CEAT Limited (500878) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the Q4 FY '21 Earnings Conference Call of CEAT Limited hosted by IIFL Capital Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Joseph George from IIFL Capital Limited. Thank you, and over to you, sir.

Thank you, Rutuja. Good afternoon, everyone. On behalf of IIFL, I welcome you all to the post-results conference call of CEAT Limited. I also take this opportunity to welcome Mr. Anant Goenka, Managing Director; Mr. Kumar Subbiah, Chief Financial Officer; as well as other members of the management team. I request Anant to make his opening remarks, which would be followed by Q&A. Over to you, Anant.

Thank you very much. Good afternoon, everyone, and very warm welcome to CEAT quarter 4 FY '21 earnings call and your interest in the company. I'm Anant Goenka and we have with us our CFO, Mr. Kumar Subbiah, on the call with us. I hope, first of all, all of you are safe and healthy at this challenging time. We will start off with some brief remarks from me and Kumar, and then we'll be happy to take some questions after that. With respect to our quarter 4 FY '21 financial performance, since we completed the CEAT CSTL merger this year. All reported standalone financials for the current and comparable previous periods have been restated. All the growth numbers that we will share both financials as well as volumes, will reflect growth on a like-for-like basis. We had our highest quarterly revenue in quarter 4 at INR 2,279 crores, a growth of 3% sequentially and 46% year-on-year. This sequential growth was completely driven by better realizations as our volumes was largely the same as quarter 3. On a year-on-year basis, our volumes were up by about 43%. We saw a mid-to-high single digit volume growth across exports and OEM, while replacement volumes declined by about 5% to 6%. On a category basis, specialty tyres and passenger car and UV led sequential volume growth by truck and bus and 2, 3-wheelers showed low-single digit negative growth. Our standalone gross margin, despite some positive inventory movement, was adversely impacted by the rising raw material prices and an adverse channel mix. Our blended raw material cost on a per kg basis went up by about 12% sequentially, leading to a 365 basis points sequential contraction of our gross margin. As company margins were under pressure due to rising raw material costs, coupled with the uncertainty on account of the second wave of COVID-19 infections, we took the conscious decision of reducing our marketing expenses in quarter 4. This coupled with other cost saving initiatives helped us manage our costs despite ramping up capacity. Our standalone EBITDA margin for the quarter was 11.2%, a sequential contraction of around 350 basis points. We ended the quarter with a standalone PAT of INR 142 crores. With respect to the entire financial year performance, FY '21 was an unprecedented year in every sense of the work, while due to the global pandemic, the first 3 months of the fiscal were a total washout. As restrictions eased, we saw a strong demand pick up over the next 9 months. On a full year basis, our standalone revenue was INR 7,573 crores, a growth of 12.2% versus the previous year. The entire revenue growth was volume-driven. Replacement sales for the year grew by over 25%, exports grew by low single-digit and OEM revenues declined. All major categories registered growth for us with truck and bus leading the pack, growing by almost 20%, PC/UV grew by over 10%, while 2, 3-wheelers grew by mid-single digit. For the full year, our blended raw material cost per kg was down by about 4% and consequently our full year gross margin expanded by about 174 basis points. As we ramped up our capacities across the 3 facilities, our standalone employee cost for the year went up by 25%, while other expenses were up by about 5.5%. However, on account of higher gross margin, favorable channel mix as well as operating leverage, our standalone EBITDA margin expanded by about 220 basis points and we finished the year with a standalone PAT of INR 414 crores. Our facilities operated at high levels of utilization throughout the quarter. Our Bhandup and Nashik plants have been delivering record numbers, while we are strongly ramping up capacities at our Halol, Nagpur and Chennai facilities. And our specialty plant at Ambernath, also touched near full utilization this quarter. Given the strong growth and demand momentum we have been witnessing over the last 3 quarters, we have triggered the next phase of expansion at our Chennai facility, leveraging economies of scale. We will now be setting up a 190 tonnes per day TBR plant, that's about 90,000 truck tyre -- truck radial tyres per month with an investment of about INR 1,200 crores. This will be incurred over the next 4 years and the investment is proposed to be funded through a mix of debt and internal accruals. Post our Board meeting yesterday, we have also declared a final dividend of about INR 18, that's at about 180% per equity share of face value 10. We continue to make inroads in OEMs, while cultivating strong relationships. During the quarter, we partnered with Renault to supply our Secura Drive range of tyres for their new Rental Kiger SUV. We also started supplying tyres to Royal Enfield for the Interceptor 650. At CEAT, our customer is always at the center of all our decisions. We align all our efforts to ensure consistent high-quality service and we were awarded by Honda as the best company in quality management at a recent event. Focus on R&D is also essential part of our strategy, and this year, we achieved the milestone of filing 100 patents. On the marketing front, we continue our relationship with the IPL as the Official Strategic Timeout Partner. On the occasion of Women's Day, we also launched a women-centric campaign. We also launched India's first women-owned operated and managed tyre shop. As part of our digital initiatives, we recently launched a new feature on our website, which allows customers to buy tyres online through our website and get their fitment done at the nearest CEAT shop. At CEAT, we also believe that the impact that we have on the environment is getting more and more important. We have put in a lot of effort to create an entire framework to monitor, measure and manage that impact CEAT has on the environment, and we've taken an ambitious target to reduce our carbon footprint by 50% over the next 10 years. To ensure achievement of this target, we have evaluated our entire value chain and identify dispute areas such as in life tyre management, cleaner products, renewable energy sources and many more, which we will target over the next few years. The social and governance component is also an important area that we have always focused on whether it is focusing on diversity, inclusion, education and social impact that we have through our CSR activities. With this, I would now like to hand over the call to our CFO, Kumar Subbiah.

Thank you, Anant. Good afternoon, ladies and gentlemen, and thank you for joining us for our quarter 4 FY '21 earnings call. I'll share some quarter financial data points with you all, post which we can enter the Q&A session. I'll start with revenue. Our consolidated revenue for the quarter stood at INR 2,290 crores, a sequential growth of approximately 3% and year-on-year growth of about 45.5%. While the sequential growth was largely on account of improvement in net realization, the year-on-year growth was largely on account of volume growth. Overall, our full year consolidated revenue stood at INR 7,610 crores, delivering a growth of 12.3%. Now, gross margin. With the rising raw material costs, our gross margin was adversely impacted and contracted sequentially by about 355 basis points and stood at 42% for the quarter, a drop in gross margin percolated down and impacted the EBITDA margins equally. The key raw material costs have been increasing consistently for the last 6 months and we took price hikes to the tune of around 3% on an average across many categories during the quarter. Going forward, in quarter 1, we expect raw material cost to further increase to the tune of about 8% to 10% over quarter 4. We continue to monitor the situation closely and taking appropriate steps to mitigate the impact of -- increase in raw material costs. Now, I'll move onto debt, capital expenditure and working capital. Our continuous focus on judicious cash flow and working capital management helped us to reduce our gross debt by another INR 139 crores in quarter 4 and overall by about INR 510 crores during the year. We ended the fiscal with a gross debt of INR 1,418 crores and our working capital was down by about INR 396 crores during the financial year. As of the -- at the end of fiscal, our consolidated debt-to-equity was 0.42 versus 0.66 at the same time last year. Our debt-to-EBITDA also improved to around 1.4 as of 31st March. Our project CapEx during the year was about INR 470 crores and our CapEx outlook for the year is in the range of about INR 1,000 crores to INR 1,050 crores. Our operational expenses in EBITDA despite ramping up facilities, we have been able to manage our costs well as a result of cost-saving initiatives. As a result, our employee and other expenses put together increased by 42.4% sequentially. Our consolidated EBITDA was INR 269 crores for the quarter, A margin of about 11.7%. Our EBITDA margin contracted by 350 basis points sequentially and around 120 basis points year-on-year. Our overall consolidated EBITDA for the year stood at 13.4% versus 10.9% in the previous year. All our -- now that our facilities have been largely commissioned, our consolidated depreciation went up by about INR 90 crores during the year. For the full year, our depreciation was about INR 340 crores, up about INR 63 crores over the same period last year. Since we are carrying little higher debt in the first half of the year, our finance cost for the year was INR 176 crores, an increase of about INR 25 crores over the previous financial year. Post detailed evaluations, we decided to move to the new tax regime, effective financial year 2021. Hence, we had a positive tax credit worth INR 11 crores in the P&L. Going forward, we expect the company's effective tax rate to be at lower levels as per the guidelines. On a consolidated basis, we ended the quarter with a PAT of about INR 153 crores and INR 432 crores for the full year. All right. Now let's open the floor for Q&A. Over to you.

[Operator Instructions] The first question is from the line of Nisarg Vakharia from Lucky Investment.

Yes. My question is to Anant. Over the last 4, 5 years, as we have scaled up our business, you have seen these raw material pricing challenges quite a few times. My question was that our size and scale of roughly about INR 8,000 crores turnover today, can we safely assume that 11.2%, 11.3% margin that we have done in this quarter is more or less the worst case margin that the company can do?

No. I think it's very difficult to give a worst case or a best case with the margins. I think there are too factors that really determine our margin. I mean we have seen margins at say, 10% kind of levels, even as early as a year ago or so. So it's not that this is the worst case at all, we have seen some pressure in raw material prices in the last 2 quarters and we will be experiencing at least a 10% increase in raw material price from quarter 4 to quarter 1. So to that extent, we do need to take fair amount of price increase during this quarter to maintain even current levels of margin. On the...

Quality of business is also improved, right, over the last 2, 3 years? The mix has also improved towards passenger vehicle and those segments where your margins are...

That's right. The quality of business mix, et cetera., is quite positive. But we've also been focusing on the OEM side, which is important to be there as you are focusing more on the passenger car and 2-wheeler segment. So as a result of that, we -- while our product mix has improved, our market mix has moved more towards OEM, which is needed in the business. So to that extent, I would tend to see that there is further pressure of profitability margins going forward in the next 1 to 2 quarters.

The next question is from the line of Hitesh Goel from Kotak Securities.

And congratulations for the CEAT team for increasing market share in FY '21. So my question is on the truck capacity that you're putting up, I noticed that it's a substantial increase in capacity around 40% of your existing capacity, and given that even if we build in a -- we are building a substantial improvement in truck OEM sales over next 3 years, replacement demand in my view can't grow more than 4%, 5% CAGR in the truck segment over a period of time. So this clearly indicate that CEAT is looking at a substantial improvement in market share in this segment, so -- which is a very low ROCE segment. So can you tell us your plans in this segment? How will you increase market share in this segment? What are the steps to be taken to really utilize this capacity?

Okay. So the market itself has seen very slow growth over the last, say, 5 to 6 years' time. So I think the truck segment is now right for further growth. And we ourselves had not focused much on the truck segment, say, from 2010 to '14, '15 kind of time period. In the last 2 to 3 years, we've come out with some very high-quality products, which is our X3 range, which has been very well accepted in the market. Our margins have improved. In fact, as you may have heard, truck was the fastest growing category for us in the current year. We set up a large capacity in Halol, which is beginning to get well utilized as we are ramping up and to that extent, we feel confident about the category. For us, majority of our growth will come in the replacement segment, while OEM also has lot of potential for growth. If you look at our current market shares today, they are somewhere in the high single-digit levels and therefore, there is a lot of potential for growth on the truck side with respect to where our brand equity is. We've been in the industry for over 50, 60 years' time, so to that extent, I'd say there is a lot of potential for market share also to increase. And finally, I think international business is also an interesting area with U.S.-China trade relation being under stress general relationships under being stress. I think European, U.S., Southeast Asia, all these 3 markets are quite ripe for Indian exports into these areas. So I think looking at that, we feel quite confident of the truck segment going forward.

Yes. And my second question is on the raw material cost, you had alluded to the fact that 10% has increased from fourth quarter to first quarter. So have you taken any price increase as yet to offset that?

So between March, April, a couple of percentage points price increase, our OEM pricing is largely indexed and exports also we've seen some price increases. So there has been, but not to the extent of raw material price increase that we see.

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

Sir, my question was generally on the industry and price increases. We have all seen that our cost increases have been really sharp, our demand has been very strong. Most of the players are operating at very high utilization levels, there are no imports. Then why are players are not taking adequate price increase so as to maintain margins, because even in these kind of margins industries are not making a very high ROCE, right? So wanted to understand your thoughts on this, as to why there is not a desired level of pricing discipline in the industry?

I think that's a very tough question. I don't have an answer as to why that is not happening at an industry level. I can just talk about CEAT. I think we've tried to take as much price increase as possible at this point of time. I think further price increase will happen based on competitive moves, but why is someone else or others not taking, I don't have an answer for that part of it.

So basically, then the margins will come down sharply in the next 1 to 2 quarters right, given the kind of cost increases that we are seeing?

Sorry, could you repeat again?

Sir, basically in the event that price increases are not happening, then basically margin pressures could be quite sharp in the next couple of quarters, right, given the kind of...

That's right. There will be margin pressure, we'll have to manage our costs effectively. So I think both we have to be careful of and we manage.

Sure, sir. Sure. Sir, secondly, you did highlight in your opening remarks that a specialty tyres plant is operating at full utilization now. Obviously, it's a very positive development, so just wanted to understand, are capacity plans in that and is the industry -- is it driven more by industry growth or do you think you have started to make inroads more in the European and U.S. market in the segment?

But I think it is both. So the industry has also grown well, but I'd say, that we have offered a much higher range, which is very important. So as we've been growing, we've been adding at least 100 products a year in the specialty tyre segment, which is very much liked by distributors. Second is our product quality is top notch. So that -- now that people have experienced it, there are further orders coming in and just to share with you on the capacity, we had a capacity of about 33 tonnes per day, we will be taking that up to 45 tonnes per day by around June. This CapEx is largely complete and to another 55 tonnes per day in about 9 to 12 months' time. So that's how largely we are planning capacity, it's a very small batches, because we are spreading our CapEx as demand picks up as well.

Sir, sure. And just one last final question from my side. Based on the capacities that we have today, what is the peak revenue potential that we can achieve due to some current pricing that we have? In this quarter, did we operate at close to 100% inflation across plants or there is a scope for increase in revenues from the current asset base as well?

Right. So we are undergoing expansion, as we speak. So the capacity utilization was close to 100%, but our passenger car facility, for example, is a 20,000 tyre per day capacity in Chennai. In fact, we are currently at 10,000 tyres per day, but the machinery is still coming in and we are still ramping up that capacity. So we are producing whatever we can on the passenger car side, but this will further increase every quarter or so. So to that extent, there is a lot of upside. Same thing on the truck side as well, there is a fair amount of potential for growth. So on both sides, I'd say, there is upside, but it is ramped up as we ramp up.

And in the 2-wheeler side also, there is a room or there we are kind of maxed out?

No, no. 2-wheeler there is room. 2-wheeler now we are finding that, what we -- our supply is now moved slightly higher than demand. So we are very comfortable on the 2-wheeler side.

Anant, is this -- is it possible to kind of quantify as to -- if we ramp up all these 3 capacities that you have talked about, right, not the future CapEx plans, the ones which you have already executed. What could be the peak revenue potential that we can do from our existing base.

Right. So one is if you are saying closed, I mean without counting the new capacities that are ramping up, we've done INR 2,200 crores in this quarter. So that itself will take you up to close to INR 9,000 crores. And then on top of that, I would say -- I would at least take into account truck radial and passenger car, which can offer at least about another INR 1,000 crores, both put together. So approximately, we are talking about INR 10,000 crore capacity that can come in from, the current completion of current CapEx.

And then, the new specialty tyre and the new TBR plant will add on to that in the next couple of weeks, right?

Yes. In 1 year's time. It's all undergoing expansion. So that will add at least INR 1,000 crores.

So INR 10,000 crores based on the existing capacity?

That's right.

The next question is from the line of Jay Kale from Elara Capital.

My first question was on, how do you see the mix going forward in '22? From a replacement versus OEM, this year we've seen a very high growth in replacement segment. Within segment of trucks, PCR and 2-wheelers, if you could give a packing order of replacement growth expectation in FY'22. And within overall replacement and OEM, would you expect OEM to lead the growth in FY '22 and replacement to kind of normalize.

Okay. Yes, last year, if you were to compare, it certainly say that it was very skewed towards replacement. That's because the first half of the year replacement picked up much faster than OEM. This anyways has started to normalize towards quarter 4, as we speak, because we saw good demand in OEM even in quarter 3, 2-wheeler OEMs were going Gung-ho in terms of supplies in October, November. I think the area of growth that can come is on the truck OEM side going forward for the rest of the year. And PCR and 2-wheeler can be under a little bit of pressure with respect to OEM demand because of the current lockdowns that you're seeing. So there are retail outlets that are getting closed down locally. We are seeing plants closing down here and there now. So predicting demand will be tough, but I think we will go back to our normal mix of replacement, OE and export mix. So exports is somewhere around 12%,13%, OEM will be somewhere between 25% and 30% of our total revenues and the balance about 60% will come out of replacement mix. So that's how largely we are looking at it in terms of the overall mix. In terms of replacement OEM passenger segment, which is the car and 2-wheelers, it is much more skewed towards higher OEM scale, so it's about 45% OE, 55% replacement, approximately, and it's about 85% in replacement for the truck business at an industry level.

Okay. Got it. And sir, on the replacement side in FY '22 since FY '21, there you had multiple factors for different segments that you had your restriction of imports, truck radial also you had some bit of restriction of imports. So in FY '22 would you expect, say, the truck segment to lead the growth again in replacement segment followed by 2-wheeler replacement and PCR replacement, in that order?

I think the growth rate will continue to remain strong in both. I'd say, at least as a percentage, both will continue at a similar kind of level because the base effect at least for the first 4, 5 months will be -- which will be felt will be very strong. But I'd say, the second wave will certainly bring in a lot of uncertainty, so we are beginning to see already in the last 15 days some slow down to a certain extent. So I think the predictability stuff, but as a percentage, overall, there should not be a major divergence between the 2. Maybe OEM, as I said, as your mix gets readjusted, OEM will, of course, see higher growth on a year-on-year basis, because last year this time OEM was near 0 with all the lockdowns.

Right. And then, just on the cost increase pass-through in the -- on the OEM side, would it be a 1 quarter lag or how is it? So for example, you've taken a 3% price increase in Q4 on the replacement segment, would you have got a similar increase in the OEM side as well or how is the -- how does -- how is it going for the OEM side?

No. OEM would move exactly with raw material. So to that extent, we would have got a much higher price increase with OEM. But you're right, there is about a quarter's lag. So the margin erosion that you've seen from quarter 3 to quarter 4 is largely because of replacement.

Okay, okay. And the CapEx part, you've mentioned, FY '22 would be around INR 1,000 crores, INR 1,050 crores of project CapEx, so the maintenance CapEx will be over and above this INR 1,000 crores, INR 1,050 crores, so maybe around INR 1,200, INR 1,300 crores would be the total consolidated CapEx, including maintenance CapEx?

We do maintenance CapEx of about INR 150 crores, above INR 1,000 crore will be our project CapEx.

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

I have a few questions. One, if I see your annual balance sheet, in the Slide 20 and 21, consecutively, I can see your payable days have been spruced up from 55 odd days to 95 odd days closely, and for fiscal '21, bulk of the cash flow or debt reduction is very much similar to the quantum of working capital reduction. So how should one look at the state of working capital on a base of FY '21? Should one expect 95 odd days of stable days to sustain ahead?

Kumar? I request Kumar to take that.

Yes. See, the working capital going forward, the whole of 2021, we were operating inventory at lower level -- little lower levels, as we had to ramp up the plants, one. And #2, the demand picked up later part of the year. So therefore, we had to quickly move the material from place of manufacture to place of sale. And in order to ensure that we are able to service all our customers well and keep adequate inventory in the pipeline, we expect when the normalcy returns and in fact, about INR 100 crores to INR 150 crores of additional inventory is necessary, both on raw materials as well as on finished goods side, okay. Otherwise, on other parameters in terms of number of days, largely we should be able to maintain it, okay, at the level that which we had in 2020-'21, because last year as well as in the earlier years, we were able to bring in efficiency in working capital and going forward, we would like to maintain a same level of efficiencies in terms of number of days from '21, '22, except for the fact that inventory we may have to keep little more.

So the payable days gives rise in sustainable model?

Yes. Payable, at the current level, it is sustainable, at current levels.

Okay. Second question, sir. If I look at -- as you said in your earlier comment that on a sequential basis, in volume terms, truck business was down. Am I right, sir?

That's right.

So if I look at trucks being almost 1/3 of your business and OEMs being 1/4 of truck business in general, so if I see Tata, Leyland and Volvo Eicher, all have been grown almost 35% sequentially in volume terms. So if I do the broader math, it implies replacement market would have contracted sequentially, so how look at that? Is it because of market share change or that the market is still would have contracted in Q4, the tyre replacement supplies?

No. I think last quarter was a very high strong quarter for us, quarter 3, also in terms of growth on a year-on-year basis. So we are talking about a very high -- and the growth was largely flattish, marginal maybe minus 1%, 2% on that sense. So to that extent, I'd say that -- and our exposure right now with truck segment has not picked up enough on the OEM side. So we are very optimistic about further growth on the OEM side. We've already seen good growth with Tata Motors. I think in the coming year, we will see very strong growth with Ashok Leyland as well. So our presence with them on the truck OEM share has been relatively low in general. As you know, in the replacement segment also in truck radials, we are under 10% market share. So even on the OEM side, it is similar kind of level. So there is a lot of upside.

And sir, what is the current level of 2-wheeler market share largely after the end of the fiscal for you?

It continues to be at about 28% to 30% range.

Sure, sure, sure. And last question, sir. From a industry perspective and CEAT's perspective, what kind of cumulative price hike you have seen in the tyre -- the truck tyre replacement calendar year to-date?

I can get back to you separately on that, but I think, I would say approximately 2%. I may be off a little bit, but it will be approximately 2% in the truck tyre replacement. Roughly, it's somewhere between 2% to 3% somewhere.

Rightly somebody asked in the call previously also and you had also mentioned raw mat basket is up 12% this quarter and another 10% pending for coming quarter and where the truck side is a significant part. So yes, market condition is bad, but that's the big risk for the overall market -- margin for the whole industry, not only CEAT. So no option of taking any substantial price hike, obviously, tough to pass on fully nor the voluntary risk on margin will be significantly prevented from here?.

That's right. So there is some stress on margins. I'd say that -- as I said, OEM, which is about 25 exports, which is about 12%,13%, so I think 35% to 40% of the business should be in a little bit better position, but replacement margin is under some stress as we go into quarter 1.

I would request Mr. Banerjee to please rejoin the queue as we have the participants waiting for their turn. [Operator Instructions] The next question is from the line of Jinesh Gandhi from Motilal Oswal Financial Services.

So my question pertains to our market share. So in 2-wheelers, market shares have been stable in this year -- sorry in TBR, OEM, we've seen some bit of market share improvement led by new capacity. Can you talk about what is our market share in PCR, how that has been trending in FY '21?

Yes. So similarly passenger car also we've gained market share, I'd say, the most in the passenger car segment in this last year. We were at around 10 to 12 -- 10% to 11% market share and this would have gone up to approximately nearly maybe like 4 to 5 percentage points in the last year. So we've seen as you've seen about 40% to 50% growth on a year-on-year basis. So we feel very confident and positive about PCR, that's the area where we gain market share. We've added 10,000 tyres per day capacity from a base of about 20,000 tyres, we are at about 30,000 tyres per day to-date. And therefore, there is a lot of -- I mean -- and we are still fully utilized, so we feel confident about the passenger segment going forward.

All right. Sorry, you said, you're fully utilized in PCR?

Yes.

I guess, at the end of 10,000...

We are fully utilized at current capacity levels. Of course, supply will go up as we speak during -- coming into this quarter as well.

Right. So this 30,000 tyres per day capacity will peak out at about close to 40,000 to 45,000 per day, right?

So our overall capacity in Chennai is going to be 30,000 tyres per day in phase -- if you add Phase 1 plus Phase 2, Phase 1 is 20,000 plus Phase 2, 10,000. So we are 10,000 of Phase 1.

Okay, so only the 20,000 to come?

Yes.

And given our focus on this category, on the PCR segment and growth being relatively stronger, you think the need to look at the second phase or the next phase of growth for PCR in the near term?

I think that's a call that we will take towards the latter half of the year. I think it depends, we will only take a call once we reach about say 70%, 80% capacity utilization of the current capacities that we have. But I hope that by the end of the year, we take a call because there is still about something -- about an 8 to 10 months' lead time at least for that next capacity to come in. So based on our forecast of what demand will be, say, if we assume that by December- March quarter, we take a call, then that capacity will be ready by say 1 year hence or 10 months also.

All right. Got it. Got it. And secondly, my last question pertains to the quantum of price increases, which we'll need to pay to pass on -- our cost inflation, which we have already seen between third quarter and what could be the residual price increases required to pass that entire cost inflation?

So I think, there's a raw material price increase of about 10%. So that would mean at least 5%, 6% price increase.

All right. So 10% in coming quarter and close to 12% was in this quarter, which I think past 2 was just about 2%, right?

Yes. But a little bit more than that. If you just look at replacement, it is about 3% but if you look at all other categories, it's higher than that.

Got it. So in the next 6 to 12 months' time will you be able to perform between 7 to 8 kind of percent price increases in the next 6 to 12 months in the pricing?

I -- we hope so. I think there is no answer to that. I don't have an answer. We'll have to see what the competitive situation is.

The next question is from the line of Prateek Poddar from ICICI Prudential.

Sir, this is Prateek from the Nippon India Mutual Funds. Just a couple of questions, one is a clarification and then a question. The first clarification was that, is it fair to say that CY from calendar year till date, your raw material pricing has gone up by almost 16% as we speak and in front of this, you have taken down 4% price increase, as of now. That's the clarification.

Calendar year to-date, that means from January 1 until April?

Yes. As we speak. Yes, till today. Yes.

Kumar, would you have an answer on that?

Yes. During the calendar year to -- till yet, yes, the raw material prices have gone up by about yes, 8%, I would say, beginning to end.

Sir, I didn't understand. You said Q3 to Q4, there was a 6% price increase and in Q4 to Q1, there is a 10% price increase, right? So 16%, right?

Yes, yes. No, you are talking about calendar year, is it? Current calendar year?

No, no. I'm saying from January 2021 till May 2021, there is a 16% increase, right? From quarter 4 and quarter 1 combined of financial year, if I were to put it that way. There is a 16% gross increase, right?

Let's take these 2 separately, right? I'm not able to iron and give you response. In the quarter 4 from January to March, yes, approximately about 8 to -- 8% would have gone up, okay? And another 8% to 10%, we expect in quarter 1 of the current financial year, over quarter 4.

And how much have you taken to cover this as of now?

How much has been, sorry?

How much have you taken, I mean, price hikes have been taken to cover this cost increase?

No. The indication -- see there is a drop of about 350 basis points in the gross margin in quarter 4, okay? And that was because we had not covered the price increase. So -- and let's assume quarter 4, we had to take an increase of about -- assuming raw material price increase was 10%, necessitating about 6.5% increase in selling price, we could take approximately about 3% and balance 3.5% has come as gross margin impact, okay? So now quarter 4 is closed. Now we are talking about quarter 1 over quarter 4. Quarter 1 over quarter 4, we expect the price -- raw material prices to be higher to the extent of approximately 8% to 10%. That may call for another 6%, 7% increase just to cover quarter 1 alone, if not to cover what we have not recovered in quarter 4.

So sir, that's the question. Now the question is built on this. Given such very high intensive raw material pressure, which we have, how -- would you look at something which you did last year same time in terms of when there was a full-blown lockdown, where you had incurred or where you had used. I mean you had cut down your other expenses and employee cost in a very severe manner. Would that be something, which you would resort to otherwise I think margins will be under tremendous stress, isn't it? As we just...

Now, we have taken up other cost-control measures in terms of bringing down our discretionary costs, certain costs we have frozen and not agreed for any inflation, okay. With just 1 month has gone by and in the event, we are not able to take the prices up in May and June, we may have the resort to more stricter cost-control measures. I think first shot would be to take the prices up, so it's still very early to say that we would be able to cut other cost significantly to bridge the margin. I think it will be a mix of both.

Also last year -- just to add, last year was a lockdown period. So since it was a lockdown period, you didn't have your factories running at that point of time, so your entire utility cost, et cetera, would anyways not being incurred, which is now getting incurred because your factories are running. So to that extent, you can't compare Q1 last year to Q1 this year in terms of cost elimination.

No, no. Sir, I was honestly asking you, how do you plan to get over this such high raw material cost inflation? What -- if you can share with us in the next couple of quarters, because, sir, if -- I mean, my -- as an investor, or as an outsider, if in quarter 4, the price increase was where demand was at its best, we couldn't pass on the entire raw material price hike, how should I think about the next COVID wave to plan there is some -- certain uncertainty as you call them out. So I was just trying to understand -- I'm sure you must have budgeted something or you must have thought about how to get over this RM inflation, right?

Yes. No, I think, Kumar has answered that.

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

Opportunity -- Sir, the first question is, I mean on the pricing -- and sorry to again ask on this point. Just wanted some color about this pricing competition, do you think for across every segment there is a pressure or you think there are some segments where we are the one of the largest players like 2-wheeler you talked about where the market share is higher and there we can take the initiative to raise prices or is it not the case? So some color on that will be helpful.

No. There is a differential pricing capability across different categories, but a lot of whatever we could have done we have done. We will keep experimenting here and there if competition does not take price increase and we feel the need to do, we may take selective price increase in certain areas on our own, which is also fine.

Okay. Because directionally, I thought that your market share -- because in trucks it's lower, it may be difficult, but the segments where we are reasonably like PCR, we are gaining share and 2-wheeler we are the leaders sort of, then we should have some more pricing power in the segment.

That's right. But on the other hand, there is also little bit of uncertainty that's come in the last 15 days with all these closures and demand certainty has also come down a little bit.

Yes, yes, yes. Compared to -- it's just that I have seen things tend to normalize, we will look at raising prices in that scenario. And can you quantify in April how much will be the price increase we have taken so far in April?

April we have not taken any price increase.

Okay. So after March there has been no price increase in April till date?

No.

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

My first question is more directed as a clarification to Kumar. Kumar, you mentioned about the gross margins, but you failed to account for the finished good in, we call those, options benefit that you have taken for. So actually, adjusting for that the absolute gross margin impact was much higher, is that not true?

Yes, no, see, when I said gross margin impact adjusting for finished goods, any movement in finished goods -- the way gross margin is calculated, okay? For example, finished goods is more, you tend to have a theoretically higher gross margin and the reverse is also true. So when -- internally, when we calculate gross margin, we look at the cost of materials and our cost of goods sold and accordingly arrive at -- we don't arrive at it that way. But the way profit and loss account is reported, okay, and one line item comes as the difference between opening and closing finished goods and that entire difference is adjusted against the raw material consumed, okay? But the difference between opening and closing finished goods value also had other cost elements like manufacturing costs and distribution costs. So when we mentioned, it would be 50 basis points, it's only to the extent of raw material impact on it.

Okay, okay. So it's not as per your SEBI reporting structure?

Yes.

Okay. Yes, so second question is directed towards Anant. Anant, from a business standpoint over the last few years, I think the industrial capital allocation switched from consumer-oriented category that we were doing, so like we were, obviously, leaders in that space in 2-wheelers and then we went through the PCR/UV space. Towards TBR and truck, bus segment, so is it fair to assume that we as a company are also orienting more towards the industry revenue mix structure and which will also have its own challenges in terms of profitability side? And second, you have always highlighted that whenever you look at new CapEx, you look at a very stringent hurdle rates on return on capital, are they same also true for the truck, bus investment that you are looking for?

Yes. So there is no real change in terms of our strategy. In terms of focus on passenger car and 2-wheeler, that continues to be the arrowhead of the business, we have allocated disproportionate capital in both these areas. If you look in the passenger car, we had allocated INR 2,200 crores, in 2-wheeler you need much less capital, so to that extent, maybe about INR 700 crores, INR 800 crores and that will continue to be our area of focus. But to be in the tyre business, when you're on that scale makes a big difference. You need to be there also in the truck to be relevant to the channel to be -- for size purposes as well and we've seen good success there as well. So we -- as a percentage, we will continue to be disproportionately higher in between passenger car and 2-wheeler side. So to that extent, that continues to be there. And yes, we have strong hurdle rates. We have worked towards ensuring that we maximize our return on truck. And as I had shared, we've seen good success also in the last few years on the truck side. And I think, some of that will get felt as we sell more and more of our premium products and we get economy of scale advantages.

Small clarification on margin. You mentioned A&P, have you paid out the IPL expense or is that not paid out?

If I -- I may be wrong, but I -- we have paid out for the Strategic Timeout. I think it will go as a share of whatever IPL has happened. So I think the balance expense of IPL may shift to the second phase of IPL whenever that were to happen. Is that correct, Kumar? Or is it that the entire Strategic Timeout payment has happened? Can you add?

No. In terms of payment, normally, it is made little advance before the IPL starts, but in terms of the impact on profit and loss account is linked to the number of matches. So as far as the current quarter is concerned, if we are going to have only 50% of the matches, the cost that will go into P&L only will need 50%, either the money will come back from BCCI or as and when it happens, it will absorbed.

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

And 2 questions. First, a clarification on the strategy on the UV side. So a few years back, we had in a thought process that you want to have 2/3 of our revenue only from trucks and OEM, these businesses. So that changes or that number has undergone revisit, but also because you have added specialty tyre as a business category.

That's right. So approximately -- just to share with you, what -- about 27%, 30% of our revenues come from 2-wheeler, approximately 15% to -- around 15% to 20% range comes from passenger car and another about overtime, about 10% of our business will come from the specialty segment, excluding domestic farm budget. So if you add domestic farm, which is -- then that's another 5%, 6%. So we are seeing a fair share of our business coming in and then the balanced growth that you see will come between further in truck and in PCR. So as a mix it -- I'm not sure whether it will reach 2/3, but I think it should reach about 60% of our business, easily will come out of the passenger and specialty segment. There will also be about 10% or 7%, 8% in others, smaller category sales.

So no major change in that part of the cycle. Second, just out of curiosity, Q3 and Q4, industry would be -- were the consumer would have been able to adopt the price hike, given the high utilization levels and industry chose not to pass on or at ground level, there was some resistance that you are seeing that consumers are not willing to accept the price hike, because it is slightly counterintuitive and utilizations are high, everything is going well and the industry is not able to pass on the price hike. So what is -- was it the concern as a manufacturer or you are getting those even from the ground level?

No. I think in Q3, we were still consuming the lower cost raw material that we had procured earlier. Then going on to Q4, I think it is largely dependent on competition levels that you take a call on price increase, but sometimes you take a call, you see how demand works or some confidence in certain products that are there, you take price increases and then some of it you have to depend on competition. So it was not that we took price increases and the industry was not -- or -- and the market was not accepting and you have to roll back or -- none of that.

Okay. And if I want to squeeze in one last question. So if you can just run us through that in TBR and PCR, where would it be in terms of price ladder versus your -- versus a leader or your immediate competitor? So -- and how is the gap that has been bridging if you can give a -- because when we do our check, it is more region-specific and there are wide disparities that we have observed, so internally when we look at that data...

Hello?

Mr. Chirag, sir, we cannot hear you.

Yes, yes. I'm there. I thought -- I wasn't sure whether I went off or Chirag.

Hello, am I audible?

Yes, now I can hear. Sorry.

Hello, am I audible?

Yes, yes, Chirag. I can hear you.

Yes. I was just trying to understand that internally, in your benchmarking, how are you moving versus the #1 player in PCR and TBR as far as pricing is concerned? So how was -- where is the gap today and where it was, say 1 year back or 1.5 year back?

Yes. I think there would be about a couple of percentage, maybe approximate price gap. Earlier, this could have been maybe between 3% and 4% -- 3% to 4% price gap. The other thing that also matters is how much of your premium products or how much of, say, in passenger car higher range sizes that you're selling. So our share of high-range sizes has also improved substantially. And as you enter more and more OEM, our OEM presence about 4, 5 years ago was not as strong and that has improved quite a lot and those tyres are now beginning to come out in the market, which is allowing more higher range sales also to happen. So it's not only just pricing, but it is also the mix that makes some difference. So to that extent, that gives us confidence on overall realizations improving further in the passenger car segment. This is less relevant in the truck segment, but there are economy tyres that are also premium tyres that we sell and the premium tyres' ratio for us has also gone up quite well and there is further upside opportunity as well.

Thank you. Ladies and gentlemen, due to time constraint, this was the last question for today. I would now like to hand the conference over to the management for closing comments.

Well, thank you, everyone, for your interest in CEAT. We look forward to staying in touch and seeing you once again, same time next quarter. In the meantime, do stay safe and healthy, and all the best to you and your families. Thank you.

Thank you. On behalf of IIFL Capital Limited, that concludes this conference. Thank you for joining us and you may now disconnect your line.