CEAT Limited (500878) Earnings Call Transcript & Summary

Ladies and gentlemen, good day, and welcome to CEAT Limited's Q3 FY '22 Earnings Conference Call hosted by Kotak Securities Limited. As a reminder, all participant lines will be in the listen-only mode, and there will be an opportunity for you to ask questions after the presentation concludes. [Operator Instructions] I would now like to hand the conference over to Mr. Rishi Vora from Kotak Securities Limited. Thank you, and over to you, sir.

Thank you. Hello, everyone. A very good morning to all. Hope you all and your families are keeping safe and feeling well. I would like to thank the management of CEAT for giving us the opportunity to host this call. Today, we have with us Mr. Anant Goenka, Managing Director; Mr. Kumar Subbiah, CFO and Investor Relations team. With this, I'd like to hand over the call to Mr. Anant Goenka for his opening remarks, post which we can open the session for Q&A. Over to you, sir.

Thank you, Rishi, and good morning, everyone. A warm welcome to CEAT's quarter 3 earnings call, and thank you all for joining us today. This is Anant Goenka and we have with us our CFO, Kumar Subbiah, on the call with us. I hope all of you are safe and well. And as usual, we will start with brief remarks from me and Kumar. And post that, we'll take up Q&A. Quarter 3 this year has been unusually challenging for the industry, primarily due to slowing domestic demand and unabated cost pressures. The results for the quarter reflect the challenges on this account with negative growth in both the replacement and OEM segments. During this period, our focus was predominantly on careful calibration of our response to the evolving demand dynamics by ensuring adequate liquidity by tightening cash flows and managing inventory levels by moderating production. In terms of the replacement segment, commercial volumes, which include truck, bus and farm segments remained weak on account of liquidity pressures and high fuel prices. Passenger segment started to show some weakness towards the latter part of December due to the start of Wave 3 and some uncertainties as a result of that. Overall, replacement volume declined by about 4.5% sequentially and 14% on a year-on-year basis. Sequential decline was more pronounced in passenger categories, while the year-on-year decline was led by commercial segments. In terms of OEM demand, the truck and bus segment saw good traction, PC/UV also saw some improvement due to some easing in semiconductor shortage. However, farm and 2-wheeler demand were sluggish, leading to overall OEM volume decline of about 3% and about 7% on a year-on-year basis. Exports has continued its healthy performance across categories, especially in the OHT segment. And this has resulted in sequential volume growth of about 5% and year-on-year growth of about 27%. Exports continues to be a focus area as we undertake investments across products, marketing and new markets and channel expansion. Overall, we saw sequential volume decline of about 2% on a year-on-year basis, a decline of about 6% during quarter 3. On the cost front, raw material basket per kg went up by about 4% sequentially on account of higher natural rubber and crude prices. This inflation is expected to continue, although at a lower level into next quarter as well. We took standard price increases to offset the raw material impact, but these were towards the latter part of the quarter and was a little lower than what was required. Coupled with some amount of adverse product mix and inventory impact, the gross margins contracted by about 3% over quarter 2 level. We exercised strict control -- cost control measures and despite several headwinds, we were able to maintain our operating expenses at near Q2 levels. However, given severe gross margin and lower volumes, EBITDA margins contracted by about 3.4% over quarter 2. We ended the quarter with a negative PAT of approximately INR 15 crores on a stand-alone basis. As a part of our efforts to align CapEx with market outlook, we have decided to moderate some of our CapEx plans. As regards to our truck radial expansion, we were primarily focusing on the first phase, which involved an investment of about INR 700 crores. We are planning to push that by about a year vis-a-vis our current schedule and indefinitely postpone the balance INR 500 crores of Phase 2 because strategically, we have decided to increase our focus on the OHT segment. Meanwhile, we intend to complete this downstream capacity expansion of OHT to its full capacity of about 105 tonnes in the next 12 to 15 months. Given these changes, we would revise our growth CapEx guidance to about INR 800 crores in FY '22 versus INR 1,000 crores that we had planned. And in FY '23 to about INR 700 crores to INR 750 crores. Our association with OEMs continue to improve. Recently, Skoda unveiled its premium midsized Sedan, Slavia on CEAT tires. The 2-wheeler EV business is another exciting space with strong drivers such as rising fuel prices and government incentives. We are working very closely with all the major 2-wheeler EV OEMs. We were also awarded for our R&D capabilities by Questel India, recognizing the remarkable work done by us on intellectual properties. Also, our premium range of tires has received encouraging response from the market on account of good quality products in nearly across segments. IPL 2021 continued in October, and we were associated with the event as the strategic timeout partner once again. Our puncture safe tires also won the best new product launch in the SMARTIES India 2021 and Gold Medal in the Brand Equity Media Strategy Awards. With respect to ESG, we have achieved close to 32% gender diversity in our new hirings so far in FY '22. We also introduced a program in-house called INWEAVE, it's an internship program for women aspiring to return to the corporate world and for special-abled candidates. We received a very overwhelming response and have been recruiting women to come back into the workforce back into CEAT as well. The current environment for the auto and tire industry has been benign since Wave 2 because of the uncertainty brought about the disruption in economic activity as a result, coupled with high fuel prices and other commodity prices. This had an impact on overall spend at all levels and resulted in lower confidence as well. However, we have witnessed sharp spurting growth during the brief period of stability. We believe that as the pandemic eases, we should see a more robust growth across categories with improved economic activity and consumer spend. I feel confident that despite the challenging quarter that we are well positioned to leverage on the opportunities to get back on growth with strong product mix and consequent improvement in margins and profitability as and when the demand uptick happens. With this, I will hand over the call to Kumar.

Thank you, Anant. Good morning, ladies and gentlemen. Thank you for joining our quarter 3 FY '20 earnings call. I'll share some further financial data points which you all -- post which we can enter Q&A session. First, regarding revenue. Our consolidated revenue for the quarter stood at INR 2,413 crores, a sequential decline of about 2%, which was led by volume decline and year-on-year growth of about 9%, which was driven by higher realization on account of price increases that we took in the last 12 months. Now coming to gross margin. Raw material costs continue to rise and impacted our gross margins, which stood at 34%, a sequential decline of about 290 basis points. Our blended raw material costs went up by 4%, in line with our estimates. We managed to take approximately a little over 2% price increase during the quarter, and the increases have happened across categories and product mix also played a role adversely due to lower replacement sales, leading to drop in our gross margins during the quarter. RM prices continue to increase, though at a slower pace now. As per the current market conditions, we expect that our blended raw material costs to go up by about 1.5% in quarter 4 over quarter 3, which means that we would still need to take more price increases in the current quarter and also in the coming quarters and hope the demand situation improves and becomes more conducive for the same. Our overall debt increased by about INR 256 crores on a consolidated basis sequentially. And now our debt as of 31st December stood at INR 2,260 crores. We incurred a project CapEx of about INR 145 crores in quarter 3 and overall about INR 480 crores in the first 9 months of the current financial year. Our project CapEx outlook for current year stand revised from earlier estimate of about INR 1,000 crores to around INR 800 crores for the current expansion projects as covered by Anant during the quarter. We also managed to bring down our inventory levels by about INR 112 crores. However, as payables declined more significantly during the quarter, our working capital still went up by about INR 63 crores. We intend to further reduce our inventory largely in raw materials in quarter 4. And also our decision to review our working capital and reduction in the estimate for the current year, we expect our debt levels to be within our internal leverage ratio thresholds. Now coming to operational expenses, we continue to monitor our costs tightly. Inflation was prominent across other costs, including our distribution cost on account of increase in fuel cost. We were able to largely curtail some discretionary spend and maintain our operating costs at Q2 level in the quarter 3. Our consolidated EBITDA for the quarter stood at INR 143 crores, translating to a margin of 5.9% of our turnover. Depreciation declined versus quarter 2 as there was one-off effect in the previous quarter, that is in quarter 2 on account of treatment of long-term leases, which we had explained during our last call. During the quarter, the credit rating agency carried out a rating assessment and affirmed AA rating for long term and A1 plus for short term with stable outlook. Now we can open the floor for Q&A. Thank you.

Sir, can we open the call for a Q&A session.

Yes.

Sure. Thank you very much. [Operator Instructions] The first question is from the line of Ashutosh Tiwari from Equirus Securities.

So firstly, you mentioned the replacement volume declined 14% Y-o-Y. So can you provide some color on the segment-wise again like 2-wheeler, tractor?

Yes. So overall majority of this decline came in the truck segment. Last year, same time was a very high kind of a base year with a fair amount of pent-up demand that came in. If you recollect our growth rates may have been somewhere around 25%, and that caused an impact on the market. So I'd say truck bus was primarily down by over 20%, 25% out of this impact. The rest of it was much more positive. We saw positive growth in PC/UV, good growth in PC/UV, in fact, good growth in 2-wheeler. It was only in the commercial vehicle segment and the tractor segment that we saw negative growth.

Okay. So that's the 2-wheeler and PCR was like good growth means, it is high single digit or it was lower than that?

No. Yes. So passenger car would be at about double-digit growth, 15% plus kind of growth levels. Two-wheeler would be somewhere at a single-digit growth and truck and bus was at negative growth, primarily most of this coming out of the truck bus bias segment.

Okay. Truck bus bias segment. Okay. And in terms of price increases, you have mentioned the 2% was taken during the quarter. So was it effective for the full quarter or some part came in December month?

No, it wasn't effect for the full quarter. It would have -- I think some of it came early part of November, from mid-November. So I'd say between November 1 and 15 was the time when a large part of the price increase took effect.

Okay. And any price increase, let's say, in January or December end?

We've taken about a percentage price increase in the 2-wheeler segment in January. We are hoping to take about a couple of percentage points in this quarter but nothing has firmed up yet, but between Jan and March, maybe another 2 percentage points across the board.

And lastly, on this payable, receivable, which I mentioned is an increase quarter-on-quarter. So let's say, it was around INR 1,022 crores about September 30. So why this increase while demand was weak? And how do you see it going ahead also in this March quarter?

Kumar, would you like to elaborate?

So I didn't say receivables, I said payables came down, okay? Receivables were largely as of 30th September.

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

Sir just wanted your qualitative comments on the demand trajectory. You mentioned on the replacement side specifically. You mentioned that it was a high base of last year and hence truck segment declined. But how would you rate this demand? Is it more of a high bit or would we be still lower than the 2019 December level? Or we are still above those 2019 levels? Or is it just that a pent-up of last year has caused this double-digit decline on the CV side? And how are you seeing the trends going in Jan-Feb-March because what we understand is in this quarter in Q3, the price increases has been a tad lower than what you had seen in the earlier 2, 3 quarters. So is it to do that you are a little more cautious now in taking the price increases given the weakness in demand? Or do you think that this is a temporary phenomenon and price increases can be very much possible in this quarter -- current quarter?

Right. So I think on the commercial vehicle side, there is a slowdown in demand on the replacement side that we had seen. To that extent, I think there is still continued some pressure on the CV side. But 2-, 3-wheeler and PC/UV were pretty good in the last quarter, except for the latter half of December, when this third wave kind of impact started coming, there were some closures that happened in some of the cities, lower footfall, lower travel, et cetera. But with this resuming things getting better maybe by February, I'm quite confident about 2-, 3-wheeler and PC/UV coming back on the replacement side. On the OEM side, I'm quite confident about -- I mean there is a sheer uptick we are seeing on commercial vehicle demand. And that, I think is a considerable shift between what was happening, say, maybe in August, September, October going forward into quarter 3 and quarter 4. OEM will make up for the loss in replacement segment to some extent at least. And international business is looking quite strong. We've seen good growth and that momentum is continuing into this year as well.

Understood. And also, if you can just broadly comment from Q3 FY '21 last year, December quarter till now and going up till Q4 of FY '22, how much of our overall cost increase have you seen? And how much of an overall price increase you have taken? And how much more is needed to offset that pressure? And would Q4 be the last of the raw material pressures as of what you see today and Q1, it should start kind of declining?

Right. So on a year-on-year basis, say, from quarter 3 to quarter 3, we've seen about a 40% increase in raw material pricing. And against that, we've taken about a 15% kind of price increase. We are short, I would say, by about 5% to 6%, which is what is reflected in our average margin, say, an average margin is 10% to 12%, 10% range, say, we are at about 5% EBITDA margin. So that is the kind of price increase that we need to take in addition to whatever further inflation that may happen. As Kumar said, we are at about 1 point -- we're seeing about another 1.5% increase in raw material from quarter 3 to quarter 4. And then hopefully, things should stabilize. If you look at natural rubber, it had peaked at about INR 180, INR 190 per kg, it is now at about INR 165, INR 175 kind of range. So to that extent, there's been some minor correction on that side. Crude on the other hand, has gone up a little bit. But it looks like the pace of inflation has certainly come down, and hopefully, quarter 1 will remain stable in comparison to quarter 4. And between now and, say, the next 4 months, 5 months' time, we will be able to take some price increases. The ability to take price increases is difficult. I don't have an answer to that, but we are going to endeavor for making up this loss in -- or the gap in the price increases. And I think it is an industry issue. I don't think we have lost market share, nor have we taken lower pricing increase and competition. So to that extent, I feel confident that if the industry is down, I think everyone will be under a fair amount of pressure to take price increase.

Understood. So out of the 5% required price increase, maybe 2% you could take in Q4, as you mentioned. So balance 3% to 4% is something that you will require over Q1, Q2 to get back to your original margin. Is that a fair understanding?

Approximately, yes. I didn't take into account. The 5% is something I'd say we should have taken until now since we are seeing another 1.5% price increase, maybe I would change this to 6% because there's further inflation that may happen. So -- but range bound, yes, that's what I hope we are able to do.

Understood. And just one last question. How would you -- I know it's early days, but on your EV 2-wheeler OEM orders from the startups, is it fair to assume that we would have a higher market share on the OEM side with the EVs that you have in the, say, maybe more than 30%. And going forward, how does it look with now the incumbent also coming up with new launches? How are your orders for their EV launches?

So we're very happy with our position there. We are there with maybe 80% to 90% of all the EVs in the market. And we would be having a share of business of about 60% overall for the market, whereas our normal 2-wheeler market share is at about, say, 28% to 30%. So we are happy with our position on the OEM EV side.

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

Just to reconfirm, your price increase would depend on demand conditions. So you're saying it's a tough to call kind of decision. So I just wanted to confirm that. And the second question is on the payables, which have fallen. Is that like -- is that a one-off? Or would you -- like, for example, in the March quarter, would the payables increase is it part of a regular cycle? And could you also reiterate your debt -- internal debt guidelines, please?

Sure. So I think price increases is something which is much needed at this point of time. And as I said, I feel it is an industry while commercial vehicle demand is under pressure. 2-wheeler and passenger car is relatively okay. We will aim for further price increases, but difficult for me to give a clear answer as to when and how much it will happen. On the payables and debt position, Kumar, would you like to?

Yes. See, payable reduction in quarter 3 is on account of a lower arrival of materials and mix of material, like we had more imported raw materials and less of local materials. When you import materials, you tend to pay on arrival. In case of local materials, you tend to have a little longer payment cycle or payment terms, okay? So what also happened in quarter 3 was that import arrival was more because the transit times came down. And it was taking around 60 days for a mid-consignment to come from Southeast Asia to India till October and till early November. And however, the transit time came down from 60 days to 38 days and eventually towards December, it came back to a normal pre-COVID level of around 25, 26 days. So therefore, we -- is it more important materials and that led to paying the suppliers on arrival. So we -- it's more a one-off. We expect -- we're able to come back to a normal level. Approximately our payables in the range of about INR 1,900 crores to INR 2,000 crores, covering all not only raw materials services. And during the quarter, we witnessed about INR 180 crores kind of a reduction. We expect it to come back to normal levels, but we will still control our resets in the quarter 4 of raw materials. So you may not see a big jump in payables by end of March. But however, the drop that we witnessed in quarter 3 would be able to partly reverse in quarter 4. Regarding your last question on debt level, our internal threshold with respect to latest 3 -- debt-to-EBITDA threshold is 3. And we would be in line with that internal threshold with respect to debt in the quarter 4.

If I can squeeze in one more industry-related question. The CV segment, do you see that the freight operators are not able to pass on the higher cost that has increased freight rates. Are you just seeing that the utilization itself dropped in the last month or so?

So I think our utilization has come down to a certain extent, but I think the freight price increases, which were not passed on as much in the last quarter has begun to get passed on, whether it is corporate or whether it is government, there has been some creative shifts that have happened. I think also one change this time after Wave 2 is that the EMI moratorium that was given in the last Wave 1, that is, of course, not there. So to that extent, the EMIs by the fleet operators need to be paid. So all of that is putting some pressure on the industry.

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

Can you first talk about what was the overall volume decline in the quarter?

Yes, I did share that with you about 4%. Overall, just give me a second, I think about 3% -- 4.5% was in replacement segment. But I think overall was at about 2% to 3% on Q2 basis. That's it.

And on Y-o-Y?

Year-on-year was at about 5%, 5.5%.

Okay. And second question pertains to the pricing pressure. So are we seeing pricing or lack of price increases, the adequate price increases across segments or any particular segments where pressures are higher where compression is not taking adequate price increases?

So I think there is more pressure on the commercial vehicle segment. The passenger segment is a little bit on the lesser side at this point of time as we've taken the price increase on 2-wheeler in January, about 1%. Passenger car is also relatively okay versus CV at this point of time. But overall, it is clearly much less than what we would have liked.

Okay. Okay. And lastly, on the OHT capacity expansion, which we are doing. So what would be our current capacity and utilization? And by when do we plan to take it to 105 tonnes per day?

So we are today at about 50 tonnes per day. We are fully utilized at this point of time. We are going to be taking this up to 81 tonnes -- 80 tonnes per day approximately by middle of this year -- calendar year. So by July, August, this will be -- expansion will be completed. And then we will be looking at another 105 tonnes per day. That investment has not yet begun. But over the course of the next 15 months or so, we hope to invest that and look at taking it up to 105 tonnes per day.

So from 80 to 105 tonnes we have not committed the CapEx.

That's right. So 80 tonnes by, say, quarter 3 or latter part of quarter 2 and then 100-plus tonnes from about the, I'd say, 1.5 years from now.

Okay. Okay. Right.

That is our farm radial capacity. We also have bias capacity, which we already have in our older plants that we are facing.

Right, right, right. Got it. And last question on the export side. So exports clearly has been doing well and which is driving this part of it. But on the non-OHT also, I believe momentum has been fairly strong with good growth across the segment. So can you talk more about how do we expect growth in exports over the next 2 to 3 years, which segments, apart from OHT will also benefiting out of that?

Yes. I think we are most excited about the international business for us. People are looking at a China plus one strategy and that presents a great opportunity for Indian players. And to that extent, we are seeing very good growth now and continuing going forward into the next few months or years' time across all categories. So for us, we will be starting -- we are looking at huge growth in EU passenger car, where we have already been present. We are increasing our range entering new countries like France and Germany. And with that, we will be looking at very high growth in EU. In addition, we are going to be launching our truck radial tires for EU. Again, we're talking about a very large market there, and that will help in strong utilization. This will happen by -- in another 6 -- 4 to 6 months' time, we will be launching that, and that will help in further growth. And then over time, I'd say we are still about a year out where we will be looking at U.S. markets as well for passenger car and truck radial. So with that, we think the international business as a percentage of our revenues will grow substantially.

Got it. Do exports should grow much, much ahead of the domestic market over the next 2 to 3 years?

Margins are also strong in that category. So I think the mix will really improve.

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

Sorry to probe more on the price hike side of it. Just wanted to understand on price hike, obviously, what kind of pushback are you getting? Is it more because of inflation that you are getting a pushback from the dealers? Is it because the demand is weak, you're not able to take up through? Or is it because the competition are not going through ahead with the price hike that you are not able to take a price hike. So just some more details on that front.

So I think 2 and 3 are in a way linked, right? If demand is down, people want to sell more tires or more products, and therefore, price increases don't happen as easily and utilization is a little bit lower. So I think it is between points 2 and 3 when demand is under a little bit of pressure on the replacement side and competitors are not taking up price increase. So we have to manage that way, particularly, as I said, in the CV segment where we are not in the top 2 or 3 players at this point. On OEM side, it is largely formula-based. So we are seeing continuous price increases happening there. And on the exports, international business side also, we are seeing steady price increases. So it is primarily the replacement segment where there is some pressure.

Sir, if I have to take this point ahead, in the last 2 years, if I look at this quarter versus 2 years back revenues, the revenues are up almost 40% even if I take a 15% impact of pricing, the volumes are still up almost 25%, right? So 3-year growth of 25% still means a double-digit growth. This quarter, Y-o-Y decline is partly due to high base as well. So we cannot just say that the demand is really weak. The demand came back quite sharply last year same quarter. That's what you also highlighted. And on that base, we are not seeing our growth coming in. There is no major problem of growth on an overall basis. So I would just really wondering...

No, no, you've highlighted it absolutely correctly that it is on an -- I mean, substantially higher base that we are talking about this challenge. It is -- is it that post-COVID, there has been an abnormal lull? I'd say that no, last year, we bounced back quite well. And at that level is what we are talking about flat growth this year.

So that means that demand is not that big an issue. It's probably more of a competition because of which you are not able to take packages.

That's right. That's right. And also utilization levels, right, to that extent?

Okay. Okay. And second point is, I think you alluded it briefly. But we have seen CS margins moving from 5%, 6% band to 15% also. So on a steady state on what's your target which you wish to maintain EBITDA margin assuming things are constant in external world, what's your target profitability levels that we should be looking at from the company perspective. There can be ups and downs depending on demand, competition and all those sort of things. But what is their expiration level or what is the level at which you would be happy maintaining your margins?

I would like to see at least somewhere between 12% to 14%. On average, we have been maintaining about 10%, 11%. But ideally, if we can take it up to that kind of level by at least 3 percentage points higher, that would be much better. So I think that's what I would put as our target, whether it is through mix improvement, shifting our strategic focus to different areas, whether it is international business, OHT business, if we can improve our mix towards these areas, that's what we are endeavoring for. If you look our 2-wheeler business is quite profitable. That's about 30% of our business. OHT today is only about 5%, but we would like to take this up to about 10-plus percent over time. International business, where there's an overlap with OHT is about 18% to 20% today, but if we can take that up to about 25%. So in that sense, the more profitable categories will be a much larger share of our business. And that's where we are looking at making that shift. And in light of that, also, we have curbed our PBR ambition as well. And we will look at shifting that investment to OHT demand allows that.

So if I take this -- sorry, this is the last question. If I take this point a bit ahead, that you want your company's average margin to move towards 12% to 14%. And if you're saying that 2-wheeler and exports are a higher margin business, is it fair to assume that 2-wheeler and exports will be an 18% to 20% kind of a margin business and increase in mix of these segments will help you take our margins higher, assuming at some point, commodity pressure will normalize and you will be able to take price hikes?

That's right. So these are higher margin businesses. And if we can move towards that, it would be -- is what we are endeavoring for.

The next question is from the line of Joseph George from IIFL.

I have 2 or 3 questions. So first is when you mentioned that you have cut down your CapEx plans, I wanted to understand the reasons for that. So one is the fact that the profitability and revenues. So your operating cash flows are weaker, that is one, and then you want to maintain prudence in terms of leverage on the book. So that is one possibility. The second is that the market share gain targets that you have TBR, et cetera, the achievement of the market share is not as much as you thought. That might be the second reason. And the third reason might be that the overall industry or the overall industry volumes are not as strong as you thought would be. Can you please explain to us which of these 3 pockets would that decision to cut CapEx fall in?

Right. So first, I'd say, one is as we highlighted there has been some delays because of the market situation and as well as cash flow with respect to our desire to maintain our debt-to-EBITDA and other key balance sheet ratios. So that has resulted in the delay. But I'd say strategically, we are looking at shifting our focus more towards other categories, which would be international business, OHT business, passenger, anyway we are focused on. With that, as we are looking at that shift, we would like to keep some capital at least as an option to choose to invest and seeing growth in those categories. These are our priority categories. Trust would be, say, maybe fourth or fifth in terms of our own internal priorities. So if we can invest in our core categories or our focus categories, we would be happier with that. So that's why we've decided to postpone or not at least currently only focus on that INR 700 crore of TBR CapEx at the max at this point of time.

And in terms of our internal benchmarks of how you expected market share in TBR to progress, is that meeting expectations? Or is there some hold there?

No, I think on the replacement side, it is slower than what we had hoped for. We were at about 4% to 5%. We moved to about 7% now. We want to -- we had hope to be at about maybe a couple of percentage points more at this point of time.

The next question that I had was in view of the cutting CapEx, in view of the expectations of lower cash flow from operations, when do you expect your debt levels to peak? Is it at the end of '22 or '23 can you give some sense on that? I know it's difficult because there are too many moving parts, but internally, how do you think about it? Is it going to peak at '22 end or '23 end or if you can give some sense on that?

Kumar, would you like to share that?

I think we -- it could peak in the coming year, coming financial year, okay? We are largely finishing of our capacity expansion CapEx in the coming year, what we had originally planned that INR 3,500 crores plus INR 500 crores of specialty, large part of that would be spent by next year. So that is when it is going to peak.

Got it. And the last question that I had was when I look at the inventory adjustment number in the cost of goods sold, I noticed that in 2Q, you had over produced, which would have resulted in a capitalization of overhead, whereas it 3Q under produced, which means you've utilized the inventory from the past. So this inventory accounting impacted gross margins by this quarter, maybe you see on...

Yes, you're right. I think you're reading of that number is right. So it's approximately about INR 75 crores plus last quarter, that is in quarter 2 and INR 72 crores, INR 73 crores minus in quarter 3. So it has a double effect the way gross margin is worked out, you're right.

Kumar, would you be able to quantify the Q-o-Q impact on gross margin because of this?

Yes, approximately minus -- increase in inventory versus last quarter was a reduction in inventory. This is about 1.4% approximately.

Q-o-Q, this is 140 bps.

Yes.

The next question is from the line of Sachin Kasera from Svan Investment.

Just a follow-up again on this CapEx debt and realignment of the CapEx across segments. So you mentioned that one of the reasons that CV represents the pressure is because of competition. And the reason for that is that the market is slow. So if you could just tell us what is your sense of the current industry utilization of TBR that can give us some idea as to what are the type of pickup we need to see before the pricing competition?

So I think on the TBR side, we have seen actually growth on a year-on-year basis. So even though we are talking about competitive pressures, OEM has seen much stronger growth in the last quarter. Exports has also grown. And to that extent, year-on-year, there has been growth. So utilization levels would not have come down. But when we are talking about pricing impact and CapEx plans, there are 2 elements. One is that the pricing pressure is on the replacement side. That is where sales levels -- actually absolute sales levels have come down, and that is what is causing some amount of pricing pressure. The other question you had was on utilization. In our case, at least, we have done some amount of capital investment on TBR, and therefore, we have upside to grow. I won't have data on the others, but I do believe that others will also have some amount of upside to grow on the TBR side.

Sure. And within TBB and TBR, is it that there's one particular segment where the pressure is more in the replacement in terms of pricing and margin? Or is it equal across both TBB and TBR?

So TBB is a declining segment altogether. The technology every year we've been seeing continuously 5% or so negative growth. Approximately 2%, 5%, 0% to 5%, and that has been taken over by truck radial. Last year was an abnormal year where actually, truck bias also grew by about 30%, which was completely unexpected. And therefore, the dramatic drop in TBR that we've seen currently. So truck bias, we expect to be continuously underutilization pressure or negative growth, and we will have to shift those capacities to other kinds of bias tires or close down those plants or take those kind of calls at some point of time.

Sure. The second question was on debt and the CapEx. So we are already at 3x debt-to-EBITDA on reported numbers. And you alluded next year also, we are looking at say INR 100 crores to INR 200 crores of CapEx. So if the current situation doesn't improve. We will also have to realign the CapEx for next year that we would then for the current year. In the sense, we keep calibrating the CapEx depending on the cash flows and the debt-to-EBITDA levels or for a year or so, we will be okay and we'll be looking more at a long-term picture. And maybe for a quarter or 2 probably break the 3x debt-to-EBITDA number.

Kumar, would you like to?

Yes. Sure. No, in the coming year, as of now, I think our plan is to be within the threshold as of 31st March, okay? And we expect margins to normalize over a period of time, okay? So as the inflation in commodity prices is moderating at this point in time against 10%, 5%, now it's about 1.5% that we are talking about quarter 4. And we hope margins would normalize in the coming quarters. So -- and therefore, our cash flow from operations would certainly improve. I think there is still some scope for us to extract some cash from working capital side. I think we will be prudent in the coming year, too. And depending on how the next year unfolds, okay, we would moderate our CapEx in the event, we continue to operate at slightly lower margins in the coming year. But our intent is to keep the debt-to-EBITDA within that range of around 3%.

Sure. And just lastly, on this TBR CapEx. So because of the pressure that you are seeing in the market replacement, there's a temporary deferral for maybe 4 to 6 quarters and then we again aspiration to grow our market share and become a relevant player in TBR over the next 3 to 5 years? Or is it that strategically we've decided that exports and passenger cars and you have the OHT segments where the margins have return on capital are far better. So strategically, in terms of priority now, will the next 3, 4 years want to focus there and improve our margins and return on capital rather than look in terms of becoming a very strong player in the TBR segment?

Yes, sir, you may go ahead. Yes, please proceed sir.

My question was audible, shall I repeat the question?

Management, are you able to hear the current speaker?

No, I'm not able to hear the current speaker.

Mr. Kasera, I would request you to please repeat your question.

Hello, no, sorry. I think my phone went on mute, I'm sorry about that. So I heard the question. I was halfway through the answer, but I didn't realize I was on mute. So yes, we were -- for us, winning is -- we are looking at winning in the passenger space. So which means passenger car, 2-wheeler segments, where we are -- we have very strong momentum. In 2-wheelers, we are already up there. On the passenger car, we are growing well. For us, in truck radial, we never had ambitions to win or gain abnormal -- largely be amongst maybe the top 1 or 2 players. It is important to be there in the truck radial segment from a scale, covering of fixed cost as well as more from the customer side. When you're looking at going to dealers in India, you have to have the entire range of tires. So that's the perspective that we have on truck radial. Going forward, we will manage truck radial or trucks more for profit. So we will sell in more profitable segments if we can and whatever presence we need to have to manage the channel, we will do that. But if we need to increase, for example, international business, which gives us higher margins, we will focus a lot more in that. So over time, as I said, in terms of our growth aspirations will be much higher on the passenger and OHT and international business rather than the domestic truck segment. And that, I see our shift has become a little bit more sharper over the last, say, 3, 4 months from an intent perspective.

The next question is from the line of Basudeb Banerjee from ICICI Securities.

Kumar sir, you just mentioned 150 basis points interest of the inventory investment out of the 290 basis points gross margin reduction. So in the initial comments, you also said there were some ForEx impact. Can you quantify that?

I think Basudeb, I think your voice was not so clear, very soft. I couldn't get the question.

Am I audible?

Yes.

Question to Kumar sir, initial comments you mentioned some ForEx impact also in this gross margin. Can you quantify that, sir?

I didn't mention any ForEx impact.

Okay. So second is, sir, because of the second phase of TBR, which you canceled. So at current gen, sir, if you can mention the TPD existing Halol capacity and first phase, how much you're adding?

One second, one minute. We are doing about 100 -- at end, a peak capacity alone will be at about 140,000 truck tires per month. This will add another 40,000 truck radial as we -- when we look at that first phase of expansion in Chennai for TBR.

So basically, for 40,000 tires per day, this INR 700 crores for first phase.

That's right.

And that will be operational fully by when, sir?

It would be at least 1.5 years from now, not before that. So we had planned for it to be ready by end of this year, which is this calendar year. We've delayed it by about 9 months at least.

And your existing Halol TBR is operating at what utilization?

We will be at about 75% or so utilization, 70% utilization today. No, 75%, yes.

A good thing that from capital allocation perspective that you are shifting from that low ROCE TBR where market shares are also low to better margin products. So one thing which came to my mind is like typically in those developed markets like Europe, U.S., the typical -- difficult route of going through being supplier, then making a margin replacement. So like how are you strategically positioning your brand in those developed markets?

Right. So I'd say one is on the truck segment, it -- you don't need to be present in OEM for replacement sales. So anyways, if you look at the market, it is about 80-20 or 90-10 towards the replacement segment even in India or internationally. So is the passenger car side, too, if you look, there was a very strong Chinese presence in these countries. And to that extent, there have been antidumping duties imposed, and there is a strong demand for passenger car tires. In terms of positioning, we will not position ourselves at a Chinese level. But since there is a vacuum, there are opportunities for value players to come in, where we are offering very good quality tires at a much lower price. So to that extent, that is the positioning that we will take and look at entering. So you'll have the -- maybe Michelin, Bridgestone at the highest level followed by maybe the Kumho, et cetera, and then it would be largely the Indian players, a few other Korean players is where we would be looking at positioning ourselves.

Sure. That's great. And last question, sir. Quarter-by-quarter every time you see the Sri Lankan business numbers, so for example, this quarter, I see a stand-alone consol revenue gap of INR 7 crores and a loss gap of almost INR 5 crores. So any plans of rising that off down the line because it's not adding much of financial value at this?

No, I think that is maybe because there was -- that is not correct. I think Sri Lanka margins are very strong. We are at over 15% plus EBITDA margins there. Growth has also been good. We had a near monopoly position in Sri Lanka with over 50% market out there, market share in Sri Lanka. So we are very happy. We don't plan to high walk Sri Lanka, it's a very successful operation.

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

First question is on demand elasticity. Do you think that after such a strong price rise that have been taken, it has now started affecting demand or ability of consumer to take the price hike. And that is the reason of the sequential slowdown because over the last 12 months, if there is a 15%, 20% hike, is that the key reason of driver? And secondly, as a combination question. Even 2-wheelers and EV seem to have seen a slowdown, at least on Q-on-Q basically replacement market? Would that assessment be correct?

Okay. So on the truck radial, yes, price increases could have had some impact. I see difficult. There are so many aspects that would be there. But I mean, if you look at their own fuel price increase, it has been quite substantial. So yes, inflation would have affected them. As I said for them also, it is important to pass on the price increases. And to a certain extent, some amount of that price increase has been passed on. So yes, I would attribute inflation to a certain extent, but there are many other factors which I did share would be having impact on the TBR side. Sorry, what was your second question?

Is there a slowdown on sequential which is at least in 2-wheelers and PCR replacement?

They are largely flat, I'd say. So then on PC/UV, there was a little bit of a slowdown on the replacement. But I'd say, overall, it's been flat. And on the 2-, 3-wheeler also marginal drop on a Q-on-Q basis, about 3%, 4% kind of level.

And is it -- would this be a one-off attributable to this Omicron variant? Or there is something else that we need to look into it for the sequential slowdown?

The sequential slowdown was primarily seen only after, say, December 10. Now I'd say -- so difficult to attribute, I think Omicron effect really started coming around maybe what, December 20 or so. So some amount, I would attribute to Omicron. The rest of it, I don't have a -- I'd say that is there any other reason? No, nothing else. I think drastically to say. It's only largely just lower travel, lower footfall in cities because of Omicron. But the good thing is we have gained share in the passenger segment and at least maintained share in the 2-wheeler segment.

So if I have to ask you from your past experience, this kind of price hike that we have seen across, I'm not saying trucks, but even 2-wheelers and PCR. I would think we have not seen this kind of hike over last 8, 10 years, continuous hike of double-digit hike or more around 15%, 16% price hike. In the past, we have seen demand getting affected directly or indirectly because of such price hikes.

Okay.

Do you think that are we reaching that tipping point now?

I don't have an answer to that. I'd say that there are so many aspects. And what kind of impact -- I mean, in the end, the tire is something which people need to replace, and it can be delayed by 2, 3 months' time or 4 months' time maximum, but it is a product which is needed by the consumer to change.

Just one last clarification. You mentioned that in the opening remarks, Subbiah mentioned the import transit period has now come down to pre-COVID levels from as high as 60 days. Is this a new normal we should assume? Or there were some one-off event which led to that? Or it was even low as -- even if it is around 30, 35 days, is this a new normal?

Yes, I think so. I think it went up substantially. Now it's come back to normal, new normal means. It's currently at pre-COVID level. So I think it should be taken as a normal. Southeast Asia to India, it's kind of come back to normal levels.

The next question is from the line of Mukesh Saraf from Spark Capital.

So most of my questions are answered. Just wanted to check on the sequential volume decline on the replacement side, you had mentioned 4.5% is overall. How would that be, say, for the truck and bus because truck and bus, obviously, Y-o-Y, you said a 20% decline?

Sequential decline for truck and bus on a quarter-on-quarter basis.

Yes. Yes.

I would say across the board.

The truck and bus margins.

Across all 3 categories, replacement, OE and...

No, no, I'm just looking at replacement truck and bus.

Replacement truck and bus, it has been largely flattish between if I'm right, it is about kind of, I'd say, largely flattish. Truck radial has come down a little bit whereas truck bias has been flattish.

Right, right. And I mean, obviously, November, December, we've seen some ease on resin costs, et cetera, for fleet operators. So like you mentioned that they have now passed on some of these earlier cost hikes for them. So have you started seeing some improvement in these volumes around December or January with respect to replacement?

No, not yet at this point of time. I think we've seen a similar kind of demand situation in January as we are in the case of -- as you say, in November, December.

Okay. So that hasn't yet started picking up. And just lastly, your market shares on the replacement side, again, truck and bus, it hasn't changed much on the bias and radial side of it? Or do you see radial side of it, there's been some loss in market share?

No, we would have largely maintained our market share. I don't think there's any change on the CV side. So we are a relatively low market share. So on a low base, we have maintained at that level.

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

Sir, on the market share, when you have said that in the PV also, you have sort of gains from it. What will be the number we are at now for CVs and 2-wheelers in the replacement?

So passenger vehicle, we will be at about 14% kind of market share. And on the 14%, 15% kind of levels. And on -- in the case of 2-wheeler, something about 27%, 28% market share.

Okay. So as for the internal targets, any ambitions you have for the passenger vehicle segment, so where it can go up to, say, in the medium term?

Yes. We'll be looking at 17% to 20%. At least a 5% shift.

Okay, okay. And for the overall volumes, like in the last time you said you were looking at a low single-digit type of growth for the '22. So next year, factoring in these sales of higher OHT and exports and PV, what will be a number you would be targeting internally for the overall volumes for us?

Overall volume growth for next year?

Yes.

So I think some of the volume I mean, difficult to give a specific number. I would say a couple of -- I mean, base effect issues will be there on -- or positives will be there that there was a Wave 2 in this year, which had a little bit of a lower situation in quarter 1. So to that extent, there's again, maybe another say 3%, 4% impact in the year will come because of that. There will be an inflationary impact also of maybe 3%, 4% that can come in. So that it says at a value level value and volume will be maybe 5%, 6%. And then say, if you look at 8% to 10% growth in volume terms is at least what we should look at, maybe even higher.

Got it. And on the margin front, so if you look at -- in terms of the hierarchy. So will it be fair to say that in 2-wheelers, the replacement will be higher followed by passenger car replacement. How to understand this hierarchy for you?

Yes. I think it will be 2-wheeler and OHT will be the highest margins followed by passenger and then followed by commercial vehicles.

Okay. Okay. And any broad range if you can share, highest to the least?

No. No, we can broadly share that this is how it is in the replacement segment. OEM across the board will be relatively low, substantially lower. And exports will be not very different from replacement at an overall level.

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

In earlier comments, you mentioned about aspirational margins of 12% to 14%. Now assuming that 1.5% cost increase, which is in Q4. I mean just assuming that that's the last -- that we would see at least in near future, that 12% aspirational margins would require roughly about 7%, 7.5% price increase further? Would that be right assumption?

Yes, it will be a mix of price increase and your mix change.

So I mean product mix remains same as quarter 3. It would require about 7%, 7.5% kind of change?

That's right. Assuming...

Of course maybe change in favor of sorry. Sorry, sir, go ahead.

So I think product mix and market mix both we have to move towards more profitable areas. So I think that will result in hopefully a differential with competition and differential from the average norm of say 10%. And the balance will come from price increase, so 5%, 6% additional price increase. If you take 1.5% further inflation into this quarter, then that may become, as I said, from 5% to 6% maybe.

Now that 5%, 6%, over a number, whatever we have done still, I mean, if I look at overall price increase would total up to about 17%, 18% kind of a number while that number may look very large on stand-alone basis, if one were to look at. But if I look at about 3 years, 3.5 years kind of inflation, total increase in the tire prices would be just amounting to about 5.5%, 6%. Why is there so much of resistance across all the players to sort of do this when the number on, let's say, slightly longer term is not that large for market to digest, given that our own volumes are now -- are sort of though they have declined Q-on-Q, but still one of the highest ever in our history as yet. Why so much resistance across all the players?

So I don't have an answer to that. But all I can say is that the last 12 months has been about 15% which is fairly high. But yes, if you spread it out over 2 years' time, hopefully, that -- I mean, that number 2 years or 3 years, it will come down. Last 10 years, there's been no inflation, 0. So in the end, there is -- it's just competitive pressure, and I don't have an answer to explain why it is happening.

And did I hear correct when you mentioned that there has been no loss of market share even after all these price increases for us across all the product lines.

Yes, because the price increases has been across the board, right? And I see we have gained market share on the passenger car UV. The balance would have largely maintained our market share.

The next question is from the line of [ Vishal ] from Svan Investment.

Confirm 2 points, sir. Your new TBR capacity, you said in Chennai will add approximately around 140 TPD, if I'm not wrong. So sir, by the end of this expansion, what will be the overall capacity for TBR you will have in terms of TPD?

I said it will add about 40,000 tires per day. In tonnes per day, I will get back to you. I said it will add. We are at 140,000 tires -- not tires per day, 140,000 tires per month is our current capacity in Halol or shortly, it will be. It will be our peak capacity at Halol. Another 40,000 tires will get added, which is about 45 tonnes per day. I will just confirm on the tonnes per day, yes.

Okay, okay.

The next question is from the line of [ Disha Sheth ] from Anvil Shares.

I just wanted to ask that 20% to 25% sales drop in truck bus replacement truck bias, the trend should continue. It is overall, the industry scenario that the bias is coming out and radialization is picking up. It's not because of the higher base, right?

No, no, the bias will continue to come down, absolutely, you're right. But I'm saying overall CV market, you have to look at it at an overall level. So that will continue to grow.

Okay. So every quarter or every year-on-year, we'll see this bias capacity coming down and we can see the drop in sales because of that bias, but it is not because of the demand that where I'm coming?

So bias is coming down. If you look at a year-on-year basis, even the -- I spoke about data of the overall CV segment on a year-on-year basis for quarter 3. So for quarter 3 last year was a very high base because we saw a 25% growth on a year-on-year basis from FY '21 to -- '20 to '21. And now into '22, we are seen a -- we have therefore seen a drop in CV demand. Not only bias, but I say, on average across the board lead by bias.

Okay. Even radial somewhat. Okay. And sir, for PCR replacement, how is the demand momentum since the Omicron wave has peaked out and things are improving. PCR replacement, OEM and 2-wheeler replacement OEM?

The 2-wheeler replacement OEM is under pressure. I'd say last year, last quarter also, there was a fair amount of cut that was taken by the 2-wheeler OEM. So to that extent, that is continuing. Sorry, which other categories did you want to know?

And 2-wheeler replacement is also down, right?

Two-wheeler replacement is stable, it is steady, I would say. It's not down versus, say, previous quarter. It is quite steady.

Okay. And PCR, OEM and replacement?

PCR OEM, I think, was affected because of the chip shortage as that eases, it will pick up because I think the order base is pretty strong for the passenger car player.

And replacement in the momentum in Q4 looks good.

Positive. I'd say right now, quarter 4 maybe, as I said, latter half of Jan, early part of December, some impact of Omicron in the cities is there. But I think that will again come down as Omicron kind of ends, I'd say we are still kind of going through the wave. Hopefully, in another 15, 20 days things will be better.

The next question is from the line of Anand from B&K Securities.

I just wanted to check, given the current realizations, what is the -- after all the capacity expansion, what is the kind of target revenue potential that we have from the capacity? And not only that, are the new capacities also kind of achieving a similar asset turnover? Or are the investments getting costlier?

So a lot of large capital investments that we have planned is coming to an end. So we have planned about INR 3,500 crores. I think we have about another INR 1,000 crores that is left over the course of the next, say, 12 to 15 months' time, means another maybe INR 100 crores, INR 150 crores in this year, another INR 700 crores, INR 800 crores into next year. So it is more of the balance CapEx that is left. We will be doing about INR 100 crores, INR 150 crores into debottlenecking, which is already also getting spent as we speak. So a large part of the greenfield expansion is over. Now whatever will happen is more likely to be more brownfield and therefore, that will help. And then we have enough headroom to grow. So we will have enough maybe -- enough CapEx for another 25% growth going forward. So passenger car, truck radial, except for OHT, we will have enough headroom for the next, say, 1.5 years to 2 years. So very little plan for next year for any new CapEx, except small CapEx in OHT.

We'll have to go for the next round of CapEx probably from FY '24. Is that right? Is my understanding right?

Yes, we will wait and watch in terms of how the demand situation unfolds, how things turn out at that point. But it's largely the latter half of the CapEx is let for us, which will happen in the coming year.

Sure. And lastly, any comments on the asset turnover?

Asset turnover, as I said, should get better. I mean there will be -- with steel inflation, et cetera, will machinery get expenses as we go forward. That could have some impact, but tire prices are also inflating to a certain extent. But besides that, asset turnover should improve because we're doing largely only brownfield. So you don't have land, you'll have much less building costs that will be there, more about machinery and all that you will have to be putting in, at least for the next phase of say PCR and TBR et cetera.

Sure. I mean just in terms of the ratio, I'm just looking at -- if we put an investment of INR 100 crores, can our revenues be INR 120 crores, INR 130 crores from the investment or will it be only?

Absolutely. No, it will be between 1 and 1.25 absolutely right. 2-wheeler will be higher, but passenger car will be close to 1, 1.1. Maybe TBR is a little bit on the higher side, maybe again, 1.2 to 1.25 type levels.

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

Thank you all for your interest in CEAT, and for your time this morning. I look forward to catching up with you again next quarter. Take care and stay safe. Thank you, everyone.

Thank you. On behalf of Kotak Securities Limited, we conclude today's conference. Thank you all for joining. You may now disconnect your lines.