapEx, proportionate amount, about INR 100 crores has been spent already, in the first 9 months. The balance amount would be spent in the quarter 4. Sure.

Understood. And lastly, on the price hike side, you indicated near about cumulative 3% increase across passenger car and TBR segmental date. So do you think this is sufficient? Or do you think you will need more price increases to offset the cost pressures? Any thoughts on that? And why 2-wheeler, we have not taken any price hikes yet? Is it, demand is weak? And any specific reason, if you can highlight?

Yes. So we do need to take another, say, 3% odd price increase during this quarter to offset the entire raw material price hike. And that will be decided based on competitive situation in the market. So we will be evaluating it during the course of this quarter. And on the 2-wheeler side, again, because of the competitive situation, our pricing was considerably higher than our benchmarked SKUs or products of competitors. So to that extent, we have not taken a price increase yet.

Understood, understood. Great. Last question, sir. So the CapEx of INR 700 crores, you indicated for next year, this is the project CapEx, and maintenance CapEx will be on top of that?

That's right. We do about INR 150 crore of maintenance CapEx every year.

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

Congratulations on a very, very good set of numbers. Sir, my question is primarily on the replacement demand. What according to you is actually driving such demand? Or in other ways, are you seeing such strong demand partly because of import bank? And if you can give some color in terms of how our 2-wheeler in TB and TBR segment is doing? Because we used to have a lot of imports on the TBs and TBR, but 2-wheelers, the imports used to be much lower. So I just wanted to understand how much of this demand you are seeing is because of import coming down and domestic plays benefiting? So some sort of color on that because the replacement demand has clearly surprised on the upside in the last few months.

That's right. So replacement has been particularly strong. I'd say, one is we feel because of personnel mobility requirement going up amongst consumers, and that is affecting the passenger car segment, 2-wheeler segment particularly. Second is rural, as I said, has been strong. If you look at, say, farm segment, even replacement demand has been strong, OEM demand. So farm has grown very nicely. CV, as I said, has grown amongst the fastest of all categories. So we are also seeing across category growth. And import restriction has also been a boost to a certain extent. Maximum imports were coming in on the passenger car segment. 2-wheeler, there was very little import. So to that extent, 2-wheeler did not clearly get affected. But approximately, I would say, 3% to 5% of the market would have at least got vacated because of -- or further opportunity came up because of import restrictions that have come in.

So Anant, do you mean that if import ban would not have been there, instead of 35%, you would have still grown at 30% or 32%?

Yes, maybe about a 5% impact approximately.

But according to you, is it because that after lockdown and things are moving, your truck tires, basically, there are a lot of replacement, which was required. Because see, these kind of growth, we have not heard of or we have not had expected. I'm sure even you would not have expected this kind of growth. So what according to you could be the sustainable growth once we catch up the base? Will we go back to the 7%, 8% kind of a growth, which we used to see in the industry? Or do you think something is really different has happened in the industry because of which we can see higher replacement growth for maybe 1 or 2 years or more?

See, I think this kind of growth -- I mean, right now, demand is continuing to be strong. So I can tell you for the next quarter, we are quite optimistic you look at next quarter after that, also, we are talking about a very low base effect that will come in. So most companies have shown minus 30%, 40%, 50%. So to that extent, quarter 1 will also be very strong, and possibly some of that will also go into quarter 2. So I can tell you that the next 9 months are looking to be relatively positive a lot because of the low base effect as well. Beyond that, it is a little difficult to say. If you look at the last 2, 3 years, have also been relatively muted. So last 2 years, average growth would have been under 5% CAGR. So to that extent, also, we are talking about a longer-term relatively lower base that has been there.

Sure, sure. This has been helpful. Secondly, on the iron portion price increase side, on the price increase side, what we understand is that MRF probably has gone ahead and taken a price increase. And is it because of that in 2-wheeler side, is the competition really different because of aggressiveness of MRF and Maxxis coming into play? I just wanted to understand what is the reason or what is the difference in 2-wheeler segment that you have not taken a price increase despite such strong growth, despite really struggling for capacity and stock? So just wanted to understand that part.

Right. So we like to maintain some kind of benchmark pricing differential with competition on certain key sizes, almost sizes in a way. So that is a differential that we don't want to overprice our product versus competitors, even if the market gives -- maybe able to absorb it. So to that extent, that is the call that we've taken. Let's say, for example, you decide you will price certain, say, 2% higher than competition, we don't want to change that gap. So to that extent, we try and maintain that approximate benchmark.

Sure. Sure. And lastly, any details in terms of what sort of market share gains you would have seen in the replacement market or do you think that industry growth itself is so good that industry sales is also growing at close to 30% kind of on a Y-o-Y basis?

Yes. So industry also has grown well. I'm aware of that, but I would also say we have gained market share. I don't have quarter 3 data, but I would surely say that in the first 2 quarters of the year, we would have gained at least 2% market share across all categories. Passenger car would be even higher, maybe 3% to 5% market share increase, at least in the passenger car space.

[Operator Instructions] The next question is from the line of Mukesh Saraf from Spark Capital.

Yes. So my first question is regarding the mix between your replacement and OEMs. As you've mentioned that replacement of over 70% in the first half, and you are expecting it to kind of come off to the usual 60% levels. But where are we now in that mix?

Right. So to that extent, of course, that would have got -- that has got adjusted because if you look at -- OEM demand was quite strong in October and November festive season. So we have come up to close to our normal mix. So we don't have -- we don't share generally exact data. But approximately, it is 60%, 25% 15%. 60% in replacement; 25%, OE; and 15% exports, is our average, and we'll be very close to that kind of mix.

Okay. So we're back to normal there. And so going forward, in terms of gross margins, the mix shouldn't really have an impact, it would just be raw material costs, and whatever price hikes we are able to take?

That's right.

Right, right, right. And secondly, again, on the expensive side, if I look at your -- employee costs are up 33%. You did mention that it included some bit of incentives as well. But if you could give some sense on where we can stabilize in terms of employee costs. I remember you also mentioned last time that you do kind of look to add these employee costs 3, 4 months ahead of time. But some sense on where we can stabilize on how much do you see the ramp-up further in terms of these plants coming up? And how do you see this going forward?

Right. So a large part of this is asset is variable. As volume is growing. We need to have more people. So some plants, we were operating, I'd say, for example, 6 days, we've taken that up to 7 days. Our Chennai plant is ramping up. So as we take up that, we will continue to see further increase in at least employee cost in that space. And some amounts were provisions. So with sales being slightly higher than we expected, numbers being a little better, we had to -- we've done some provisions for bonus payouts and other kind of sales incentive payouts that would be happening.

So we can expect the absolute employee cost to continue to kind of rise from here as you ramp-up deficits?

Yes, possibly. Kumar, would you like to add on that?

Yes. See, employee cost for the quarter was approximately about INR 178 crores. If you look at the same period of last year, we were around INR 145 crores to INR 150 crores, okay? And if we continue our current level of operations, and it could be around INR 170 crores spend at a quarter level. But if we operate at a higher level, there will be an increase in employee costs, in line with the increase in volumes.

Right, right. And just lastly, in terms of your advertising expenses, I think on a normalized basis, it's about, say, around 2.5% of sales. Are we back to those kind of levels, that is our other expenses, are we back to those kind of advertising expenses? Or do you think there is much more to be ramped up there as well?

No, we want to maintain 2.5%. In fact, we were -- we went above that. Quarter 1 was, of course, 0 advertising. But quarter share, I think we were up over 3% as a percentage of sales. But overall for the year and going forward, also, we will maintain the same advertising as a percentage of sales.

Right, right. And so 9 months, we should be around the 2.5% right now?

In 9 months, it could be little higher. But on a full year basis, it will be in line with 2.5%.

[Operator Instructions] The next question is from the line of Shyam Sundar Sriram from Sundaram Mutual Fund.

This is Shyam Sundar from Sundaram Mutual. My first question is on the pricing environment per se. I mean while the RM inflation has been quite strong, we have shown a lot of confidence in taking up prices. Is it also a reflection of the import restrictions that has sort of squeezed the supply side that is getting more confident to take up the prices. And do you see more leeway in terms of taking up the 3% increase that we talked about in the next 1, 1.5 months to completely offset the cost inflation?

Yes. No, I think the price increases have not been sufficient actually. So while we've taken a 3% price increase, it's not enough to offset the raw material price increase. So we need to do some more price increase over the next -- this quarter to make up for the increased raw material prices.

Right, sir. So the leeway to take up prices is also because of the supply squeeze that has happened due to the import ban. And are there any other supply constraints from the domestic tire makers? Or there is no supply constraints on the domestic tire supplier manufacturers forces?

So overall, I think the industry has enough capacity to serve the market. I believe everyone has done a fair amount of investments. In our case, I can say that in certain categories, we have been short of supplies, particularly in the passenger car space.

Okay, okay, okay. I understand sir. Sir, just one other question. On the replacement growth that we spoke about, specifically personal mobility driving of growth. So does it -- because the vehicle part addition has been coming down over the last few several quarters because of the new vehicle sales have been lower. So -- but still we are seeing currently a very strong replacement growth. Does it mean that a lot of people who had not gone for replacement earlier, say, in the last year, that is the accumulation of those, but that demand that is now playing, why we still then start easing after 8, 9 months into going forward?

Sorry, I think the question was not very clear to me.

Okay, okay. So the vehicle part addition, sir, the population increase has been coming down because of the new vehicle sales being lower over the last several quarters in total OEM sales and new vehicle sales. But we are seeing a very strong replacement growth, the 32% growth that you mentioned, so is it because some of the earlier replacement that should have happened, say, last year, which got postponed is all now coming into -- which is getting replaced now and because of the need for personal mobility, and will this sort of taper down going in 9 months after -- from here on?

Yes. So I think people are replacing more because they are traveling more on personal transportation. So as a result, whether it -- I don't think it has as much to do with new vehicle demand. New vehicle demand has also been positive. But the replacement is happening because people are using more of their personal vehicles. So as a result of higher usage, that is also helping. I was talking to one of our customers -- and OEM customers, so they were like during the lockdown, people didn't have much to do because they couldn't go out, so they would go for drive, for example. Now you go for a drive, your car is getting well utilized, tire is getting well utilized. But -- and that's the only outing which people had. So I'm just giving you an anecdote, but I'm saying that the utilization of vehicles, personal vehicles has gone up. And as a result, people need to replace tires more than what we've had to.

Understood, sir. Sir, one last question, if I may. Between such bias and truck radial, how has the demand trend been? Is there a better preference for PGB over PBR? Or any such ships that you are seeing? That's all.

No, both segments have seen high growth, surprisingly. We always thought truck bias is going to go negative or flat growth for longer term. But I think with strong demand in CV segment also, both have grown very well. Truck radial has grown more than truck bias, but both are showing 30% plus kind of growth numbers.

[Operator Instructions] The next question is from the line of Prateek Poddar from Nippon India Mutual Fund.

Sir, 2 bookkeeping questions. One is on your debt. If you can just help me understand how much of the debt reduction was due to working capital relief and how much was due to FCF generation in the first 9 months? And second question is, is this the peak level of debt now? Whatever -- I mean, whatever debt levels we end up the year, FY '21, is it fair to say that, that would be the peak debt? And from here on, if at all, either the debt would remain flat or will come down?

Kumar, would you like to take that?

Yes. Okay. See, overall, if you look at for the current year, we -- our debt level came down by about INR 370 crores, if you start from 1st of April till date. And working capital reduction is also closer to the number, around INR 300 crores kind of a reduction in working capital that we have managed to do in the first 9 months of the year. So -- and we -- if you look at overall, our capital expenditure is around INR 450 crores in the first [indiscernible], including routine operating CapEx or specialty business. There is no one-to-one correlation, but it's correct to say that debt reduction is very close to the reduction in working capital, okay? So therefore, that be internal generation -- internal approval has been utilized to repay the debt. And cash profit is very close to the CapEx that we have entered in the year. So both of them, we managed to match and the differential amount is kept in the form of cash. So that's one way of looking at it. The second question is whether we have reached the peak? No. As Anant had also indicated, so far, project CapEx that we have incurred in the first 9 months is around INR 250 crores only, okay? We are going -- our total CapEx for the year is going to be a little less than what we had initially indicated in terms of rates. We indicated up to INR 600 crores, INR 500 crores to INR 600 crores. We are now more looking at the lower end of that range. So -- and as we incur CapEx next year and the balance for the quarter. In the next quarter, depending on how much CapEx that we incur and whatever cash profit, the tax may move up. It also depends on the working capital. It is unlikely to be substantial, if there could be some increase in the debt level. And in the next 2 years, if we manage to keep our CapEx around INR 700 crores, that Anant had also indicated here. We -- ideally, if we're able to generate enough cash, then we should be able to sustain the debt or increase only to the extent of working capital. That's the way we are looking at it at this point in time.

Got it. So basically, then whatever levels you end up with in FY '21 of that, mostly you're there. Like from there on, the increase should not be substantial. It could be slightly at max?

Yes. See, working capital, currently our [indiscernible] inventory is quite low, okay? And it's the quarter for us to increase it. And even raw materials inventory also needs to go up at this point in time. It's a very tight supply situation for even raw materials. Those things will take up. And when you sell more, your receivables also increases. So there is some amount required to meet the increase the working capital requirement in due course of time. It will be substantial. It may go up, but it would be very substantial.

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

Yes. Just one clarification. When you say there is additional price increase of about 3% needed, that's on the total portfolio, right?

That's right.

And for the quarter 4, any indication on the cost index? I mean should it be equivalent to the gross-up amount of that 3%?

No idea. Can you repeat again, then second question?

So based on that 3% needed -- the price increase needed, the cost increase in the quarter 4 or cost index in the quarter 4 should rise by about -- roughly about 1.6%, 1.8%?

So if I'm answering your question right, answering that from quarter 3 to quarter 4, we expect about a [indiscernible] price increase. That is equivalent to, say, about a 6% price increase at 10% raw material price increase. It is about a 6% increase needed in net realization, that's -- about 3% is done. We have another 3% left or we need to do. But by the end of March -- so this is the average of quarter 4 raw material price increase that I'm talking about. There can be more than 10%, in fact, moving on to, say, quarter 1 of next year also because March exit raw materials will be even higher.

Okay, okay. And in terms of natural rubber, we have seen some cooling off happening probably because of the new production would have started coming in. Any view that you have over there? How has been the inflow or production in this particular season and what bearing could it have on the nature of the prices? Because even after -- even in the month of January, they are still hovering about INR 150, INR 155 a kg kind.

So what is your question?

In terms of rubber production...

Right. So these have got -- peak starting months that are there right now, rubber prices are largely dependent on -- it's a global commodity. So it doesn't affect as much as what is happening in India, there can be some impact, but it is a lot because of what is happening in China in terms of demand and other global numbers. And whether patterns, say, in Southeast Asia, in terms of any flags or crop disease, et cetera. So to that extent, I think output has been quite okay. Kumar, would you like to share into here?

Yes, yes. Sure, sure. Yes, I think Anant has largely responded. Indian rubber prices normally mirror the international prices. So therefore -- and therefore, the -- unless the international prices [ cool ] down, we don't expect the local prices to significantly change. One of the other reasons for the local prices to be higher, or international prices to be higher is also on account of steep increase in the freight rates. And some premium over the published SICOM prices. So there has -- the local prices have marginally come down, okay? But when we indicated our average cost for the quarter and also exit cost for the quarter, it was based on INR 152, INR 153 per kg kind of a natural rubber level. So even if the production goes up in India because the demand is higher and the international prices are still strong, the local prices may not come down unless international prices come.

The next question is from the line of Shalini Vasanta from DSP Mutual Fund.

So I had a similar question around debt, which was answered by Mr. Kumar earlier. I have no further questions from me.

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

So can you tell us 9-month volume growth numbers for replacement demand, OEM and exports?

I think on average, we would be at positive growth across on average. But I -- we won't be able to share the 9-month data specifically. We don't share the exact data points. So I've given you approximate data points, and maybe you can just compute it out of that.

Yes. Because I think overall volume growth in 9 months is 3%, 4% only. Am I right?

Yes. It's just moved into positive territory in the last quarter.

So OEM would be a decline, right? I mean it's a replacement, which would have grown in double digits. Because you said, OEM is also positive growth in 9 months.

I can get back to you on that. I don't have the data here. But yes, replacement has clearly surpassed. So yes, OEM would be negative.

Yes. And was there a growth in export segment also? Just trying to get 9-month data you're projecting forward?

I think exports would have been negative as well, marginally. Net-net replacement has far exceeded, and it is much larger than -- it's a much larger category.

The next question is from the line of Jinesh Gandhi from Motilal Local Financial Services.

Just a couple of questions on my side. One is with respect to this VRS scheme, which we are running. So by when do we expect benefit to reflect in P&L? And what could be the savings because of that? And secondly, looking at the tax rate in this quarter, does it mean that entire benefit of CST accumulated losses is now accounted for or we would take it in the subsequent quarters?

So both, I'd ask Kumar, can you respond on the VRS and...

Yes. Sure, sure. No, see, as far as VRS is concerned, it's an ongoing activity for us, okay? So we have some high cost for factories and particularly in buyers plants, except in the last quarter. Otherwise, in the previous quarter, we were not able to utilize that capacity fully. So it's important to keep those factories cost competitive. And from a long-term perspective, we continue to run some volatile retirement scheme options. We may give it to employees. And that will go on. So every year, we -- a certain number of people when they opt for it. Those benefits will not be visible. It will reduce the impact of any increase in overall salaries and wages for those particular factories. So it's going to continue in older factories in the next few years or so. So that is point number one. And your next question was on?

So primarily, CSTL, merger accumulated losses being fully accounted for in 9 months FY '21? Or we expect some spillover of benefits in FY '22?

No, it's been fully accounted in quarter 3. So since the merger happened on first of September, okay. And as of 1st of September, in that quarter, accumulated losses as per the books has been adjusted against and accordingly, the tax benefit was also accrued in the last quarter to the tune of around INR 50-odd crores. So we don't have anything more from the merger in terms of tax benefits.

Okay. And one last question to Anant. Considering that we have taken already 3% kind of price increase, you are seeing fully absorption of that already in the market, is demand not getting impacted by that? And how confident are you of taking another 3% kind of price increase, given the demand environment?

Yes. So the 3% has happened, and there's been no impact on the market at this point of time. Demand continues to be strong. The balance is tough to say. I don't have an answer as to when we're going to take it. I hope we are able to take it during the quarter.

The next question is from the line of Chirag Shah from Edelweiss Securities.

I have got 2 questions. So first question is continuation. So when I look at your EBITDA per tonne, it seems to be flattening out over the last few quarters. And given the raw material cost pressure that we are witnessing, how -- and there employee costs can enter from here on, if activity improves, how do we look at EBITDA per vehicle? So what are the levers to using EBITDA for vehicles for us?

No, we don't have that data point. We won't be able to share that with you. I think it'll have to be computed by you itself.

Okay. So according to EBITDA per tonne, is not really changing -- it continues to improve?

Yes. So I mean, one is, you look at our margin, right? So margin is also a reflection of EBITDA per value in the way. So to that extent, EBITDA is continuing to flat between the last 2 quarters. Employee cost, while it will go up as we ramp up our factories, it will not go up at the same because we are only adding feet on the street in a way the people who are on the shop floor. So the overall employee, if we grow by, say, 20%, it doesn't mean our employee costs will go up by 20%. So the employee costs will go up every year based on the normal increment cycles that are there. And the factory will show equivalent growth to a certain extent for that one factory. So the employee cost [indiscernible]. Yes.

Yes. On the German R&D center that we have, can you indicate -- so what type of operations it is? And when can we expect meaningful contribution from the R&D center? And is it something across all the segments like PV, 2-wheelers and trucks? Or it's primarily for PV?

Yes. So the German R&D center has been operational now for 3-plus years, and it is fully operational. We are doing a lot of testing that happens in Europe. This is primarily focused around the passenger vehicle segment but also does other categories. So over time, as we look at entering into Europe for other categories, it helps us there. We get a lot of market intelligence and information on what are future tires that are emerging. We get global capability results. So we have people from all over the world who are there in our German office. So the capabilities that we get are a lot more diverse. And so to that extent, it is fully operational, and it will ramp up based on the needs of expansion in terms of other categories as well.

So it is not right for India perspective, right, if your products for European market?

No, no, it is for European markets is a large part of what it does, but it also adds a lot of capability to India. So we learned a lot from how do you take decisions on which patterns, for example, you introduced? How is testing done? Do -- we need to do certain different types of tests in different test tracks around the world? So you have something in Norway that we will do, Germany that we will do, even for Indian market to Indian tires. So to that extent, there is a lot of knowledge transfer and capability to transfer that for India.

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

Anant, a clarification on the price side. So you mentioned a 3% high, ex of 2-wheelers, right? So effectively, 2-wheelers is 1/3 of revenue. So effective pricing for the portfolio is around 2%, 2.5%. So to come to a 6% price portfolio price increase, you would have to do potentially nearly 4% increase on a blended portfolio basis. Is that understanding correct?

Yes. So the overall price increase that we would have done would be 3% on average across categories, including 2-wheeler. While we're not taking 2-wheeler, what I'm saying is we would have taken [ 1.5% ] on early part of December and about 3% to 4% in the latter part -- or about 3% in the latter part of December. So that may be 3.5% on other categories, which would kind of average out to just around the 3% level on average.

So you're saying on a portfolio basis, you're at 3%, but you've done higher price increase in other categories and not done a price increase within those?

That's it.

So okay. So small -- so this is slight confusion. So is there an effective requirement of price increase higher on a product basis? And just because you're not doing on 2-wheelers and you are doing a higher increase in other categories or increase of 6%? Is that understanding correct?

Yes. So on average, across all categories, we would need another 3%. Now whether it happens in 2-wheeler or it happens something higher across other categories, that's still to be seen. That's what's happened in December. But I think we will -- I mean, if there is any price increase, and we may look at two, 3-wheeler also in this quarter.

Okay. And my second question is more of a clarification. You mentioned replacement mix has come back to normal level. So I'm a little confused here because replacement has grown double than OEM and exports. So how has it come down? How has that happened? Because the growth obviously is 2x the OEM and exports.

Sorry, I didn't understand the question.

You mentioned to a participant that the replacement mix has now normalized back to last year level. In H1, you were at 71%. And even in this quarter, you've grown in replacement by 35%, which is more than 2x OEM in the score. So how is the replacement mix come down?

No. I said that we would not be able to share data. But in the longer term, what we are saying is our mix will continue to be at this kind of level. OEM, on a year-on-year basis, would have gone back up to normal growth levels. So we saw strong growth in OEM. This is year-on-year growth. So last quarter, OEM would have been, for example, at negative growth levels. This year, on a year-on-year basis, both replacement and OEM have shown strong growth. One is at about 15% plus levels, one is at about a 25%. So it has moved more towards replacement. But the skew that you saw on a quarter-on-quarter -- on quarter 2 versus quarter 3, that would have got adjusted, right? Because on a quarter-on-quarter, we would have shown a higher growth.

Right. But -- okay. I think it's only...

In the longer term, there will be -- we will go back to normal -- a normal mix.

Right. And one small clarification, if I may squeeze in. In terms of the price negotiation, OEM, has that passed through being done, completed? Or is there any delay on that account?

On sorry?

On the OEM side, on the commodity price, are that seamlessly working?

Yes, yes. That is working normally.

The next question is from the line of Abhishek Jain from Dolat Capital.

Sir, how was the revenue mix for the truck, 2-wheeler and passenger car for the 9-month FY '21?

Our mix or category mix?

Yes, category mix.

So category mix, approximate, again, we wouldn't be able to share with you exact information. We share it on a 6-monthly basis. But approximately lately, our truck would have been about close to 35%, 40%. 2-wheeler is about close to 30%, and passenger car is about a 15%. So that's the approximate bake up between, and then the balance would be farm and off-highway tires.

And in TNB segment, how is the change in the split, especially in the TBR versus TBB?

So TBR, TBB -- TBR has shown higher growth. So we would be having about 60-40 kind of a mix between the two. 60% biased, 40% radial.

Okay. So what kind of the growth in the TBR segment in the last 9 months because you have added new capacity? So what is the growth in TBR segment? Because TBB must be degrowth from here on. But what is the growth in the TBR?

So both on a year-on-year basis for quarter 3, I'm not giving you the 9 months because quarter 1 skews everything. So on a year-on-year basis, we would have grown by over 35% between both the categories. Over 45% in TBR and over 30% in TBB, approximately.

Okay, sir. And sir, my last question is related with this dealership extend. So how much dealers you have added in last 9 months? And how is the mix in rural versus urban?

No. So dealers difficult to really give a number because it varies across categories. In 2-wheelers, you have very small mechanics, small dealers who deal tires. So they're -- so the numbers, they would also be very skewed. But on average, we would have added even more than 300 dealers plus.

So what is the total strength right now?

Of dealers? Maybe about 5,000 dealers. And then there will be a large number of sub dealers, what we call them as sub dealers, these are a small 2-wheeler dealers. That would be a very large number.

The next question is from the line of [ Achal Jain ] from JPMorgan.

I would like to know about your ESG, whether you're ESG compliant or not...

I'm sorry to interrupt you, Mr. [ Jain ], you're not very, very clear. May I request you to speak on the handset mode, please?

Yes. So I would like to know that whether CEAT is ESG compliant or not? And one more thing that I just to ask about the replacement and the cost that you have been telling us that the raw material cost has been going up. So one question that just came into my mind was whether or not like the replacement tires if they could be recycled or not?

Yes. So as I shared in the latter half of my opening remarks, ESG is very, very important to us. According to us, in governance, we are, of course, at a very high level. We gave a lot of importance to even the social aspect, so areas like diversity, getting people from various backgrounds. We have over 50 people who have people with disability, for example, women recruitment or gender diversity is very important. So we have over 20% people in our new factories, not only Chennai, but even Halol, et cetera, who are women operating on the shop floor. So we also look at people with background diversity, so not only CAs, MBAs and engineers, which is typically what one would look for. But what about people from liberal arts background, et cetera, and people from different nationalities and background. So to that extent, diversity is something that we invest a lot on. On giving back to society through our CSR needs, we invest on providing English education to various schools, municipality schools. We have partnerships with a few thousands of schools around Maharashtra where we train teachers. We look at doing activities around our factories so just some examples of social work that we do. And on the environment front, we have very clear targets that we've taken. We disclosed -- we are at the highest level of reporting disclosure. But we want to do good for society. It's not just a compliance aspect that we want to do. We want to do we compliance plus-plus because we see the earth deteriorating every day, and we want to play our role in making a difference to society. So whether it is working on how do we make our factories more energy-efficient products, having better rolling resistance which is more fuel-efficient tires, using greener raw materials. So we have plans across each area that we can impact the environment on ESG.

Ladies and gentlemen, due to time constraints, that was the last question. I now hand the conference over to the management for closing comments.

You're thank you for hosting the call, Ashutosh and team. And thank you all for your time and interest in CEAT. We look forward to catching up with you once again next quarter. Stay safe, stay healthy. Thank you.

Thank you, everyone.

Thank you. On behalf of Equirus Securities, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.