CEAT Limited (500878) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to the CEAT Limited Q2 FY '22 Results Conference Call hosted by JM Financial. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Mr. Nitinn Aggarwala from JM Financial. Thank you, and over to you, sir.

Thank you, Faizan. Good afternoon, everyone. On behalf of JM Financial, I would like to welcome you to 2Q FY '22 post results call of CEAT Limited. We have with us the senior management team from the company represented by Mr. Anant Goenka, Managing Director; and 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. Anant Goenka for his insured remarks. Over to you, Anant.

Thank you, Nitinn. Good afternoon, everyone, and a very warm welcome to CEAT's quarterly earnings call, and thank you all for your time and joining us today. I'm Anant Goenka, and I have with me our CFO, Mr. Kumar Subbiah, on call with us. I hope all of you are all well. And as usual, we will start with a few brief remarks from me and Kumar, post which, we'll be happy to take questions. The quarter started on a relatively positive note on the demand side as markets started opening up post-COVID Wave 2. In the replacement market, recovery was strong in the passenger segment, with demand going back to normal levels. Commercial segments, CV as well as the farm segment were relatively weak. Overall for us, replacement volumes grew at about 23% sequentially, with a marginal decline of about 3% on a year-on-year basis. OEM volumes grew at about 35% sequentially and 17% year-on-year on -- largely because of a lower base. Semiconductor shortages continue to impact recovery in the passenger OEM segment. Exports have continued to do well for us, with a sequential volume growth of about 10% and a year-on-year growth of almost 50%. Overall, we saw a sequential volume growth of about 23% year-on-year and 9% during the quarter. The demand situation looks positive. On the other hand, costs have continued to rise. Our raw material basket went up by about 6.5% sequentially on account of higher crude prices and logistical challenges resulting in higher freight rates. The increase was higher than our estimate of 5% at the beginning of the quarter. We took standard price increases during the quarter to offset the impact, but these were not commensurate with the raw material inflation. And hence, our gross margin contracted by about 1.8% over quarter 1 levels. Higher volumes helped in better absorption of fixed costs. As a result, our standalone EBITDA margin stood at 8.9%, slightly higher than quarter 1. We ended our quarter with a standalone PAT of INR 36 crores. Our OEM strategy is playing out well, and we continue to strengthen this aspect of our business. We continue to do well on the passenger side as well as continue to be a preferred partner in 2-wheelers and 3-wheelers in the e-mobility space. We've also revamped our CEAT shops with a more modern look and several customer-friendly features. The new design has been rolled out in select cities from August onwards. We continue to invest in marketing. We launched 2 major marketing campaigns this quarter with SecuraDrive for passenger car and UV tires featuring our brand ambassador, Amir Khan and CEAT Gripp X3 for 2 wheeler tires. Both campaigns are focused on reinforcing CEAT's safer mobility brand appeal. IPL 2021 also resumed this quarter, and we continue to remain associated with the event as strategic time out partners. On the digital side, our website is recognized as the Best Website of the Year by CMO Asia. We continue to invest in digital as well as on ESG, environment, social and governance. On the sustainability part, we've taken on many internal initiatives on improving our sustainability and carbon footprint in the company. On our diversity and inclusion journey, we've been recruiting about 30% of our new recruits are women. We've also had our first batch of 7 transgender associates joining CX this quarter. With this, I end our highlight, and I'll be happy to hand over the call to Kumar.

Thank you, Anant. Good afternoon, ladies and gentlemen, and thanks for joining our Q2 earnings call. I'll share some key financial data point with you all, post which we can enter the Q&A session. First one is on revenue, our consolidated net revenue for the quarter stood at INR 2,452 crore in rupee terms, a sequential growth of about 29% and year-on-year growth of about 24%. The revenue growth driven by volume, price and favorable product and category mix. On gross margin, our raw material cost continues to raise and impacting our gross margin, which stood at 37%, a sequential decline of about 203 basis points. And our blended raw material costs went up by about 6.5% in quarter 2 versus quarter 1. We took price hikes to the tune of anywhere between 4% and 5% in the quarter across most categories and segments. The price increases taken so far is not sufficient to -- or not sufficient to cover our unprecedented commodity inflation we have seen in this financial year, and there is a need for further increases in the coming months to absorb the cost increases. Raw material scenario still remains challenging. As per our current market understanding, we expect our blended raw material costs to go up by another 4% in quarter 3 versus quarter 2. I'll come to the debt, CapEx and working capital, our debt and during the quarter increased by about INR 219 crore on a sequent share basis, largely driven by CapEx, payment of our annual dividend and increase in the inventory levels and debtors. We incurred a total CapEx of about INR 226 crore during the quarter, which includes approximately about INR 150 crores towards our capacity expansion projects. And our project CapEx outlook for the current year still remains at around INR 1,000 crores. Our working capital -- operating opening capital increased by about little over INR 100 crores in the last quarter, largely due to higher inventory levels, both in raw materials as well as finished goods and also increase in [ finished ] goods arising out of higher scale of operations. We are taking steps to reduce the both finished goods and raw material inventory in quarter 3. Operational expenses during the quarter as a percentage of turnover was lower compared to quarter 1, largely on account of higher scale of operations, our advertisement costs entered the normal levels, increasing by about 70% over the previous quarter due to fiscal resumption of our marketing efforts and as well as IPL event has happened in quarter 3. Employee cost declined by 3% sequentially, which is largely driven by reduction in some of the COVID norm-related expenses. We continued our effort to optimize our rest of the operating costs, along with some scale benefit, we are able to manage our EBITDA margin at quarter 1 levels. Our consolidated EBITDA stood at INR 225 crores in terms of percentage about 9.2%. Coming to depreciation and interest costs. During the quarter, we recognized right-of-use assets under Ind AS 116, aggregating about INR 61 crores on the rental arrangements with CFAS, DCs and OE blowdowns. The same is accounted with effect from April 2021 with necessarily accounting we've done in the current quarter. While this does not have any impact on our profit before tax, it has led to higher depreciation to the extent of INR 20.45 crore during the quarter as it includes the depreciation for quarter 1 and the approximate impact on a quarterly basis, about INR 10 crores and other expenses have come down equivalent to the same number. Due to the above, our overall depreciation for the quarter moved up from about INR 96 to INR 121. Since our EBITDA has increased during the quarter, the finance cost has also found up from about INR 46 crores in quarter 1 to now INR 50 during the quarter. During the quarter, in the month of September on approval of -- by shareholders of our organization. We disbursed dividend to the tune of 180% of our share capital amounting to INR 73 crore. Our consolidated profit for the quarter stood at INR 42.28 crore, and our effective tax rate for the quarter stood at 27%. And we would also like to update you on the credit rating in the month of September, our annual credit assessment was carried out by India Rating, and we were affirmed credit rating of AA for long term and A1+ for short term with stable outlook. With this now, let's open the floor for Q&A. Thank you.

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

My first question pertains to the demand outlook. So do we expect the momentum which we've seen on the replacement market to continue in second half? Like passenger vehicle demand continues to be strong, particularly in the traditional side? And any trends which you are seeing CVs and farm side?

Yes, Jinesh. So we are seeing an increased -- I mean, good demand on the passenger side. This is in the replacement segment, both 2-wheeler and passenger car are looking good. Commercial vehicle has been slow and is still -- will take some time to pick up, particularly for us on the truck bias side, we are seeing a slowdown, whereas radial, we're seeing an uptick in terms of demand. Farm has also been under a little bit of pressure. Last year's base was very high. Farm demand, both between OEM and replacement was kind of highest ever levels. So maybe on a higher base, there's some relatively year-on-year pressure on the farm side as well. On the OEM side, we are finding commercial vehicles picking up much better than last year, whereas there's some pressure on the passenger car and 2-wheeler side because of the chip shortage issue. And overall 2-wheeler demand is looking slowing down on the 2-wheeler side. So I think this is the overall outlook. Exports has generally been very strong all through the year. However, the challenge of container availability, freight rate increase is a challenge, but we are managing to show good growth despite these challenges.

Understood. Understood. And with respect to the price hikes, you indicated 4% to 5% price rises taken in second quarter. I'm presuming average would be lower considering the timing differences and expecting -- so have you taken any further increases in October?

Yes. We've taken about 2.5% in 2-wheeler tires, about a couple of percentage points in passenger car as well and about 3% in farm. This is what -- some of this has been taken in the middle of October, and some of it will be taken end of October. So 29th to the 1st of November will be on passenger car and farm, whereas 2-wheeler, 2.5% has already been taken.

Okay. Okay. And after this price increase there will be what another 2% to 3% under recovery on account of commodity cost inflation? Or it would be higher than that?

So we expect about a 3.5%, 4% increase in raw material in quarter 3. That requires approximately what about slightly under 3% price increase to equate that. So yes, maybe another couple of percentage points are needed because TBB or truck radial is not included in what has been taken. So we do need at least 1.5% to 2% price increase between, say, November 1 and December to equate to that.

Okay. Okay. Understood. And thirdly on clarification on the depreciation part. So Kumar, you indicated it's about INR 10 crores is the difference because of the accounting issue INR 10 crores moving out of other expenses and coming to depreciation. Is that right?

Yes. On a quarterly basis, that is the impact. But in the current quarter, we have done it effective 1st of April. So current quarter has INR 20 crores in it. But going forward, it will be about INR 10 crores per quarter.

Okay. Okay. And any sense on what would be our normalized run rate of depreciation, maybe, say, for FY '23, given that by then, we'll be having that sort of our capacity is fully operational.

Okay. See, current quarter -- first, I'll explain current quarter, and then I'll also give you a broad outlook. Okay, current quarter, our depreciation is about INR 120 crores. Okay. And just to make sure that it is comparable you have to remove about INR 10 crores, okay. So because it includes INR 10 crores relating to earlier quarters, then the number comes down to about INR 110 crores for the current quarter. In the current year, we would still incur CapEx as per original plan, which we will cover it separately. So -- and depreciation is linked to the assets that we capitalize. So expect depreciation to -- in the event that we go ahead with all the CapEx and capitalize on the assets, etc. Another about 20 -- INR 15 crores to INR 20 crores kind of a depreciation impact would come in the next financial year, progressively.

Okay. So additionally, INR 115 crores to INR 120 crores.

INR 115 crores to 120 crores over and above the current quarter or quarter 2.

Okay. Okay. Got it. And last question on our current utilization rate. So can you share where are we with respect to utilization in key segments?

Yes, utilization levels are relatively strong. We've done well in all the new capacity that we set up in Ambernath, which is our off highway tire, we are nearly fully utilized. There's been a small expansion that we did a few months ago. Passenger car, we are also quite well utilized. Chennai is ramping up. Halol is fully utilized in passenger car segment and Chennai is ramping up as we speak. I'd say we are today at about 80-ish percent utilization, the area where we are underutilized is in truck bias. And truck radial also, we have -- are ramping up.

Okay. And on the 2-wheeler side?

Two-wheelers looking good demand. We have over 80% utilization. 85-ish percent.

The next question is from the line of Amyn Pirani from JPMorgan.

My first question was on the gross margin. So would you say that almost all of it is because of raw material? Or is there an angle of revenue mix also? Because if I look at your revenue mix, your replacement share has come down significantly first half this year over first half of last year. So is the gross margin also because of this mix change? Or is it entirely due to the raw material pressure?

No, it will be because of both. But I'd say this year, we've come back to a normal mix. Last year, if you recollect post-COVID both OEM and exports were at very low levels with all the closures and shutdowns that were happening, whereas replacement market bounced back very well. So to that extent, replacement was a very much higher share than normal. So this quarter, I'd say it's more of a normal mix, where replacement would be approximately closer to about 60% of our sales, and will be closer to 25%, 26%, and export would be the balance. So roughly, that's how would be the normal kind of mix in today's terms. So some amount, yes, will be because of the mix and some amount is raw material as well.

Okay. And if I look at your other expenses. So if I look at first half this year over first half last year, it seems that there is, I mean, almost no benefit coming from operating revenue, obviously, revenues have grown substantially because of the low base of last year. But other expenses have almost kept in line instead of -- so is there something happening there? Or was there some extra savings which happened last year because of the lockdown, which are coming back now? And how should we look at this operating leverage playing out as the revenues grow further from here?

Sure. Kumar, would you like to take that?

Yes. No, 1 or 2 big ones that I call out. The first one is that in the quarter 1 of last financial year, there was no IPL, one. And number two, our advertisement cost was 0 because during COVID period, we did not spend anything. Similarly, in factories and all other locations, we had scripted almost as minimum as possible. We didn't run the plant, okay, in quarter 1. See the way you see the profit and loss of account during the quarter, it produced and incur costs, it would come at a cost, but it will get adjusted in the closing stock value, that's what normally happens. So there has been increase in finished goods inventory also, if you look at first 6 months or the next 15 months. So that is also another effect. So mainly because of higher level of marketing costs in most of other cases, operating expenses, if we remove the advertisement portion. And as a percentage actually there's a growth.

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

So we've seen the debt levels go up across both short and long term. So could you give us the CapEx guidance for the next year? And what sort of peak debt numbers can we expect over the next 12 to 18 months?

Yes. Kumar, would you?

Yes. Okay. See, in the current year, broadly, if you look at our -- in the first 6 months or the last 3 months, approximately about INR 220 crores is increase in our debt level. And it -- and we also had in the current quarter, that is in quarter 2, payments of about INR 73 crores of dividend, which is not a recurring event it happens once a year. One, number two, working capital, particularly the inventory has also moved up in quarter 2. So these are 2 reasons. In the past, still whole of last year almost, we were able to deliver reduction in absolute working capital, whereas in the last 2 quarters or so, there has been an increase in working capital, which -- something which we'll going to focus a little more on quarter 3 to deliver some reduction. As far as CapEx is concerned, and our expected CapEx for the current year is approximately about INR 1,000 crores project CapEx approximately. And we have already spent a little or INR 300 crores in the first 6 months, balance of more than what we would be spending. And as far as the following year is concerned, while we don't have any revised outlook, the outlook that we had given in the last quarterly call was because now we will get to know the expected CapEx for the next financial year, during our annual plan exercise that we normally do in the quarter 4 -- beginning of quarter 4. But assuming that the same -- the CapEx would be around INR 700 crores to 800 crores in the next financial year. That would be the quantum of CapEx that we will have in the next -- whole of next financial year. And current year I indicated to you, we are ranging for about INR 1,000 crores and little over INR 300 crores has been spent. So that is the kind of outlook that we have for CapEx.

And on the debt level, so what sort of peak debt number can we see during this period?

Okay. Difficult to talk about the next financial year and due to lower cash profit in the first 6 months and also on account of increase in working capital our debt level has increased in the first 6 months of the year, contrary to what happened. So our debt level as of September 30 is equivalent to where we were in June 30, 2020. So we've gone back to that particular level. In terms of peak debt as of now, we don't intend to cut our CapEx significantly for the next 6 months of the year. As of now, that's what our plan is. But it depends on how the current quarter goes in the course of the quarter, we may still review and take necessary steps. We expect the debt to go up by a few hundred crores. Exact amount, we're not able to tell you because it's linked to amount of our operating performance and operating cash flows. But we expect in the current financial year, in the balance 6 months of the year, it could go up by a few hundred crores.

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

So Anant, I just missed the opening comments. Just wanted to first understand the volume growth for the quarter?

Our volume growth year-on-year or quarter-on-quarter?

Either way you can share.

23% was our volume growth quarter-on-quarter and year-on-year was about 9%.

Okay. 23% q-on-q.

Quarter-on-quarter.

Okay. Second question is on competitive intensity in general. So there were some apprehensions 6 months or 9 months back, Max is coming in, in 2-wheelers, and Apollo guys also trying to kind of hold. After the 9, 12 months of those here entry, what is the scenario today? Has profitability for the industry come down marginally or profitability is intact and there could be some market share loss among peers that is how industry is stabilizing?

There has been some marginal drop in profitability in 2 wheelers. I'd say this was about, at one time, about 4 years ago, there was quite a substantial drop at relative basis when there was a price drop taken at that point of time. And once again, I would say, relatively in the last year, 2 wheeler has seen a smaller price increase than other categories. But overall, we are happy with where we stand in terms of our market share. We have only maintained or gained our market share in the 2-wheeler space. And we've also increased or had a very strong space in the 2-wheeler EV space with respect to market share. It is higher in the EV space than even in the regular industry. So to that extent, I'd say, competitive intensity is the same in 2-wheeler versus other categories, which is no different. In fact, maybe marginally less just because you have more players in the passenger car space.

And on the true EV side, what kind of market share you would be having today?

See still relatively a much smaller market, but it would be over 50% leverage.

This is helpful. Secondly, just a question for Subbiah. On this operating leverage, so we should assume that the costs have now normalized, right? And from here on, if volume ramp-up happens, operating unit should be visible?

Yes, true. Even in the current quarter, operating cost, if you exclude advertisement costs, which could vary depending on when IPL happens, etc. We are seeing that leverage. Okay. So going forward, should the turnover go beyond INR 2,400 crores. And you see that with the leverage on operating cost as a percentage of [ volume ].

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

Sir, my first question is on the price increase. You talked about a 4.5% to 5% price increase, 4% to 5% price increase in the second quarter. So was it -- were you able to take price increase across all the segments, 2-wheeler, PV, CB, PV buyers, PV radials?

Yes, this is the average across category.

Sir, my question primarily was on the 2-wheeler side because that was one segment where we are seeing lesser price increase, especially on the motorcycle side of it. So just wanted to check whether we have been able to take price increase and it has been followed by the peers. So are you able to pass on the cost hike in that segment, which was not happening until a few quarters back?

Yes. So the 4.5% price increase includes some amount of motorcycle as well as, again, a price increase in 2-wheeler on middle of October by another 2.5%.

And in October, when you have taken price increase on 2-wheeler, it is also on the motor cycle or it's a large scooter side of it?

Both.

So basically, the key here is what I was trying to understand is, are you seeing any specific segment where the competitive intensity is much higher and where price increases are becoming in more difficult? I can see that in October, you talked about the price increase in PV, 2-wheeler and farm but not in CVs. So do you think any specific segment where the intensity is higher pricings are more difficult? Or do you think it's relatively fine now given the kind of cost pressures you are seeing?

So on the -- I can share with you a little bit on the demand side. I'm not sure if the price increase directly reflects on demand. But I would say that demand side, CV replacement is still under some amount of stress, particularly truck bias.

Okay.

That's -- but the other segments, so there is sometimes, we don't think the price increase exactly at the same time, from maybe in July, some maybe in August. So it's relatively okay spread out.

Got it. And just one more thing. On the truck radial side, you had set up capacity, you are setting up more capacity. Earlier, we used to have low single-digit kind of a market share. Where would we be on both the truck radial side and also on the passenger vehicle side in terms of a broad range of market share?

So on the truck radial side, yes, our market share was somewhere around 5% kind of numbers in the past. This would have come down -- come up to about 8% to 9% level. In the truck -- sorry, and on the passenger car side, from about 11%, 12%, we would be at about a 15%-ish kind of market share today.

And 15% would be more skewed towards OEMs rather than replacement because we were trying to penetrate OEMs much more aggressively?

No, we are kind of mixed at the same level as the industry. So about 40%, 45% being sold to OEM and about 55%, 60% getting sold to replacement in the passenger segment.

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

So my first question was regarding the volume growth you mentioned. If I'm not wrong, you mentioned that the replacement growth was a flattish to minor decline, and the OEM growth was pretty strong, I think 30% plus. One, is that correct? And two, if that is correct then how do you see the reticent growth? Is it a case where last year, if I remember correctly, the replacement, there was a lot of pent-up demand and the inventory levels at the dealers end was also quite low, and hence, Q2 has seen a substantial growth on the retail as well as the wholesale side for CEAT as well as the industry. And hence, on that extremely high base, we are kind of flattish now. So in that context, how would we be 1 year prior to that kind of level? Have we -- are we at least at those levels? Or are we having a growth on those levels? And going forward, how do you see this Y-o-Y growth for replacement in the second half of FY '22? Because last year, we had seen second half -- second quarter and third quarter, extremely high-growth one because of the pent-up as well as the Chinese restriction of imports happening. So if you could just throw some light on the replacement trajectory?

No, you're absolutely right. So last year, same time, replacement grew at a much faster pace and continued its growth trajectory into Q3 and Q4. To that extent, we are on a high base. And therefore, replacement growth on a year-on-year basis will be possibly at a low single-digit kind of numbers at this time. The more important thing is our mix. So we will be selling, in my view, more of passenger car segment, which has been our focus area. Truck radial, also, we expect to grow much better versus last year, where we will see a dip for truck bias. So if you compare even versus the year before that, usually truck bias is a segment where there is a shift in radialization happening, we see truck bias generally being flat to negative. But last year, truck bias was at maybe record high levels or some 5, 6-year high level. So to that extent, my truck bias is what is letting slower levels of growth because it is a high-value or high-volume kind of category on its own. So that is a big shift that we have seen from last year to this year. But overall, on a year-on-year basis, growth in replacement will be a little bit lower at an overall level. Led by truck bias getting -- showing negative growth.

Understood. Understand. In terms of your PV OEM market share, you had, I guess, the plans of having market share gains in the OEM segment. How would you see that currently? In terms of are those incremental orders largely in the base and from here we should settle -- we should largely grow in line with the industry? Or you still believe over the next 1 or 2 years, you can significantly grow higher than the industry on the passenger car OEM tire segment?

We do feel quite confident on OEM market share on the passenger side. We would be at 15% plus levels with respect to market share in the passenger car and UV -- passenger car space largely. So we do feel quite happy with that. We, for example, were part of the new Mahindra Bolero, the new launched on our tire in the last month or so. So to that extent, we are entering new OEMs and gaining market share in the OEM side.

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

Yes. So small clarification to your response to the earlier question. So is it -- like to assume when you mentioned that the utilization of bias is on this is primarily the truck bias impact, which might be like underlying demand slowdown issue? Or do you think there is that pent-up on the bias has happened and that is an ongoing issue? Is it a demand-driven drop? Or is it just pent-up [indiscernible] and then no incremental demand?

So it is largely because of a high base of last year, which to me was a little bit abnormal. If you look, as I said, on a year-on-year basis, truck bias has been flat to maybe somewhere between 0% to minus 5% growth every year because radial tires is what is growing at a faster pace. So last year, the truck bias saw that substantial growth. People were moving more maybe towards the value segment because of the uncertainty that was happening, some amount of pent-up demand last year where truck radial capacities also could not be supplied. And so truck bias also was selling very well. Now that has normalized. And therefore, I think we are seeing good growth in the truck radial segment, but truck bias has gone back to its normal rate of negative growth to a certain extent. If you take into account last year's very high growth, I would -- it is, therefore, showing a substantially higher negative growth in this year.

So what is truck radial growth had last year, today?

The truck radial would be growing at least for us at possibly 20%-ish kind of level. I can just get back to you on exact number. But year-on-year, we would be at 25% plus growth.

Understood. Second question is on your marketing spend and your trajectory on that. I heard Kumar saying that it's gone up by 70% quarter-on-quarter. So with still accruing in quarter 3, what is your thoughts on marketing spend, both? And you also mentioned the CEAT Shoppe have been revamped. So can you shed some light, how are you thinking about those then this year and potentially next year?

Yes. So marketing, we generally try and maintain it at similar levels as a percentage of sales. There can be a minor change here and there, but we are continuing to invest in cricket in IPL. So some amount of market IPL was held going on -- coming on to October as well. So there will be some amount of the IPL cost impact with respect to October. But our marketing spend has not -- will not go up as a percentage of sales, it will be at similar kind of levels is what we would like to maintain it at.

So when you say similar, you want to say similar to pre-COVID percentages? Is that what you want to...

Yes. As a percentage of sales, we'll continue at that level.

Understood. Third question is, I think probably you or Kumar can answer. On the people cost side, I think I heard Kumar mentioned about COVID spend is not recurring. So any just -- remind us what was that spend for last quarter? And what is your trend of people cost that we should expect going ahead?

Kumar, would you like to take that?

Yes, approximately about spending about INR 5 crores, INR 6 crores per quarter on an incremental basis due to some COVID-related SOPs that we had to adhere in our manufacturing locations. So -- and that amount came down in the month of September onwards. If things are okay under normal conditions, we would be spending much less. For example, we're providing transport facilities and the number of people who are sitting in the buses were far lower, maybe 50% of what it was earlier, et cetera. So some of them, we have relaxed a bit in quarter 2. And so third, also in quarter 2, a little lower level of production towards the later quarter 2, so leading to some reduction in employee costs, particularly on the contractual side. But for you to make your own estimates, you can always assume in quarter 1 as the base. And as and when we add people in factories, and some annual increase. So about 175 crores in was the kind of a number that we saw in quarter 1. Okay. So as far as the current year is concerned, in that range INR 175 crores to INR 180 crores could be a normal kind of a number at a higher level of operations in our manufacturing locations.

And with some of the capitalization of the new facilities coming on next year, will that meaningfully increase or should be nominal increase?

I think the amount of employee costs that we capitalize is very small. Employee cost increases only when we add people for us. So whenever we ramp up production. In general, we tend to add people at least 6 months in advance, 6 months before the real requirement. So from that point of view, we'll keep adding people, but capitalization will have limited relevance, more of commissioning of plants and ramping up production is what will impact. As we are already into the first -- end of first month of quarter 3, the impact of employee costs in terms of additional people in the current financial will be limited. But next year, if we see more need for ramping up production in new locations, you will see an increase. And we also have an annual increment cycle starting from 1st of July. So that increase also needs to be built in. So approximately INR 175 crores to INR 180 crores kind of an assumption for the current year, for the balance 2 quarters is a reasonable estimate.

And Kumar, my last question is on your interest cost side with your credit ratings, also slightly improving on -- what are your thoughts on your interest cost side working capital also getting a little stretched on the first half? How are you thinking about that in the second half of the year and potentially next year?

Okay. We have made good progress in bringing the interest rates down. Overall, our cost of capital has undergone improvement in the last 12 months. Whether the long term or short term, we are generally able to borrow money at a competitive rate of interest comparable to credit rating of companies maybe one notch higher or 2 notches higher than us. That's what it is. I think what is taking the absolute interest cost up is because of increase in overall debt. And while we are seeing average rate of interest is coming down. So our plan is to bringing back some efficiencies in working capital in the current quarter, particularly on the inventory side and improve our operating cash flow during the current quarter. But as we intend to spend close to about INR 1,000 crores of CapEx during the financial year. From that point of view, we expect our long-term debt -- our overall debt to move up by a few hundred crores in quarter 4. So that may lead to higher amount of interest costs, but interest rate could still remain at the current level, but absolute interest costs could go up by about 10%, 12% over the current base.

The next question is from the line of [ Disha Sheth from Anvil Share & Stock ].

Sir, since we are concentrating more on OEM, over a long term, will our margins get affected because?

Yes. No. So we are not concentrating more on OEM or -- so we are -- for us, we are going to be focusing on both OEM replacement as well as export market. In fact, the export market for us has grown at the highest pace this year. But as we move more and more to the passenger segment or move more means we aim for higher market share there, we expect the category mix to be favorable. And therefore, we feel that net-net, it will be margin accretive despite having 40% or so sale in OEM and 60% sales in replacement in the passenger segment.

Okay. So overall, for the company over the next 3 years, what mix we are looking for replacement OEM and export?

We would be looking at about a 60% share in replacement, about similar levels, 25% in OEM and 15% export approximately.

Okay. And sir, just wanted a clarification, can you please repeat the replacement and OEM growth for current quarter-on-quarter and year-on-year?

Right. So for the replacement market, year-on-year growth was 9%, quarter-on-quarter growth was -- sorry, overall, it was about 23%. Replacement. I'd like to repeat again. Overall replacement volumes grew by 23% on a quarter-on-quarter basis, with 3% decline on a year-on-year basis. OEM volumes grew at 35% sequentially and 17% on a year-on-year basis. And exports grew at about 10% on a quarter-on-quarter basis and year-on-year at about 50%.

Okay. So -- and overall volume growth is 23% quarter-on-quarter and 9% year-on-year?

That's right.

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

If I look at the presentation, in the first half the farm has contributed 11% of sales versus 7% last year, and the specialty has contributed 4% of sales versus 7% last year. While we have said that pharm has not done well and specialty has done very well. So is there any mistake over there in the PPT?

I think there was a change in classification that we did. We -- if I recollect right, yes, can I get back to you on this?

Sure.

Yes, there was a change in classification where we kept some part of farm outside, and we may have done that.

Okay. So specialty only exports, you mean to say?

So the farm exports has been reclassified from specialty to farm in FY '22. Earlier the farm exports was part of specialty tires.

Okay. I got it. Secondly, on this working capital increase in the first half, is it more driven by raw material inventory or finished goods have gone up for?

Kumar, would you like to take that?

Yes. It's a combination of both. And both have gone up and almost in equal proportion. Part of the increase is also because the value has gone up, but balance part is the volume of inventory that we are holding has also increased over 31st March. So the increase has happen on both.

Okay. And you plan to bring it down in the second half?

Yes, true. That's true.

And lastly, can you raise some color on the inventory with dealers is it normal or more than normal how are we looking at it?

Yes. It would be at -- market rate is what we try and maintain it. I don't recollect the percentage right now, but we can get back to you on that command, Kumar, do you remember?

Anant, there's no change in the level of inventory with the dealers, there has not been any change, any significant change in the quantum of inventories at the market, the dealers hold in the given period.

And on TBR side, you mentioned that we've seen 25% volume growth. So is it like we are doing well because of the lower market share? Or is the market also have done recently well in TBR in the last quarter?

So how has the market done in TBR in the last quarter in the replacement segment?

Yes. Yes. You mentioned that you've seen 25% growth Y-o-Y in TBR volumes. So is it because of our market share, though, that's why we are doing well or even market have done better in that TBR?

I think both cases, but we had a relatively lower base. So we would have done better than the market with respect to overall growth. We grew well. A lot of the growth also came from OEM growth. So OEM base last year was very low. So it was led by OEM, followed by exports and then replacement.

So is the TBR replacement volumes up Y-o-Y for us?

Yes, yes. It is up strong double digit.

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

On the RM side, I just wanted to understand, the current commodity like crude prices are up sharply. So the RM inflation you are indicating of 4% to 5% factors in the current prices? Or do you think based on the current rates, there can be more cost pressure going ahead even after this?

So currently, as I said, in quarter 3, we are seeing about a 4 percentage kind of price increase overall on the raw material basket. There can be a little bit going on from quarter 3 to quarter 4 as well. So everything is not reflected yet because there's a little bit of a lag between crude and what is in our crude derivative products. So that may reflect in quarter 4.

Okay, sir, got it. And second is on the price increase side. So if I see on a Y-o-Y basis, we have seen a very sharp increase in the prices. So do you think from here on, basically, there will be -- there is some impact, which may happen on the demand side because we have to take more price increases to offset the commodity cost pressure. So any thoughts you have, if you can share? And any segments where you think the demand might set impacted because of this?

Yes, I think it's a difficult answer to give. I do feel that there is pressure on fleet operators because of tires as well as crude raw material pricing, their profitability has got hit. Now how much will it affect demand? Because overall economy has relatively bounced back, people need tires. So maybe there can be some amount of retreading or delayed purchase a little bit, but difficult to quantify what will happen.

Got it, sir. At least on the consumer side, do you think there will be longer replacement cycles or anything which some of these things can come into which can affect demand? Or you don't think that is much of a possibility on the consumer side?

No, I'm very doubtful on the consumer side. I think the commercial segment is a little bit more sensitive. And passenger cars should be okay.

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

So thank you all very much for your interest in CEAT and your time today. We look forward to seeing you once again same time next quarter and do stay safe and take care. Thank you very much.

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