CEAT Limited (500878) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the CEAT Limited Q1 FY '22 Earnings Call hosted by Motilal Oswal Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Jinesh Gandhi from Motilal Oswal Financial Services Limited. Thank you, and over to you, sir.

Thank you, Malika. Good afternoon, everyone. On behalf of Motilal Oswal Financial Services, I'd like to welcome you to our 1Q FY '22 post-results call of CEAT Limited. CEAT is represented by Mr. Anant Goenka, Managing Director; Mr. Kumar Subbiah, Chief Financial Officer. I would like to thank the management for taking time out for this call. I would now hand over the call to Mr. Goenka for his opening remarks. Over to you, Anant.

Thank you, Jinesh, and good afternoon, everyone. A very warm welcome to CEAT Quarter 1 Earnings Call, and thank you all for your time and interest in CEAT. I'm Anant Goenka. And as Jinesh shared, we have our CFO, Mr. Kumar Subbiah, on the call with us. I hope, first of all, all of you are safe. It's been a very challenging time over the last quarter for many of us and our families and friends. So hope you are all well. As usual, we will start off with brief remarks from me and Kumar, post which, we can take up questions. With respect to financial performance, as we exited quarter 4, we witnessed the fall in domestic demand towards the end of April because of the COVID second wave and several localized lockdowns, which happened as a result all across the country. As a result, May was significantly impacted. But by mid-June, we started seeing some green shoots in replacement demand. While OEM and exports was a washout during quarter 1 of the last year, sales were relatively better this year. On a stand-alone basis, our revenue for the full quarter stood at INR 1,898 crores, a year-on-year growth of 70%. Sequentially, our stand-alone revenue declined by 16.7% in quarter 1, which was partly aided by about a 4% improvement in overall realization, offsetting a decline of 21% in overall volumes. We saw close to mid-single-digit sequential volume growth in exports. OEM volumes declined by around 30%, while replacement volumes declined by around 20% sequentially. Trends were more or less similar across product categories. Our stand-alone gross margin continued to be adversely impacted by rising raw material prices and an adverse channel mix. Our raw material cost on a per kg basis went up by about 12% sequentially. As company margins were under pressure due to rising raw material costs, coupled with intermittent lockdowns, we took the conscious decision of reducing our marketing and other discretionary expenses in quarter 1. This, along with other cost-saving initiatives, helped us manage our overall costs despite ongoing ramp-up in capacities. Our stand-alone EBITDA margin for the quarter was at about 8.7%, a sequential contraction of 250 bps. We ended the quarter with a stand-alone PAT of INR 20 crores. Raw material prices remained at elevated levels. We continue to take staggered price increases to offset this impact. As a result of our consistent efforts to provide a better work environment for our people, we have been recognized as the top 35 Best Places to Work by Great Place to Work Institute yet again. We've also continued to add some digital features for our customers and dealers, and some of these include image analytics and warranty registration, WhatsApp engagement for various customers as people are using WhatsApp as a preferred channel and pickup at the store and get fitment of tires as we work towards developing an omnichannel offering for our customers. We also continue to work with our OEM in building long-term relationships. During the quarter, we partnered with Olectra's EV bus and Okaya's EV scooter. Some recognition that we got, other recognitions were that we got the best performer for extended support by Hyundai. We also received -- our fleet solutions business received an award from Mint -- Business Transformation Award from Mint. Recently, we also tied up with Tata Power to set up a 10-megawatt solar power in Maharashtra -- solar plant in Maharashtra for our Bhandup plant power requirement. This is a step towards our goal around sustainable energy. We have committed to solar power for all our plants with either open access or rooftop, and we're targeting to meet 50% of our energy needs through renewable resources by 2023. Our Nagpur alone and Chennai plant building also received the Indian Green Building Council Recognition Platinum certificate. CEAT also continues to be conscious of the safety of everyone around. We extended our support in all ways possible, including initiatives like donating oxygen concentrators, holding vaccination drives for our people as well as the communities and also setting up fever clinics in rural and semi-urban Maharashtras. If you look to see, the second wave, finally declining. And we hope things get better going forward. With this, I'd like to hand over the call to Kumar Subbiah, our CFO.

Thank you, Anant. Good afternoon, ladies and gentlemen, and thanks for joining our quarter 1 earnings call. I'll share some further financial data points, which you all -- with you all, post which, we can enter into a Q&A session. First, revenue. Our consolidated net revenue for the quarter stood at INR 1,906 crores, a sequential decline of 17% but year-on-year growth of about 70%. The sequential decline in revenue was largely due to the impact of COVID second wave. Now gross margin and also some update on price hikes. With the rise in raw material costs, our gross margin adversely moved during the quarter and contracted sequentially by about 306 basis points, and our gross margin stood at 39% in quarter 1. The raw material costs have been increasing consistently and significantly in the last 3 quarters. The increase in the raw material prices during the quarter 1 was 12%. And consequent to increase in our raw material costs, we took price increase of our tires to the tune of 3% to 4% across core categories during the course of quarter 1. Going forward in quarter 2, we expect raw material costs to further grow to the tune of about 3% to 4%. However, the price increases that we have taken to date are not sufficient to cover all the increases in raw material costs, and therefore, we still need to take some more price increase in the current quarter and to recover the impact of raw material cost increases. And third, some update on debt capital expenditure and working capital. Our consolidated debt increased by INR 368 crores during the quarter as a result of higher level of CapEx in quarter 1 and also increase in working capital. Our working capital during quarter 1 increased by about INR 236 crores, primarily on account of higher inventories as of the end of the quarter and also a decline in payables. As far as CapEx is concerned, we incurred a project CapEx of about INR 182 crores during quarter 1. And in addition, we also spent another INR 139 crores on some of the long-term cost savings and energy saving-related capital proposals. Our project CapEx for the current year remains in terms of forecast, as we had indicated in the earlier quarter, to the tune of INR 1,000 crores. And in addition to that, we would also spend about INR 150 crores to INR 175 crores on routine and maintenance CapEx. Next, I move on to operational expenses and EBITDA. We have been able to control our operating expenses despite ongoing ramp-up of capacities at different locations as a result of several cost-saving initiatives. We undertook cost control measures during the quarter. On account of that, we've managed to bring down our other expenses to the extent of 23.2% and also employee cost to the tune of about 4%. Our consolidated EBITDA was INR 173 crores in absolute sum. And in terms of margin as a percentage, 13.1% for the quarter. And EBITDA margin contracted by about 265 basis points sequentially, lower than contraction in gross margin and largely on account of a larger control on our costs. Depreciation and interest cost. Depreciation costs went up from INR 90 crores in the previous quarter to INR 96.5 crores in the current quarter on account of capitalization of assets in our new projects, and interest costs moved up from INR 40 crores to INR 46 crores on account of increase in debt during the quarter. Our profit after tax, as Anant indicated, stood at about INR 20 crores on a stand-alone basis and INR 22 crores on a consolidated basis. And our effective tax rate for the quarter works out to 28%, and tax rate is likely to be in the range of 26% to 28% during the year. Now let's open the floor to Q&A.

[Operator Instructions] The first question is from the line of Ashutosh Tiwari from Equirus Securities.

So firstly, can we just tell us what kind of price increases you've taken across different segments like 4-wheeler, passenger truck, truck and all from December to June? [indiscernible]?

Yes. I think I'll share with you the data from April approximate numbers. Broadly, it's been quite consistent across categories between April 1 to current levels. It's been around 5 percentage price increase that we've taken, about 4% in quarter 1 and about 1% to 2% in July as well. I'd say truck bias has been slightly higher, maybe a percentage more. But largely across the board, it's been between 4% to 6%.

And the prices that we've taken in July, that is from first of July?

Around middle of July.

And that is which segment, sir?

I think this was also largely across all segments that we've taken. Kumar, would you have that data for July, which segments?

Yes, I have. Effective July, we took an announcement given by SPC. We -- come middle of July, we took. And from early July, some other categories.

Okay. We also expect to take some price increase end of July as well.

That could be in the range of 2%, 3% or lower?

That's right, 2% to 3% end of July, what we've announced.

Okay. So we told -- we were told that on a Q-on-Q basis, the RM price is likely to grow by 3% to 4%. And some of the pricing that we take in to June of, say, 4% probably has come through in June month itself. So you made whatever pricing you have taken into last quarter and July so far. What is the incremental impact in Q2? Can you say what you need to take?

We still do need to take some more price increase. As I said, as we saw that there was about a 12% plus another 4% raw material price hike. So there will be -- we need to take about another 4% to 5% price hike from now onwards to come back to normal margins. When you say about -- if you say 10% to 12% is normal, we need to take that much more.

Okay, okay. Got it. Okay. And secondly, on this interest cost element, it was around INR 45 crores in this quarter. Going ahead, I mean do we expect further increase in debt from here? Because I think operationally, things will normalize. So the debt can further go from here?

Kumar, would you like to?

Yes. See, the debt level this year compared to last year, last year, we -- our CapEx was kept under control, okay? And our total project CapEx was around INR 460 crores only last year. And this year around, we intend to take it up closer to INR 1,000 crores. So that could be one, and therefore, that needs to be funded in the form of a debt. And second, there could also be -- working capital also have got keeping in pace with the level of operations. So we expect the debt level to go up during the course of the year, and therefore, it will have some impact on the interest cost.

So even from Q1 levels, do you expect the working capital debt further to go up?

So working capital, let's assume we should be able to maintain or deliver at which we ended the quarter as of quarter 1, okay? And so -- but we still have, again, INR 1,000 crores of CapEx. We spent a little less than INR 200 crores only in quarter 1. So balance will have to be spent. And this year, we will also have a dividend outflow, which the last financial year we didn't have. Because the previous year, we had dividend payout, 2 payouts in the previous financial year. So therefore, there will be some dividend payout, which we expect it to be around INR 74 crores approximately. So those things will have to be taken into consideration and plus the cash profit part of it. So the debt level will go up during the course of the year.

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

On the demand side, first, if you can highlight from Q2, have we started seeing growth on the volume side around a 9% to 10% type of -- I mean I put some growth because we have said that June, we have seen a good recovery. So how is it panning out going ahead? Some thoughts there?

Yes. We are seeing good uptick from the market. In terms of approximately, I'd say, there will be similar levels to last year post COVID or post wave 1 impact. So if you look at H2 kind of numbers, we are going back to that kind of normal levels of sales in that sense. We are seeing a higher uptick in the passenger car and 2-wheeler segment. Truck is -- may take a little bit longer. Right now the uptick is higher in these 2 categories.

Understood. And just to summarize on the pricing part, so we took a 1% to 2% hike in July, and we think another 2%, 3% hike should happen by the month end so as to neutralize most of the cost increases. Is it broadly correct?

I don't think it will neutralize the entire cost increase. So I think what will happen largely will be we will still need from now onwards. I think we have a couple of percentage points planned in end of July. We will still need at least another 3% price increase between, say, September -- August, September kind of period to neutralize the price increases.

Understood. Okay. But I mean in terms of segments in the past, we have seen in some segments like 2-wheelers, we have not been able to raise prices to the extent required. I mean going ahead, do you see anything of that sort in any segment where competition may not take pricing figures out there as high competition, which should not lead to such price increases? Any risk to that increase?

Right now, we are seeing quite a fair even increase across categories. The only category where we are seeing a little slower increase is on the scooter segment, which may be planned at the end of July. Otherwise, all categories are maybe a percentage point here up/down. So some maybe 4, some maybe 5, some maybe 6. But as I said, it's not a big difference between the various increases that we see. Scooter, there was a last price increase sometime in quarter 4. This last quarter, there's been no price increase in scooter.

Okay. Understood. Okay. Lastly, sir, on the OE and replacement mix if you can share for the quarter, that will be my last question.

Yes. So replacement was around 55%, OE was around 25% and export was around 20%.

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

Just a few questions on the last set. So as you said that post the price hike in the beginning of July, some more price hike in July and some more in coming months to neutralize. Am I right, sir?

Yes.

So just wanted to understand that post-neutralize win, what is the target level in terms of gross margin, which you are benchmarking as well?

Kumar, would you like to share?

Our gross margin trend past many quarters, it has always been in the range of 40% to 42%. The revenue -- the quantum of revenue play a role in terms of EBITDA margin as a percentage, okay? So during the last quarter, I think our gross margin of 38% is adjusted for inventory difference. It could be a little lower also. I think our target is to go back to that level of 42%, 43%.

So basically, 58% for RM sales, so roughly 400 basis points of improvement.

Yes, right. No, the only [ translocation ], these increases are happening at different points in time. Many have exited. Okay, for the benefit to come, full benefits to come, you have to wait for the following quarter. These increases will benefit -- at the end of the quarter, if this price increase will happen by -- we would exit at that debt level, assuming raw material stays at the level at which we have forecasted and the price increase happens, but in the next quarter is when you would be able to see that.

So Kumar, like entire industry in this kind of scenario, how to look at that from a percentage perspective or from a per kg benchmark gross profit kind of perspective one should be targeting on?

So from our point of view, we look at both, okay? And since your question was on percentage, and therefore, we responded. But for us, both are important. But the percentage understanding helps because EBITDA is always a percentage. And therefore, from there onwards, when we arrive at EBITDA, it helps. But when we take pricing decisions, when we understand the costs, particularly raw material costs and realization, we look at the realization and RM costs in terms of per kg basis.

Sure. Because as you said, 12% raw mat market inflation, then further 4%, 5%. So the denominator inflation is so much. But even if you try to maintain gross profit per kg, the percentage margin might look deflated.

True. That's true. That's true. That's true. Particularly if you only like to recover the increase in cost, okay, while we would have got the same gross margin per kg, but gross margin as a percentage would decline. So it's important for us to balance both.

So 2 more questions. Second, sir, the kind of price hikes that you've announced since Q1 and Q2 combined, especially the truck replacement price hike, which hardly happens such a quantum of price in such a short time span. So how do you -- how are you seeing market accepting that? Or that can result in subsequent discounting, et cetera, overall as much?

So I think at this point of time, as I said, we are seeing a fairly decent growth. The challenge is there is a slower increase in demand in trucks segment. Now that could be partly there is monsoon season. In part, there is a price -- fair amount of price hike that has happened, and there is also some changes in overloading norms in the east. Now mix of all these reasons could be causing a slower uptick in truck. But other segments, we are seeing largely demand to be okay. As I said, I shared with you the truck bias. Truck radial has been lower at about 4%, 4.5% price hike.

And last question for Kumar, sir. Like in these challenging times in terms of margin and adverse working capital and overall cash flows and the CapEx requirement is also high. So it's now almost, what, 5 years you have done a secondary market raising. So any consideration of taking that part?

No. I think Anant will only respond to this question.

No. No plan at this point of time. If there is a need at that point, we will share, but there's no discussion consideration of moving to the secondary market.

The next question is from the line of [ Rishab Dugash ] from CD Equisearch.

So my first question is in the replacement market segment, what would be the catalyst of business growth in the specific area moving ahead?

Yes. [ Rishab ], I didn't understand the question clearly.

Okay. Let me repeat it again. So my first question is in the replacement market segment, what would be your catalyst for business growth in the specific area moving ahead? I mean in the replacement market segment.

Right. No, catalyst for growth. I mean what -- I mean, I guess, is I would say, bounce back of largely macroeconomic indicators going back with mining activities, revolving -- industry revolving. Generally, industry is doing well, there's a fair amount of cash in the market. Commodity companies are doing extremely well. So with some of these things happening and the COVID wave coming to an end, I think that is what will result in increased demand for at least the commercial vehicle segment. With respect to personal mobility, there has been some hit in the rural segment. And so again, with the wave going over, hopefully, people will go in towards going back to buying cars 2 wheelers. And demand for personal mobility also going up during this period, risk per demand. So these are the catalysts that I see for demand going forward.

Okay, sir. So sir, my follow-up question is that in this replacement market segment, what is the one thing that you are most focused on this specific year?

In the replacement market, our most important priority category will be the passenger car segment. We have -- we are looking at winning in the passenger car space, where we've already established a very strong equity in 2 wheelers. We are leaders in this segment. Whereas passenger car, there are a lot of synergies between the 2-wheeler retail distribution, brand equity and so on. So this is the big area that we are looking at focusing and gaining market share and driving growth. We are seeing great traction post wave 2 in the passenger car space. Last year, also, we gained market share. So -- and that will be through OEM presence, through increased distribution and a new range of tires that we are launching.

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

Sir, first, housekeeping question. One, can you indicate what is your total volume growth Y-o-Y decline sequentially? And average -- effective price hike because we have taken a segment price hike during the quarter. So what is the effective price hike for the quarter that has been done?

So sequentially, we showed negative 20% growth. Year-on-year, we grew by about 70%.

At the aggregate level, right?

Quarter 1? Yes, yes.

And effective price hike that has been taken in the quarter given the staggered user of price hikes that we have done?

Would we have the -- have we taken on overall price hike of about 4%, effective price may be -- I don't have the number, maybe about 2.5%. Kumar, would you like to correct that in case some of the detail is not correct?

4% is the net realization improvement in quarter 1 versus quarter 3. Effective price, 3.8%.

So effective price hike is 4%.

Yes, yes.

That would also be an element of mix in there, right, which is true, true, true?

There's an element of mix. I think all put together, 3.8% price growth. Last part of it, we don't have the breakup of impact of price versus mix and the balances volume.

This is helpful. And my second question is on demand in [ Jagran ]. So versus OEM, the indication, how are you looking at? Generally, you prepare yourself for an OEM guide? Or you have your own intelligence? And either overstock or understock yourselves for the demand, but on the OEM demand I'm referring to. And where are you today in that assessment versus what OEMs are indicating to you?

So OEM does give us an indication for their respective -- for their demand. For replacement, of course, we know what is happening in the market. We work on a full system and replacement market. So if there is pull for the product, we will produce accordingly. If there is no pull, we don't produce. Whereas OEM, they give us an intent, they give us an indication of how things are looking. Are they going to close their plants for a few days in the month or -- and so on and so forth? And so we plan accordingly. In terms of preparedness, so there is no issue. So all our plants are running. So it's a matter of just producing more on for their demand, and we have sufficient upside on capacity. So we are fully ready in terms of demand.

So my question was that when today, OEM is indicating like for next month, for August 1. Did they want to uptake X unit? Are you prepared for you prepared for X unit? Or you're preparing for X-plus something based on your reading of general demand?

No, what we give as -- we prepare for that, but we have enough capacity, as I said. So it is not difficult. It is not -- unless we are short on capacity because of demand across all categories or all our markets being high, it's a different situation. But otherwise, it is very easy to take up capacity. Today, if we are saying we want 1,000 tires next month and they say, no, we want 1,100, it's very easy to take up that 100 more tires.

Okay. And last question is just the pricing environment that we are seeing and its impact on demand. In the past, we have seen accretion in replacement that a continuous pricing environment for a longer day period starts denting the demand in some of the other from, either down trading or general weakness in demand. How do you look at that particular mix? Because we have seen a reasonable amount of inflation in pricing from the end customer perspective and while demand is yet to pick up because of newer disruptions that we have seen. While next 2 quarters, you may be okay. But beyond that, how do you assess this demand curve given the way the pricing cycle is that we are in? Probably, this is one of the steepest price hike that we have seen at the industry level.

That's right. For quite some time, I mean I'd say the last -- this kind of price hike happened maybe about more than 10 years ago. Rubber has gone up to INR 240 per kg and so on at that point of time. But I would say certainly in the last 10 years, this has been the time where we've seen the highest inflationary pressure. But I'd say it's difficult to predict how demand will go. I mean in a way, tires is quite -- is a product which you need to replace. You don't have a choice. So you can delay by a little bit here and there. But eventually, it either has to be replaced or put in the new vehicle. So I don't see any major impact. In fact, I'd say that there can be an impact of the shorter term because of price hikes where people will look at billing. But medium term, things should normalize.

Okay. And just clarifying. So you mentioned that your CapEx is around INR 1,000 crores, right? So is there a scale down? Because I think the last quarter, you indicated some INR 1,100 crores. So you have found some efficiencies or if you can get ballpark INR 1,100 crores range? Or is there a scale down by INR 100 crores in CapEx number?

No, no. The last time, we gave a range of INR 1,000 to INR 1,100 crore. I think we're maintaining the same. We are not selling it down, unless we see some drop in demand and a change in plan. As of now, we are going with that.

And maintenance CapEx, around INR 150-odd crores, INR 152...

Maybe INR 150 crores to INR 175 crores level of routine CapEx, including more. Yes.

The next question is from the line of Prateek Poddar from Nippon India Mutual Fund.

Just one question. Sir, just one question, and it's very hard for me to hear it last time. I remember March was a month for the industry, which will be high yield. And yet, there was no price hike. And this time, you seem to be more confident by -- you said that in the end of July, we'll take a 2%, 3% price hike. And between August and September also, we'll take a price hike. So what is driving that? I'm just trying to understand that. Just one question, sir.

Yes. No, I just said that in August, September, we need to take a price hike to neutralize. It may not happen either. So I don't -- I'm not giving an indication of a price hike in August, September. I hope we are able to take it. But in the month of July, we have announced a price hike. So that is likely to happen. That's where we stand. But I don't think -- I still don't feel very encouraged because we need to make sure -- we are still lagging, as I said, by about 3% to 4%, and that's what we need to take.

Got it. And lastly, when you say utilized [indiscernible] on the EBITDA front, the range is 10% to 12%, our long-term range. That is what is meant by when you talk about the price increase, right?

Yes. I just said that, largely, if you were to look at our past, our average EBITDA has been at that kind of level. So I was saying that, okay, to go back to what we were in the past, that's what we need.

The next question is from the line of [ Visha Hase ] from Annual Research.

Sir, I wanted to check that since the international rubber is at 125 and we -- Indian rubber is at 165, can we assume the trend is going down? And if we import more, that will be beneficial? And why is there difference for now?

Kumar, would you like to take that?

No, no, there is no difference between the international and the local rubber today. What we have indicated is without duty. Rubber is subject to 27.5% duty on a price of 120. So if you add that, hardly any difference between the international black rubber and the local rubber.

Okay. Sorry, I missed that. And secondly, when we say that we take price hike and towards next Q3, the margins might go -- turn back to normal. So can we assume Q1 was the base margin and now we can cover up with the price hike in Q2 and Q3?

So I would say I hope that by H2, we will be better. I think we expect some challenges to continue into Q2 because raw material prices are going up. So I -- so possibly, similar kind of a range in quarter 2, and then quarter -- second half mostly will be better.

Okay. And just asking the question again in terms of demand. Can we see -- I mean you were saying that the demand is back to the H2 level, right? I mean the strong demand is back. Is it the pent-up demand like which is back?

It's a little tough to estimate. There is so much volatility in the market, and I'd say it's a little bit difficult to say what exactly is the driver behind the demand. As I said, on the truck side, it's a little bit lower. Passenger car, we have seen strong levels. I'm sure some of it will be pent-up demand, and therefore, difficult to predict right now what exactly is the driver.

And sir, 2-wheeler, both OEM and replacement, both is strong or only replacement?

No replacement is strong. OEM is weak.

And same for passenger?

Yes. Passenger is a little bit better than 2-wheeler OEM demand. 2-wheeler OEM actually is the lowest relatively. Passenger OEM is a little bit better, but I'm talking largely about replacement being back.

Okay. And you are talking about the coming quarter, right? I mean the July -- I mean the coming month.

That's right. What we are seeing in latter half of June, July.

The next question is from the line of Dhaval Shah from Girik Capital.

Sir, just one question. So how is the intensity of imports now? So we were discussing a year back regarding imports and then there was this action by the government. What is the scenario currently?

So there's no change. Imports continue to be very minimal. So no real change in terms of increased imports at all that we are seeing.

Okay. So there were thoughts that they could route it through Thailand or some other country. Is that happening?

No, not really. There has been an increase in tire imports, but it's marginal shift. I mean it was always relative to China, Thailand, and of course, increased because China has come down. But we are not seeing anything happening maybe through Thailand yet. I mean it could be marginal, but nothing to speak about. As a percentage, of course, Thailand has gone up.

Yes, sir. So is it a point to worry? Or would you propose the government to include Thailand as well in the import ban list? Or that's not to worry about right now?

I see as a chain matter, it is not increased as such right now, but we will -- I think that is a call which we will have to see at an industry level whether we want to propose to the government or not.

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

Sir, how is the revenue mix for the PCR, 2-wheeler and PMD in the first quarter?

The revenue mix of, sorry, PCR?

Two-wheeler and PMD in first quarter?

Can I get back to you on that? You are talking about overall, across all categories?

Yes, across all categories in the fourth quarter.

Okay. I can get back. I think about truck and bus would be around 35%, 2-wheeler will be around, 25%, passenger car will be around 15 percent-ish approximately level. And then the balance will be all other categories approximately level.

And sir, how much is the current system inventory at the end of June '21? Is it normal level or a higher level?

Kumar? Inventory level?

No, inventory was higher as of June, 30th June. Our inventory was higher by -- about INR crores over 31st of March. With the mix of both raw material and finished goods, 2/3 of it is finance goods and 1/3 of it is raw material over 31st March level.

And how many days inventory line with this dealer right now?

Yes, I don't see there any change in that inventory. I think this inventory buildup happened at the factory locations on account of drop in demand, okay? And in fact, June was lower than May, okay. We're taking corrective action to bring it back. No change in the inventory level at the dealer's level. Yes. It's only our own inventory. Because the demand drop happened suddenly, we took time to react and build the inventory levels down. In quarter 2, it would bring the inventory level back to a normal number of days this year.

In all 3 categories?

Yes, mostly. What we did is that going out in the inventory, we cut down the production in the month of May. So now that the sale has come back to the normal levels, okay, and any excess inventory that we have at this point in time will get consumed, okay, and it should be fine. If quarter 2 is a normal quarter, I think inventory by end of the quarter would be normal.

Okay. Sir, my last question is related to the import ban. So the domestic carrier is getting benefit of meeting, especially in the PCR premium segment. So how long this benefit will avail by the domestic producer as MLC start to ramp up the domestic production in the concerning quarters. So how much time -- how much benefit these domestic dealers will be able to take?

I think it will take -- it's not easy to set up capacities and ramp it up so fast. So I'd say, for example, if you're talking about Chinese tires, et cetera, I don't think they're going to come into India. The [indiscernible] who are already there. Some have capacities, and they have been selling. Some are only producing one kind of tire, for example, truck tires. Now for them to set up a passenger car tire plant, they have to, first of all, announce that, then they will look at further investing. And setting up a plant picks at least 2 years' time. So I don't see any substantial shift in terms of production in-house from MLC. I think you'll get to know it in the papers when we announce whenever we do. So stay tune.

The next question is from the line of Swechha Jain from ANS Wealth.

Sir, I have 2 questions. One is just a clarification. I think in one of the queries to one of the participants, you said that if we take another 4% to 5% price hike, you'll come back to normal EBITDA margins of 10% to 12%. So can we safely assume that we are looking to aim at closing FY '22 at these margins, 10% to 12% kind of EBITDA margin?

I'm not talking about an average margin for the year. I'm talking about margin for that specific quarter. So say, for example, if we are -- I'm not even talking about quarter 2 because if we are taking something in August or September. I'm talking, say, for example, going onto quarter 3. If we are able to take this kind of price hike in quarter 2, we will see a normal quarter 3 in terms of margins, say, 10% to 12% margin. And for the year, I think difficult to predict because it depends on how things pan out. But if you're assuming 10% to 12% in H2, you have to take the lower margin in, say, H1 to average it out.

Right. Sir, what is the key deterrent in -- for us -- for not taking the price hike? I just want to understand that.

I think that it's a competitive world largely, and there is a certain lag that happens when raw material prices go up. We are not able to pass it on immediately to customers, and it happens in a phased manner. And I'd say that's the only -- it's just competitiveness.

Okay, okay. And second question is, I think you also mentioned in one of the answers that we are seeing a slower increase in demand in the truck segment. But in the last call, if I'm correct, what we were -- what you guided was, we are planning to increase our truck tire capacity by 40%.

Correct.

So -- and we are seeing a slower increase in demand. So if you can just throw some light as in why we are seeing a slower increase in demand but we are increasing our capacity by 40% in this segment. So how does it correlate?

Right, I think here, there is a difference in time line that we are talking about. So when we're talking about increasing capacity, we are talking about -- we announced a further capacity increase, which will take 20 months to come up. Therefore, we are seeing in the longer term, we expect truck to, of course, revive. When I'm saying truck demand revival is weak, I'm talking about very short-term month of post-COVID wave 2 impact as of June and July. So it could easily revive going forward into August, September, which will not have any longer-term impact to what we are talking 15 months, 20 months hence. So when we take capacity decisions, they are based on long-term macroeconomic trends. And what's happening now is purely by here and now effect of the virus and near-term economic impact.

The next question is from the line of Mayur Milak from Bank of Baroda Capital Markets.

So we did saw your other expenses really come off. I was also trying to understand that this quarter would have had the payment for the IPL. Is that right? Or because of the cancellation, we could save some money on that? So what is the status on that thing?

Yes. So IPL, we pay to the extent of the matches or percentage of matches that were held. And again, when they come up in September IPL, we will incur the expenses. This is largely of the strategic time-out that is there. We are not doing any advertising at least in the month of April. Now for the month of September, it's a call that we still have to take. But right now it is purely the cost of -- it gets a portion based on the number of matches or percentage of the IPL event that we built.

So is there a chance that your Q2 may see added cost of what we reported on the other expenses over Q1?

Yes. So I think advertising will certainly increase. Q1, we cut down our advertisement to much lower levels. And we may look at advertising, particularly with ticket even coming in, we will see an increase in advertising expenses.

All right. So do you maintain the 2% of sales kind of number for your advertising spend? Or you believe that demand is good enough that you can maybe...

It's irrespective of demand. We will continue to maintain our marketing spend at these kind of levels. As I said here and there, a few quarters where demand really was affected, we will cut it a little bit. But in general, we want to maintain it.

All right.. And on the second thing, recently heard that Continental is now planning to give a 5-year warranty on its KPR. Do you treat this as a serious event that maybe all domestic tire manufacturers would also want to look at. How important is this warranty in the replacement market?

I think we have to further study this to understand what kind of warranty this is. Is it a mileage life warranty? Is it against wear and tear? Because if there is any damage to the tire, there is a certain replacement or adjustment or giving back we do to the customer ourselves. And sure that I believe the industry is well largely, so I think we need to further understand it and get back to you.

All right, yes. And thirdly, on the demand side., So when you say there's a 20% fall in demand sequentially, have you witnessed this demand as a bigger fall in the replacement? Or you think replacement is still on a positive growth? I'm assuming that last year, we've already seen the advantage of lower imports and that should be in the base, so the base should already be high in the replacement market. On that base, have we seen a growth or we've seen a decline?

So I say sequentially from quarter 4, we saw a decline in the month of April, May. And April, May was because of the second wave. So suddenly, there was a slowdown in OEM demand. We saw, as I said, negative 30% in OEM, negative 20% in replacement. Markets closed down, but this has started recovering in the month of June, July onwards.

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

Firstly, on the export side, have we been able to take price increases required in export markets? Or are there also the pressure in margin?

No. Exports, we have been able to take price increases better than the replacement segment. So we are more optimistic about exports in terms of price increases.

Okay. And secondly, I mean you talked about maybe this kind of price increases you were seeing 10 years back in 2011 when there's big a increase in RM prices. So if I talk about industry, I mean if you can talk about the industry then versus now because at that time, I think, among domestic, there is also the number of players who are larger and also was quite big, almost 10% market share that time. Now that must be in the market. So do you see any change in the pricing structure or the completed pressure versus then? Because I think that the MNCs are more -- I mean they are probably better off in taking price increases. So what is your sense on that?

I think competitiveness continues to be high, not major change in terms of industry structure. I agree that it's just one player that has exited or not clearly there in the market at this point of time. But beyond that, there is no major change. So intensity, I'd say there's no change. I think one thing is that there's been a lot of capital investment done by all players at this point of time. So is that causing price increases also to happen to a certain extent? But there is also a lag, so I expect there to be some margin erosion for everyone at this point of time.

The next question is from the line of [ Krishi Sahu ] from [indiscernible].

Am I audible now?

Yes, Krishi.

My question is on the financial outlook the company has. Like what we are looking for INR 1,000 crores? Which category plans will we be stepping into that? And what is the further outlook for next 2 to 3 years for CapEx?

Okay. For this year, most of our CapEx will go into the balance for Chennai factory. We'll also be investing in off-highway tires. There's some debottlenecking that we are doing at our Halol factory and possibly a small amount in Nagpur. So small quantum, but the largest one being for passenger car tire. So that's how largely I would break up the INR 1,000 crores. Kumar, would you like to share anything on CapEx outlook for the next couple of years?

Going by the current capacity creation plan and what we have already announced in terms of truck and bus redial capacity at Chennai involving [ INR 400 crores ], I think our CapEx estimate for the next 2 years, assuming that there's nothing new added, approximately about INR 700 crores to INR 800 crores kind of a CapEx we foresee for the next 2 years. Okay. And we expect some capacity expansion at Ambernath, truck and bus radial as announced, we will spend. And large part of whatever we have announced would get spent by next year. And that [ 3,500 ] for the whole year, we have about another INR 800 crores balance. So that will get spent. So range is about INR 700 crores to INR 800 crores based on our current planning.

So INR 700 crores to INR 800 crores per year for the next 2 years?

Yes.

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

Yes. So just one question, Anant. So if you look at the balance 9 months, okay, can we expect a single-digit growth happening between OEM brand and replacement comeback? And where it would be more stricter accordingly for the balance 9 months, given that second half last year, there was a movement of pent-up and it was very strong, right, also? So on that high base, do we hope for a high single-digit kind of a growth?

I hope, yes, we are able to get a single digit. Now high or low stuff, I'd say at least over H2, maybe high single digit would be difficult in volume terms value that can be because anyway, it's quite inflationary. Price hikes would be maybe over that period, we've spoken about 3%, 4% price increase every quarter. So that itself amounts to 8% also because of inflation. So if you take that out, maybe low single-digit growth is possible in volume terms.

Where would it most [indiscernible] between OEM and replacement? Where would it be most [indiscernible]?

The driver? I would say both could be at a similar kind of level in terms of growth. OEM, of course, lastly at the same time, took -- had a lower base. They started picking up around October and they are -- whereas replacement picked up from June itself. So maybe higher growth in OEM for the first -- until October. And then after that, both should be at similar level.

Thank you. Ladies and gentlemen, 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, and hope you all stay safe and well. I look forward to catching up with all of you once again, similar time next quarter.

Thank you. On behalf of Motilal Oswal Financial Services Limited, that concludes this conference. Thank you for joining us, and you may now disconnect your lines.