CEAT Limited (500878) Earnings Call Transcript & Summary

Ladies and gentlemen, good day. And welcome to the conference call to discuss CEAT's recent strategic acquisition, hosted by Emkay Global Financial Services Limited. [Operator Instructions] Please note that this conference is being recorded. I now hand the conference over to Chirag Jain from Emkay Global Financial Services Limited. Thank you. And over to you, Mr. Jain.

Thank you, Renju. Good morning, everyone. On behalf of Emkay Global Financial Services, I would like to welcome you all to this conference call. To represent the management. Today, we have with us Mr. Arnab Banerjee, MD and CEO; Mr. Kumar Subbiah, CFO; and Mr. Amit Tolani, Head of Specialty Business. We'll start the call with brief opening remarks from the management, post which we will open the floor. Over to you, sir.

Yes. Good morning and welcome to CEAT's Strategic Acquisition Update Call. I am joined today by Kumar Subbiah, our CFO; and Amit Tolani, who heads our specialty business. I would like to thank all of you for taking the time and joining us today. As you'll know by now, CEAT has entered into a definitive agreement to acquire Camso brand's off-highway construction equipment bias tire and rubber tracks business from Michelin Group. The deal is valued at USD 225 million, which in INR terms is about INR 1,900 crores. This is special for us as this is CEAT's first major acquisition. The acquisition of Camso brand will give us global ownership of the brand, along with 2 manufacturing units in Sri Lanka. For CEAT, this acquisition reiterates our commitment towards the 3 pillars of our growth strategy, which is premiumization; international business saliency; and investment in high-margin specialty segment, which is at the top of our investment hierarchy. I'm excited about this journey; and thank you, being part of this moment. I'll take you through the rationale for the transaction and what it means for us, after which Kumar shall share key financial implications. And Amit is around for answering specific business-related questions during the Q&A. First, the brand. Camso is a premium brand in the OHT segment, tires and tracks, with strong brand equity in North America and Europe. It has a loyal customer base built over the years, across OEMs and distributors, which is based on product superiority, proprietary technology, service excellence and manufacturing excellence. It supplies products to 40-plus OEMs and has an aftermarket network covering 200-plus dealers. It has got good market share in both tires and the technologically intense tracks categories. Some of its customers include JCB, CNH, Prinoth, Manitou and Kubota. What is in it for us? And why have we bought it? As communicated earlier, it fits into our key pillars of strategy, which is premiumization, internationalization and OHT. The OHT segment comprises of agriculture, construction, mining and other industries; and is globally approximately a 28 billion to 30 billion market. First of all, for us, this acquisition increases the contribution of OHT business saliency within CEAT. It is a top priority for CEAT. And after this acquisition, post the closure of transaction, this will form roughly 25% of CEAT's revenues. The transaction will include the business with revenues of USD 213 million in calendar year 2023, which includes tangible assets in Sri Lanka, working capital and the brand. The range is complementary to our catalog of products, which is compact construction tires and tracks, together constituting a USD 2 billion market potential. It gives CEAT an entry into the track segment, which we don't manufacture and sell today, which has much higher profit margins. And it has some proprietary technology associated with it. It's also a less-crowded space, and Camso holds second position globally. In this track market, which is roughly USD 1 billion, about half of the market is premium. And Camso is #2 in this market. The tire segment, which is again another USD 1 billion, the premium share is a little lower at 1/4 of the market; and Camso is a strong player there. In this segment, there is a significant value play also, which is not the case in the track segment where there's no value segment, so in the tire segment, there's an opportunity for a dual-brand play. We have to decide on that. In the track segment, there's a strong proposition with a premium brand play. Secondly, internationalization. We have been talking about raising the saliency of margin-accretive international sales from 19%, 20% to 25%. Post this acquisition, the contribution will be close to 26%. Thirdly, this enhances the premium element of CEAT's overall product portfolio given Camso's steady premium positioning across all segments of the OHT market. This will significantly enhance realization in our own specialty category. Now we also see and I will explain later, beyond compact construction segments, how we can leverage the Camso brand over the next 10 years. We have a long history of successfully operating in Sri Lanka through our JV with Kelani Tyres over last 2 decades. Hence, we are well positioned to enhance the operational activity in Sri Lanka for the Camso plants. We know the ecosystem well. We know the regulations well and we know the people well. Let me now throw some light over the transaction parameters. Michelin brought (sic) [ bought ] this brand in 2018. And it's several categories, including compact construction. We understand that their priorities may have changed over the years, as compact construction tires and tracks, which is being bought by CEAT, is primarily a bias category tires. They might have decided to exit the category and focus more on radialization. And I mentioned about the emergence of value segment in the track -- in the tire segment of compact construction, which also may be sitting on their minds. The transaction includes business which is around USD 213 million in current year '23; and global ownership of the Camso brand, along with the manufacturing facilities. The margin profile of this segment of the business is in high double digits, maybe close to 20%. We still have about 35% headroom in terms of capacity utilization in the Sri Lankan plants. The capacity is roughly 200 metric tons per day and split equally almost between tires and tracks. The manufacturing facilities have been operational in Sri Lanka for the last 40 years, servicing global demand; is in world-class shape under Michelin patronage. And of course, the integration of a well-run plant even may have some challenges during the integration, which we will definitely face and handle. As per our agreement, the Camso brand will be permanently assigned to CEAT across categories after a 3-year licensing period. This will expand CEAT's product portfolio in the high-margin OHT segment. Let me remind [ us ] that the Camso brand straddles a turnover of USD 1.2 billion across different categories, including compact construction, which is being manufactured in the plant today. So after 3 years, this entire set of categories will be available to CEAT. So this compelling opportunity today that we are talking to you about is not only tires. It's also about rubber tracks. We spoke about rubber tracks in compact construction. There is rubber tracks in harvester. There is rubber tracks in agriculture segment also. And about 80% of these futuristic segments, for us futuristic, 80% of that is premium. And Camso is #1 brand in rubber tracks in agriculture and harvester. It is #2 in construction equipment. This is much higher in profitability, and there is no value segment play here at all. So on an overall basis, I think we are looking at it positively in, first, business continuity; ramping up the capacity in the Sri Lankan plants in compact construction tires and tracks; and after 3 years when the brand is assigned to us, making foray into the profitable agriculture tracks, harvester tracks, power sports tracks and other categories that we can enter with this kind of technology. So today as we speak, the plant is 50-50 in terms of capacity between bias compact construction tracks and tires. The channel is roughly 53% OEM and 47% aftermarket. Geography: As I mentioned, key geography is U.S. with 60%, and balance mostly in Europe. We are also acquiring or getting a team of qualified manpower base of roughly 1,600-plus employees, primarily in the manufacturing setup in Sri Lanka and a few highly qualified employees in the product development setup from outside Sri Lanka. We see a strong cultural and operational fit between Camso and CEAT, including high emphasis on customer experience and employee experience, which is close to CEAT's TQM culture and people management approach. Michelin Group and CEAT have agreed to work very closely in transiting this business from the seller to the buyer across the value chain. We do not foresee any layoffs at either of the plants we are acquiring. As a people-focused organization, we prioritize the well-being and stability of our workforce. So as we embark on this new chapter, I thank you for your trust and support. The transition will bring both opportunities and challenges. And I want to assure everybody that we have a detailed plan worked out between Michelin Group and CEAT to ensure a smooth and seamless integration, with focus on continuity. Our first-100-day plan is business continuity in terms of the entire value chain, especially in relation to customer requirements. We will build on the synergies and strengths that this acquisition offers, unlocking new opportunities for growth and innovation, with TQM as the mantra and people-friendly policies being in CEAT DNA. With this, I will pause here and hand over the call to Kumar for his remarks.

Thank you, Arnab. Good morning, ladies and gentlemen, and thank you for joining on this very important moment. As you are aware, the total deal value of this transaction is about $225 million. This $225 million includes manufacturing facilities; inventory; intellectual properties like brand, trademarks, patents, et cetera. We will be carrying out this transaction on asset purchase model. And the acquisition of this business is in line with our capital allocation, where priority is given to our specialty, through OHT business, and also to our international business. As you're all aware, that our balance sheet has strengthened over the last few years significantly. And that covers our leverage ratios, and hence, we are comfortable with respect to this acquisition. Our current leverage ratios currently stand healthy at debt-equity of around 0.6 and debt-EBITDA of 1.2. We expect our actual fund flow to happen over after 6 months once all the approvals are in place. We will be financing the acquisition through mix of internal accruals and debt. We expect the debt to be of -- 70% of the total value, and balance through accruals. Our incremental debt at no point in time will not -- be more than 70% of the overall value of the transaction. Given CEAT's healthy financial position currently, it is very well placed to acquire the business. And we have already received necessary help and support from various banking partners. Also it is important to note that the deal value of -- includes some amount of payments which will happen progressively as per the agreed schedule. Considering that the deal would happen in the financial year -- quarter 1 of the financial year, we expect the acquisition value to reflect in our consolidated profit and loss account and balance sheet only after quarter 1 of next financial year. In the next 6 months, we will be carrying out various -- we as well as the seller would be applying for various regulatory approvals in Sri Lanka, India and all other relevant parts of the world. And we expect the margins -- acquisition to be margin accretive. And EPS would be accretive over a period of time. Post funding of this acquisition, we expect our debt-equity ratio to be still within our threshold of under 1 and debt-EBITDA ratio to be under 3. We'll continue to drive CEAT's growth journey through organic and selective inorganic opportunities, strongly driven by our capital allocation guidelines. We'll keep updating you on our future -- in our future quarterly interactions about the progress till the formal closure happens. Now we can open the floor for any Q&As.

[Operator Instructions] The first question now is from the line of Mumuksh Mandlesha with Anand Rathi Institutional Equities.

Congratulations on the acquisition, sir. Firstly, sir, how should we look at this underlying industry segment growth, i.e., for the bias compact tires and tracks? And also, is the segment seeing any change to radialization? And also, can you help us know how the Camso revenue performance has been over the last 5 to 10 years? And how had it been yielding market share?

I'll answer the first part of the question. The industry is -- I mentioned the compact construction tires and tracks has been 2 segments. Both are roughly USD 1 billion size. The growth in compact construction tires is roughly 2% to 3%. The growth in compact construction tracks is roughly 5% to 7%. So that has been the growth rate. What was the other question?

Sir, on the radialization, any change happening?

Radialization, yes. So as I said, tracks will always be bias. So that will be bias forever. The tires -- there is some radialization that has happened and will continue to happen. However, the core of compact construction tires will be bias because of the terrain it operates in, because of the machines and applications that it is subjected to. It requires strong sidewalls. And the increase in life of radial tire and the increase in costs of the radial tire doesn't create a good value equation for the customers, so the core of compact construction tire will be biased, with some radialization in the fringes. The tracks will be 100% bias. On the revenue trend...

And the revenue trend over the last 5 years. And post COVID, in the year 2021 and '22, the business saw some good growth momentum. In the year '23, there was marginal decline because of a higher sales happened in the previous years. So largely in the range of about 5% to 6% kind of a growth is what happened till 2022. There is some drop in 2023.

Got it. And sir, it would be gaining some market share there because a low cost base we have in Sri Lanka.

Market share...

[indiscernible]

What is the market share?

So the market share of the brand is in 2 digits. And they are market leaders in the premium segment. So that's what we have seen.

Okay, got it, sir. Sir, the manufacturing base is in Sri Lanka, so though we are exporting only, is there any challenge or advantages in terms of operation and ForEx, et cetera as the economic situation in China has been volatile? And [ any form restructuring you would require ], sir?

No. See, with respect to ForEx, actually it's a plus. A couple of years back, I mean, Sri Lanka faced issues on account of currency, okay? Those who were dependent on imports where currency outflow happened faced some challenges. Considering that we have a JV in Sri Lanka and -- we had a little bit of challenge with respect to imports, import payment. This entity is 100% exports, earned all of that income in foreign currency. So therefore, generally there will be a -- government as well as government agencies will be supporting and encouraging such entities who are highly export oriented, so from that point of view, we do not expect any issues, in terms of this unit being located in Sri Lanka, with respect to ForEx. Otherwise, I don't think there is any major concern, as far as in terms of location of Sri Lanka, from overall geopolitical reasons point of view.

[indiscernible]

Any restructuring required, sir, for that unit, sir?

Can you repeat the question? Sorry.

Yes. Any form of restructuring required for that Sri Lanka plant?

Restructuring. See. Look. We are going to get this manufacturing facility, along with people who are currently working in that particular facility. What we may have to do is maybe we may have to add some hardware, okay, so that the unit is fully self-sufficient, okay, so which we would be doing in due course of time so that there is no dependence with respect to -- or it is fully independent in terms of its ability to handle all operations of manufacturing. Otherwise, there's no restructuring planned.

Next question comes from the line of Chockalingam Narayanan with ICICI Prudential PMS.

Sir, one question was with regards to I think you talked about $1.2 billion of revenues that this business currently does. And it will be available for this factory [ to do ], so could you kind of elaborate on that?

Camso does a business of USD 1.2 billion from various factories, including Sri Lankan operations, operations in U.S. and operations in EU. The segments are compact construction, mining, power sports, agriculture, material handling, harvesters, so and so forth, solid tires, right? So when the brand -- this brand straddles this business. The factories that we are getting as part of this deal manufactures compact construction and tracks only. They don't manufacture any of the other categories which I mentioned, so when the brand is assigned to us after 3 years, we can make a foray in any of these categories with Camso brand. And the manufacturing of that will have to come through some other facility which we have to invest in.

So -- okay. So today it's -- I'm assuming you'll be present in some of those categories today. What is the pricing difference between your brand and Camso which is there in those categories?

Sure. So while our realization stands close to $3 to $4 per kg, we see that Camso's realization in the -- in similar categories is anywhere between $5.5 to $7 per kg, so around 35% to 60% of premium over our brand.

And to kind of work in that kind of a category, would you have to -- how much of CapEx would you need to kind of put in?

So as I mentioned, first -- our first objective is continuity. And we have about 35% upside in the Sri Lankan plant in compact construction tires and tracks. We'll first -- our first focus is to utilize that capacity. Post that, the tracks across various segments have significantly higher attractiveness in terms of the brand power, the trust as well as margins. So this will be relevant only after 3 years, so we'll have to work out which of those categories we would like to first make an entry. Should we invest in house or outsource capacity? All those things are under consideration, but we'll definitely make a foray. We will update you in -- subsequently when we are ready.

And would you be receiving any licensing revenue from Michelin?

No, we won't be receiving because licensing is given to us by Michelin in the first 3-year period, and post which, the full ownership of the brand or assignment of the brand will happen. So therefore, the total consideration value includes all, includes the -- some portion that has been assigned for the purpose of licensing, which is a small portion of it.

And Michelin's press release has this word of 4.9x (sic) [ 4.6 ] adjusted EBITDA. What does adjusted EBITDA here mean?

No. I think -- see. look. We relied on actual EBITDA for the purpose of evaluation of the business. And there could always be upsides whenever you buy a business, so we went by what has been achieved. And there are some opportunities. As Arnab just now mentioned, there's an upside possible in terms of utilization of the plant at a higher level. So our evaluation is based on whatever they have achieved in actuals in the last 2 or 3 years.

So if we were to understand what's the difference between the two, would it be possible to quantify?

See. I think in earlier conversations it was mentioned that, at this point in time after their way of issuing financial statements, we saw a number of -- mid-teens kind of a margin number in the financial statements. That was the basis on which we have done that evaluation.

Understood. And as part of this, how much is net working capital today?

No. What we would be getting as part of this value is the manufacturing facilities, normative level of finished goods inventory, normative level of raw materials and some engineering items. We are not going to take over any other elements of working capital as part of this, so you assume it's a -- some current assets would be coming along with it. Liabilities and receivables is something which will come into working capital of ours once we completely take over the business.

Okay. And last question from my end: What's the CapEx currently being incurred for this business? And how much of hardware incrementally required that you kind of mentioned? How much would that entail?

I think there's not much of CapEx. In the last 3, 4 years, the seller has upgraded the plant to some extent, considering capacity utilization is not very high, so therefore, with respect to adding capacities, not much of CapEx is required. However, once we take over this business, some amount of -- small amount of CapEx, we will have to incur so that the plant is fully sufficient. We do not expect any significant CapEx in the initial period. At least 3, 4 years, we don't expect anything, as far as this particular plant is concerned.

[Operator Instructions] The next question comes from the line of Siddhartha Bera with Nomura.

Congrats on a great acquisition. Sir, first question again is for some near-term numbers, if you can share, in current year. What is the revenue and margins you are looking at for this business in FY -- CY '24? And if I look at then a bit longer term: You mentioned that they are already the #2 player in these categories. And given the industry size, about 10% market share is what it seems to have, so in the longer term, do you see scope of market share gains? Or how has been the history? And what are the drivers which can help us achieve that?

Yes. So let me answer the second part of the question. We have -- got this business with an eye to market share gain. So both in construction tires and where we see a possibility of a dual-brand play; and in tracks, where we'll focus on the premium brand of Camso, we see definitely a scope of market share gain through better engagement with OEMs in NPD and also in the aftermarket situation. So that's number one. The market share, I -- let me clarify. In rubber tracks, our market share -- Camso market share is 20%, entirely in premium segment. So 20% of the entire market, entirely in premium segment. And the tires market share, where there's a value play also, the -- and Camso being in premium segment, market share is 10%, so with Camso as well as with the dual-brand strategy, we see our market share growing. This production of tires can happen in Sri Lanka as well as in our existing setup in Bhandup and Nashik, so this is possible. So therefore, we'll -- supply-wise as well as intent-wise, we are looking at higher market share definitely in the tires and tracks businesses. And looking at current year, you asked about current year situation, which is calendar year FY '24. We expect turnover to be lower than the USD 213 million that we mentioned in calendar year '23 because of 2 issues, primarily the headwinds in the market that we see in the OEMs, which we are also experiencing, all players are experiencing; and secondly, because of this transition kind of situation. And there will be a drop. And since fixed costs are not going away, there'll be no retrenchment or layoffs, so therefore, the margins will also appropriately drop. And we saw this during the deal, and we'll see this coming back up when the value chain transfers to us. So it will climb back up FY '26, '27, onwards.

Got it. And in the medium term, do you see a possibility of shifting some of the plants from Sri Lanka to India, also given the currency scenario which we also have faced in the past and other macro issues? Or do you think you may continue from there only, in the medium term, to sort of address the demand?

We intend to continue utilizing the capacity of Sri Lankan plant, which there's a headroom of around 35% at least, as we mentioned earlier, but there could be opportunities for faster growth through manufacturing in India. So looking at the customers and growth opportunities, we could manufacture additionally in India. We are not looking at transferring any capacity out of Sri Lanka to start with.

[Operator Instructions] The next question comes from the line of Amar Kant Gaur with Axis Capital.

Congratulations for a great addition, sir. My question is largely on the brands and synergies that we see, so -- and let me get it right if this understanding is correct: that after 3 years, you would be able to sell the other type of tires under Camso brand which could be manufactured in plants outside of Sri Lanka. Is that correct?

Some items could be manufactured in the Sri Lankan plant, from the other categories. We have to look at that. We think [ some more ] categories can be manufactured. And some could be manufactured outside Sri...

Okay, got it. And sir, in terms of the addition of the brand, is the new categories the only benefit that you're seeing? Or are there some more synergies, quantitative synergies, that you are looking to invoke with this acquisition?

See. There will be synergies in the plant operation, in raw material procurement, in supply chain logistics. There is a cost structure which we have seen is being incurred today. When we get in, we will realize what we can do with it, but we would not be able to quantify it right now because the deal has not closed. There'll be 5, 6 months of [indiscernible], but intuitively we feel, in terms of channel, there is synergy. The CEAT brand and Camso brand [indiscernible] value play. Camso will be a premium play. So across the OEM and distribution channels, there'll be cross-selling possibilities which are there. And the new categories, of course, is a completely new opportunity.

And sir, finally, just one last thing, in terms of fungibility of capacity. You're talking about 50%-50% capacity being utilized for tires and tracks. Would there be fungibility if one segment were to grow faster than the other and you try to utilize more of the other plant [ for this thing ]?

As things stand now as [ we inherit ] the capacity, it is not fungible.

Okay, okay, so if one segment were to grow faster, then you might need to invest more in that particular segment, maybe in Sri Lanka or India, whatever the case may be.

In downstream only. The upstream is common. Like in all tire plants, the upstream has no difference. In downstream capacities, we have to create something if one category grows faster. Or we can shift it to India. That is a separate thing. Or we can invest in Sri Lanka itself.

Understood. And just one clarification: You said you will just be acquiring assets, so there is -- there will not be, I mean, any debt that will be absorbed, so it is a pure-cash deal that you are [ doing here ].

Yes, true, because it's an asset sale basis the seller is selling. So we will be acquiring assets. We'll be acquiring stocks, others. And we will -- it will -- we will take it in another entity, okay? We already have a presence in Sri Lanka, so we are evaluating how, but it will move to another entity which will be owned 100% by CEAT India. So we are not inheriting any of the past liabilities, including payables. Everything will be up fresh from the day that we take over the business.

Understood. And sir, pricing difference that you talked about between CEAT and Camso brand currently, that difference should go away as and when you start manufacturing [indiscernible] supplies from the Camso plant. Or would that [indiscernible] to assume that, that difference will go away completely.

Sorry. Can you repeat your question, please?

What I'm asking is -- so there's a fair bit of a pricing difference between the Camso brand [ and the CEAT ] brand, right? And once you get the -- hold of the licenses, you own those licenses, you would be able to sell the CEAT-manufactured products also under Camso brand, so the pricing difference between those two should go away completely. And the $3 [indiscernible] would go up to $4.5, $5 per kg. Would that be a fair statement?

No, it is not, because the customer pays for the brand irrespective of where it is manufactured. So Camso will always be a premium play at similar levels at which it is selling today. And CEAT will be a value play at similar levels that CEAT is selling today. So there may be a dual bland -- dual-brand play in some categories; for example, in tires. In tracks, we may not introduce CEAT at all because the market doesn't have any value play at all, so we will play only with Camso, at the current level.

So then the CEAT brand will continue to be a category in the brand where -- in the -- be a -- play in the categories where Camso is already playing.

In a different segment. Camso is in the premium segment. CEAT, if at all, will be in the value segment where a value segment exists. We may not be willing to create a value segment on our own initially.

The next question comes from the line of Jinesh Gandhi with AMBIT Capital.

A couple of clarifications. One is, [ with respect to ] the Camso brand, you mentioned revenues of $1.2 billion across various categories, of which $213 million is from tracks and construction tires. So what happens to the branded revenues post 3 years and brand comes to us? Should -- balance $1 billion of revenue which Michelin has not sold, do they move to other brand? Or they will pay us some brand royalty. Or how it will work after 3 years, for those $1 billion of revenue which is not acquired by CEAT?

So CEAT will get access to all those categories after 3 years because of brand is going to be assigned to us. In the meanwhile, Michelin may migrate some of those -- migrate from some of those categories to some other brand in their own stable. So that is how the deal will work.

Okay. So they may migrate it to some other brand. Got it. And second...

Yes, but just to clarify: Compact construction and tracks, Michelin will completely exit. They are not going to compete in these categories in any brand of their own.

Right, right. And secondly, you mentioned margins were close to 18% to 20%, but if we go by the press release of Michelin and go by that EV [indiscernible] EBITDA 4.6, then implied margins are about 23%. So is that [indiscernible] difference between the way they're calculating EV, which will include debt as well and hence the difference? Or you primarily were rounding it off to 20% and the margin [ are close to ] 23%.

No. See. Look. In their public statement, they used the word "adjusted EBITDA," okay? So we relied on actual EBITDA when we arrived at the valuation. So therefore, that is always subjective in terms of what you want to adjust to arrive at adjusted EBITDA, so -- and therefore, that -- they've come to a number of whatever they have published.

Okay, okay, got it...

They used the word adjusted EBITDA, not actual EBITDA.

Okay, got it. And lastly, what would be the current overlap in terms of the category of -- in terms of CEAT's specialty tire revenues with the Camso's brand? I'm guessing it would be largely on the construction tire side, so what percentage of our specialty revenues come from construction tire?

So we are highly focused on the ag segment today. And most of our revenues come from the ag segment in the international markets. So construction is a very small percentage of our revenues in the specialty play today. With Camso, we get an access to the construction segment; and we have a huge portfolio there.

Right. And is there a scope to use Camso brand in ag category? Would it be relevant? Or I mean I'm just trying to understand if the use of Camso brand in ag can enable us to improve our realization.

Yes. The channel is the same. The customers are the same. The distribution is the same. The OEMs are the same, so there is a definite possibility for us to use the Camso category in the ag play as well.

Got it. I have more questions. I'll come back in queue.

Next question comes from the line of Mitul Shah with DAM Capital.

Congratulations. So my first question is on SKUs, how we are placed in terms of we have full range, or there is a potential to further expand the SKUs vis-à-vis competition; and how the competitive landscape in terms of SKU as well as network; or any further potential for penetration in new geographies.

So in the compact construction category as -- Camso is the market leader, so they have a complete range of SKU and customer offering. So we see that the range is totally complete. There are certain projects also that they are doing with various OEMs, which is [ industry-first ] sizes that come in. And that is also something in the pipeline. So from a range point of view, it is more or less complete. And since they are market leaders, they have the adequate range.

Even on the tracks side and on the network side...

When I say construction, it includes both tracks as well as tires, yes.

Okay. And network-wise...

So network-wise, the distribution is more than -- 200-plus distributors worldwide, high-quality distributors; and more than 40 OEMs that they have access -- that we have access to now, so very well entrenched in terms of distribution as well as OEM coverage.

The second and last question is on plant-wise efficiency. Is there any further scope for improvement in plant efficiency irrespective of the utilization, if we assume utilization to remain more or less stable at present? And whether it's more efficient compared to India plant. Or India plant is a relatively better productivity.

The plants are very well run, very well maintained. And the -- we are aware of some of the efficiency figures. They're absolutely world class; very, very well-run plant. With, of course, use, utilization of -- further utilization of capacity, efficiencies will get enhanced to the extent of fixed cost coverage, but as it is, even today, the plant efficiencies are very good.

Next question comes from the line of Rishi Vora with Kotak Securities.

Congratulations for the acquisition. Sorry I missed it, but did you, by any chance, share the actual EBITDA numbers for CY '23 and 9M of CY '24? Just for us to get some sense on the profitability despite a challenging environment at this point in time.

See. Look. It is not a separate company by itself. What -- these are all called-out numbers. We are unable to share at this point in time. We'll be able to share an update once it becomes part of our business so that we'll be able to have more hold on those numbers.

Understood. And can you also comment, what would be their average ROCEs over the last couple of years? Just to give, get some sense on the business.

See. On the margin side, it is around mid-teens, okay? On the ROCE -- if you were to set up a plant of this size, okay, we would need to incur that much amount that we are paying for the total value. So that includes other elements also. We expect ROE -- ROCE to be attractive, but we'll give you updates as we start operating the business. But it is -- we expect it to be higher than Indian ROCE. And we expect the margins to be accretive to CEAT India. So beyond that, I think we'll give you more updates in the future.

And for -- on a FY '25 basis, once the integration happens, should we assume that it would be initially an EPS-dilutive transaction? And maybe, from '27 onwards, it will become accretive.

Yes, on the margin side -- okay, look. On a financial year basis assuming that, by quarter 1 of next financial year, this happens, maybe for 9 months we will have the revenue and balance sheet consolidated, okay? We -- yes. We hope margins could be accretive for the next year. From EPS point of view, maybe 1 to 2 years from then, it's possible for it to be EPS accretive. That's the way we are seeing at this point in time.

Next question comes from the line of Joseph George with IIFL Securities.

I have 2 questions. One is when we look at the business model which is practiced in India of manufacturing it in a low-cost geography; and then exporting it to, say, U.S., Europe, et cetera. Players in India make 25%, 30% EBITDA margin, so this business, with a similar structure of low-cost manufacturing and higher-realization markets, does this eventually have a potential to go to a 20%-plus kind of a margin?

In a steady state when we get in and have run the full value chain to ourselves, it has the potential of replicating those kind of margins.

Understood. And the second question that I had was you mentioned that you have access to about 200 distributors or dealers you call it. Now do any of these dealers and distributors overlap the existing network for the CEAT specialty brand, or will these entire 200 be incremental? And if it's incremental, does it provide you the opportunity to use these distributors for the CEAT brand as well?

Yes. So the overlap is very minimal. As I said, that CEAT's portfolio is more ag focused, agriculture focused. And this is a completely construction -- compact construction and OTR space, so the overlap in terms of OEMs as well as distribution is very minimal today. And we get access to these distributors as well.

Yes, but would those distributors be useful in the context of selling what CEAT makes in the specialty division today?

Yes, yes. They would be relevant and contextual with our range that we currently have.

Next question comes from the line of Himanshu Singh with Baroda BNP Paribas.

Sir, just wanted to understand. What is the revenue split by geography and segment for the Camso brand currently?

So it's 60% of the revenues come from the North American market. 30% of the revenues come from Europe. 6% comes from -- 4% comes from South America, and rest is the rest of the world.

Okay, sure. And sir -- so Camso brand, like, they have been in very specialized markets, so are we getting anything on the R&D front also apart from the factories in Sri Lanka? Are we getting the R&D team? Or anything on that, sir?

Yes. So we are getting people who have the expertise in product development. So they are coming along both from Sri Lankan team as well as from outside Sri Lanka. We are getting all the technology. They use some proprietary technology in manufacturing the tracks, so we'll have access to that, of course. All technologies being used in the plant to manufacture the current product portfolio servicing current customer needs are also coming to us. From here on, future development will have to be on our account.

Okay, okay, sure. And just last question: So from our portfolio in the specialty side, how much of the remaining USD 1.2 billion business which Camso currently does we can actually like cover out of that?

So agriculture tires, bias and radials, we are in that business today, so that can easily migrate. We are selling in CEAT brands, and some of that can migrate to the premium end. For others, which is tracks -- and for some other segments, we'll have to develop the range and introduce into the market through a production setup which could be internal or outsourced.

Sir, any indication in terms of what portion of the $1.2 billion we can like service from our existing portfolio?

Yes. So the tires part, some of it can be serviced. The tracks part which is there in various segments, that is completely new to us. So you can say, from our current capacity, it will be 10%, 20%, maybe 30% at best.

Next question comes from the line of Abhishek Jain with AlfAccurate.

Congratulations, sir. Sir, how much -- how many SKUs the company will with -- would add, post this acquisition, in OHT segment.

So more than 750 SKUs would be added into the profile -- in the portfolio.

So total SKUs will be around 900. Plus 750, it would be around 1,650 for the CEAT in OHT segment, sir...

Yes. After the addition, we will be more than 1,700 in terms of our portfolio.

Next question comes from the line of Rishi Vora with Kotak Securities.

Just on the distributor side. Today, for Camso brand, we have 200 distributors. And obviously the -- one of the reasons why they would be our distributor is also because Camso brand was linked to Michelin brand. And now with CEAT taking over and globally we are obviously not as renowned as Michelin -- so will the margin structure change? And how easy or difficult for us it will be to retain these distributors.

So Camso brand existed before Michelin took over in 2018. And it was a premium brand right through its history. So the interaction during the due diligence phase that we had with OEM customers and some distributors is that the brand matters. The service matters. The product performance matters. The premiums didn't go up when Michelin took over. Therefore, the premiums may not go down when Michelin is selling it to us.

Next question comes from the line of [ Jatin Parashar with Parashar Estate Private Limited ].

This is my first time talking to any company, sir. So my question is that, sir, if we took this -- if we are taking this company, sir. So if I talk about the quick ratio, sir -- so will it hamper or not, sir?

Can you please repeat your question?

My question to you is that, sir -- from the quick ratio, sir. If -- you said the 30% will come from equity and 70% from -- come from debt, sir. So if we follow up the balance sheet, sir, the quick ratio is very less. So will it hamper, sir, or not, if we are not able to manage the current shortcoming, sir? So how will this -- how this -- will this acquisition be useful? Or what will it -- happen, sir? So this is my question.

Okay. See. Quick ratio is basically a better version of current ratio, okay, where -- our understanding. I'm just saying. So assets which can be -- current assets and current liabilities which can be converted into cash within a period of 6 months is normally we call it as quick. And current assets, say, average about a year. That's the way we see. We don't see any implications with respect to that because of this acquisition. As of now, [ say, it's ] working capital is a little on the negative side. I do not think it will undergo any change on account of this particular acquisition, so therefore, it may not have any adverse impact. I hope I've responded to your question. Congratulations. Congrats for asking your first question to CEAT management team. I'm sure more insightful questions will be addressed to your future clients. Thank you for giving us an opportunity to respond to your first question.

The next question comes from the line of Amar Kant Gaur with Axis Capital.

My question was on the acquisition that Michelin [indiscernible] at the time of that acquisition, the margins were about 14%. And in your opening remarks, you mentioned that the margins [indiscernible] that you have acquired is high teens...

I -- your voice is not audible...

There's noise in the background. We can't hear...

Just a second, please. Is it better now?

Yes.

Yes. So my question is, when Michelin acquired this business, the margins that they had reported was about 14%. And in your opening remarks, you said that the margins of the business that you acquire is in the high teens, close to 20%, so is the reason for that is that you have acquired a higher-margin bit of the business? Or the margins of the entire business itself have gone up over the years. And what has led to this margin improvement?

So firstly, we are not aware of the overall margin of Camso brand. We are aware of what we have seen in the construction equipment segment. Post transition, this business has potential to have very strong margins, which we have indicated. In one of the questions, we also indicated it could track close to 20% or even above 20% in a stable situation.

Next question comes from the line of Ronak Mehta with JM Financial.

Congratulations, sir, for the good acquisition. I just have one clarification on the depreciation part of -- so given that now there will be some licensing fees which will be applicable for the 3 years; and there would be also customer contract, [ trademarks ] which would have come along with this acquisition, will -- is the understanding correct that, for the next 3 years or -- there will be an accelerated depreciation? And post that, the depreciation to normalize.

No. See. Look. The brand -- full ownership of the main brand comes after 3 years, so there will not be any depreciation associated with that. We can assume that it will be replaced by some licensing fee portion. So after it becomes part of our -- brand becomes entirely with us, there may not be any material change, okay? So as we deploy the brand for larger applications, for a larger turnover, et cetera, we should -- in fact, the total income or total revenue that this brand would generate should be able to offset more than the depreciation. And we will take a reasonable period of time with respect to life of these intangible assets and accordingly depreciate, so overall, we do not expect any high level of depreciation in the initial period; even post that also, with respect to depreciation as a percentage or depreciation per kg, may not be very different.

The last question comes from the line of Ashutosh Tiwari with Equirus Securities.

Yes. The first question is [ mainly ], out of 200 distributors that you talked about, how many would be common between Camso and what CEAT is catering to right now.

So Ashutosh, there will be only few distributors that are common that cater to CEAT and Camso today.

So you will be able to sell all these agri tires you're selling the market through these distributors over time. That's the main benefit.

Yes.

Yes, yes.

And secondly, on the depreciation part, roughly what depreciation we expect per year on this. Because this also includes intangible plus also inventory, so what will be the depreciation per year?

No. Depreciation is linked to the life of the asset, okay? And plant and machinery is sufficiently depreciated in the books. We have not applied our minds in terms of what it will be. It will be normal levels of depreciation that -- you're seeing it in -- even in CEAT's P&L as a percentage of value of assets.

So around 5%, 6%, we can say...

No. Plant and machinery may be a 5%, 6% because generally the life of the plant and machinery is about 15 years, okay? So we could assume with respect to plant and machinery. With respect to intangibles, we are in the process of working out what should be the right life, for the purpose of depreciating that, okay? And we will share more details maybe in due course of time, but it is not likely to be more than that range, 5%, 6%, that you indicated.

Ladies and gentlemen, due to time constraints, we have reached the end of question-and-answer session. I would now like to hand the conference over to the management for closing comments.

So thank you very much for this special analysts call. And thanks for some of the questions which were indeed very high quality. And we will be able to share more and more as we get closer to the completion of the deal, which will happen in quarter 1 of next financial year. Till that point of time, bear with us. And we will be in touch with you in a most transparent manner as we have been always. Thank you.

Thank you. On behalf of Emkay Global Financial Services Limited: That concludes this conference. Thank you for joining us. You may now disconnect your lines.