CEAT : Earnings Call Transcript for Q4FY24

"CEAT Limited

Q4 FY'24 Results Conference Call"

May 03, 2024

MANAGEMENT: MR. ARNAB BANERJEE --MANAGING DIRECTOR AND CHIEF EXECUTIVE OFFICER - CEAT LIMITED

MR. KUMAR SUBBIAH --CHIEF FINANCIAL OFFICER - CEAT LIMITED

MODERATOR: MR. ANIKET MHATRE --MOTILAL OSWAL

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	CEAT Limited
	May 03, 2024
Moderator:	Ladies and gentlemen, good day, and welcome to Q4 FY '24 Results Conference Call of CEAT
	Limited, hosted by Motilal Oswal Financial Services 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. Should you need assistance during the conference call, please signal
	an operator by pressing star then zero on your touchtone phone. Please note that this conference
	is being recorded.
	I now hand the conference over to Mr. Aniket Mhatre from Motilal Oswal. Thank you, and over
	to you, sir.
Aniket Mhatre:	Thank you, Riya. Good evening, everyone. Welcome to the Post Results Conference Call of
	CEAT Limited. On behalf of Motilal Oswal Securities, I would like to thank the management of
	CEAT for giving us an opportunity to host this call. From the management team, we have with
	us Mr. Arnab Banerjee, Managing Director and Chief Executive Officer of CEAT; Mr. Kumar
	Subbiah, Chief Financial Officer; and the Investor Relations team.
	I would now hand over the call to Arnab sir to begin with his opening comments, and then we
	can take the Q&A session. Over to you, sir.
Arnab Banerjee:	Hi, everybody. Good afternoon, and welcome to CEAT's Q4 earnings call. I'll be taking you
	through the business updates for the quarter. And then I shall hand over to Kumar for his remarks
	on the financial performance, then we'll be open for Q&A.
	To start with, we are pretty upbeat with the demand situation in India. Vehicle penetration is still
	low, and trucks still don't travel 1,000 kilometers per day. So there's a lot of headroom.
	Government has been focusing on infra development and national highway network has grown
	60% in a decade. The top players in the industry are well positioned with capacities in place and
	balance sheets that enable matching pace with this group.
	The tire industry is covering a growing share of India's manufacturing GDP and is expected to
	be reaching 3.4% of manufacturing GDP by 2032. We at CEAT had experienced a stellar year
	characterized by a very high profitability of INR635 crores for financial year '24 along with
	double-digit ROCE. The success was further underscored by generous dividend distribution of
	300%, and we have had a stable margin for the quarter and also for the year and strong FCF
	generation. Our ratios have been strong with debt-to-EBITDA being lower than 1 and debt equity
	at about 0.4.
	The tire industry being one of the most competitive industries in India is seeing good level of
	evolution with better pricing independence across segments. During quarter 4, we witnessed
	price cuts in TBR segments by some of the players. But at CEAT, we largely maintained the
	pricing with only marginal cuts in category, while we actually enhanced prices a minor way, in
	the passenger segment as well as farm tyres.
	Quarter 4 and the entire financial year has been a momentous year for us because we are
	celebrating 100 years of our existence in the tire industry. We continue to strengthen the brand
	with targeted marketing expense. CEAT has once again secured the rights to the IPL Strategic
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May 03, 2024

Time Out for the next 5 years so this will be a cumulative of 14 years now were brand property has been with us. Volume performance we grew by 5.4% in the quarter over last year and our replacement market particularly has done well in quarter 4. Exports, grew by 22% on volume and we've witnessed robust growth from Middle East and Brazil along with Europe.

Off-highway tires also witnessed good growth in LatAM and the U.S. market. Replacement grew by 5%, led by growth in TBR, passenger and 2-wheeler segment. With our focus on premium categories we have been able to improve our saliency in premium segments in all categories. PCR market share in replacement again increased this quarter, and now we are close to 17% market share. In 2-wheeler, we have crossed 35% market share and maintain leadership. We have gained market share in TBR as well, though we are still in single digits.

OEM volumes in quarter 4 declined marginally, primarily due to decline in CV and in 2-wheeler tires. Also on a full year basis, our volumes grew by 6.5%, led by export and weaker growth in replacement and OEM segments. By way of demand, domestic situation, as I mentioned, is upbeat, inflation has moderated. We expect above normal rainfall in the forthcoming monsoon season. We expect in most categories, high single digit to touching double-digit kind of volume growth in OEM and replacement markets.

The landscape of tire manufacturing is also being reshaped by increasing focus on sustainability and the already well-known trends of CAESwhich is connectivity, autonomous, electrical and shared mobility.

On the margin front, we should share first that the commodity basket has been flattish in quarter 4 versus quarter 3 in line with our guidance. Natural rubber prices are trending high which had marginal impact in Q4. But if this trend continues, we could have an escalation of RM cost by 3% to 4% in quarter 1.

We have been able to maintain our pricing in OEM segment and export markets. Operational efficiencies helped us to not affect our margin profile significantly. Stand-alone EBITDA for the quarter stood at 13.4% and stand-alone net profit was INR 119 crores. Capacity utilization continues to be good in the range of almost 80%.

I will cover now the extended producer responsibility, which is EPR. In July '22, the Ministry of Environment, Forest and Climate Change issued regulations on EPR for waste are applicable to tire manufacturers and recyclers. This would mean that the goods sold in domestic market, in T -2 years will be considered as base for calculating our obligation. As per this, the company has an obligation as on March 31, 2024 for FY '24 and also for FY '23.

We have provided for the same on a prudent basis, while the matter has been represented to the government with the company and industry forum to apply EPR prospectively and with changes in modality. We estimate the overall liability to be INR107.2 crores for both years FY '23 and '24, and this has been provided in the books in the current year. Out of this, INR34.5 crores pertains to FY '23 obligations and has been disclosed as an exceptional item during the quarter and year ended March 31, '24.

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There has been evolving clarity and the relevant ecosystem gradually coming into place for EPR related cost in action. Going forward, we shall be providing for 100% of the quantity of new manufactured tires based on this formula, this will work out to roughly 1.2% to 1.4% on domestic sales. We expect that we will be able to mitigate this impact on our margins in the medium to long term due to improved product mix, pricing and internal efficiencies.

On the future trends, electrification, we continue our good work in the electric vehicle segment. In the passenger EV segment, we have entered Tata Punch EV, which is a high-volume vehicle. With this entry, we have become a supplier to all EV OEMs that are locally manufacturing in India. We now have close 20% share in the passenger EV in India, and we also have a share of around 27% in the 2-wheeler EV ecosystem in India.

In the commercial EV segment, we have got an entry into switch Mobility's first vehicle as well as Volvo Eicher new SCV, which has been unveiled recently. Internationalization has been a key driver. We have launched 55-plusoff-highway scale in Q4. Export business is margin accretive for us, and therefore, we'll continue to invest in product mix for agri Radial and PCR and TBR. Right now, the export constitutes about 19-plus percentage, and we would like to take this up to 25% in the next couple of years.

Mahindra launched their OJA tractors in U.S. completely fitted with CEAT tires. We are progressing well on channel expansion in U.S. market. The macro situation in Sri Lanka is improving gradually and passenger demand has improved there. However, commercial tire demand is still to come up.

On the premiumization front, we launched the steel radial sportrad and crossrad in the 2-wheeler range. This is meant for high-performance motorcycle. The current potential is about 3% of the overall market and is expected to grow fast. We are also associating with premium properties such as the KTM cup and we are sponsoring several adventure biking events as well.

Our share in premiumization continues to improve, and in PCR, cross drive, sport drive, drive and security SUV continue to gain salience in the whole category. We will continue to invest in marketing spends, which hover around 2% plus range year-to-year and which is the highest in the industry.

As mentioned earlier, our coverage for tires required for BMW, Audi and Mercedes continues to be in the range of 85% to 90% and despite rapid introduction of new models, we'll continue to launch products to keep the coverage at this range. We will continue to have highest RnD spend as compared to peers in the industry for new product development for Indian and global markets.

Our exclusive outlets have reached 550 numbers by the end of this year and our distribution expansion continues into the hinterland of the country. On the digital front, CEAT received smart manufacturing company title at CNBC that rating Manufacturing Summit 2024. We continue to deploy the Industry 4.0 initiatives from Halol to our Chennai plant in line with the light out concept.

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We have had a good engagement in all social media platforms. We continue to focus on increasing our connect with end users digitally. Brand searches for premium vehicles and SUV grew by 9x, 60% increase in brand conversion volumes and 156% increase in average engagement per post per month compared to FY '23.

Furthermore, through website leads, we registered a 50% increase in premium sales. Our CapEx for FY '24 ended at around INR860 crores, the expansion projects are on plan. We reiterate our strategy of doing bitesize CapEx every year. In line with this strategy, we expect around INR1,000 crores of CapEx in FY '25.

We are focused on reducing our carbon footprint, tonne CO2 emission per metric tonne of production was lower in FY '24 by 7%, 36% of our plant power requirement is through renewable sources and at Bhandup plant, which is in the middle of Mumbai City, we installed an auto carbon charging system, which is good for the environment.

Natural rubber sourced by alternate transit route went up to 26%, and the rolling resistance of tires went down by 5%. Overall demand situation is good. We are upbeat about the India story, as I mentioned, and there is a mild inflationary impact in raw material prices there is an EPR impact, and we expect to mitigate the impact of this escalation through better management of our resources.

With this, I would now like to hand over the call to Kumar.

Kumar Subbiah:Thank you, Arnab. Good afternoon, ladies and gentlemen, and thank you for joining our quarter 4 FY '24 earnings call. As the year-end, I will share some financial data points relating to the quarter 4 and also full year, post which we can take Q&A session. Overall financial performance, our consolidated net revenue for the quarter stood at INR2,991 crores, a year-on-year growth of 4.1%, driven by increase in volumes. Our consolidated EBITDA for quarter 4 stood at INR400.9crores, which is 5.8% higher than the same amount of the previous quarter.

The EBITDA as a percentage is a little lower in the current quarter versus the previous quarter, mainly on account of advertisement cost and regulatory costs. The regulatory cost aspect has been already touched upon by Arnab, I'll also explain briefly in terms of the impact of it.

Coming to gross margin. Our gross margin saw an improvement of approximately 100 basis points, driven by better mix and the impact of higher inventory at the quarter. As we come into the current quarter, the prices of key raw materials like natural rubber and crude derivatives have shown an upward trend. In case of natural rubber, we're seeing an upward trend since the beginning of the previous quarter and the same is likely to impact our raw material costs in quarter 1 to the extent over 3% to 4%.

The crude has seen some correction in the last 2 or 3 days, and we hope it's sustained at the current level and if it sustains the impact on raw materials could be lower. Considering these factors, we'll continue to keep a close watch on RM situation and based on how it evolves, well appropriate decisions should be taken.

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Coming to debt, CapEx and working capital. We spent about INR260 crores of CapEx during the quarter so far on a full year basis, we spent about INR866 crores, which is broadly in line with our indications given in the earlier interactions.

I'm happy to share with you our overall operating working capital came down by about INR102 crores during the year and largely driven by improvement in inventories and receivables. We are also happy to share with you that we generated a healthy free cash flow of INR857 crores during the year, which is the highest and that helped in terms of funding all our CapEx during the year from our internal approvals.

Our consolidated debt stood at INR1,629 crores as of 31st March, a drop of about INR470 crores versus the same period of last year. Our debt to EBITDA on a consolidated basis stands at a comfortable level of 0.97 and debt equity of 0.4. Our debt EBITDA of 0.97 is the lowest in the recent years.

Coming to operational expenses, our employee costs largely remained same level as quarter 3. Our marketing spend has increased during the quarter on account of new campaigns, participation in IPL and WPL. This will continue in quarter 1 as well as due to IPL in quarter 1.

For the year, as explained earlier on EPR. During the year, we made a provision of about INR107 crores towards extended producers responsibility. Our of INR107 crores, INR35 crores related to the previous year, and therefore, we have reported that as an exceptional and balance amount has been shown as other expenses in our consolidated as stand-alone books.

In the quarter 4, we approximately provided about INR40 crores after adjusting the provisions that we made in the earlier quarters. The impact of this additional provision that we made in quarter 4 is close to about 1.3% of the EBITDA for the quarter, and this may be appropriately considered while making comparisons with the previous quarters.

Depreciation for the quarter increased due to higher capitalization and commissioning of our assets, and we expect it to remain at this level for coming quarters and in the first half of the year. Interest costs declined during the quarter compared to quarter 3 on account of lower debt and effective is largely the inter statement line in quarter 3, and we expect the interest rate to be in the range of plus or minus 25 basis points into quarter 2.

On a consolidated basis, we have an exceptional cost of INR58.17 crores. As explained just now, it includes close to about INR35 crores relating to EPR. We also have a voluntary retirement scheme launched in one of our factories and the cost of that is about INR7.99 crores and during the year, we also made some changes in the distribution model in Bangladesh and leading to reconfiguration of our business model.

And therefore, we took a call to take a write-off of some of the assets in our Bangladesh joint venture entity, and the impact of the same is about INR15.66 crores. Our overall consolidated profit for the quarter stood at INR102.3crores and on a full year basis, it stood at INR635.3crores.

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	CEAT Limited
	May 03, 2024
	In the Board meeting, the Board recommended a 300% dividend for the last year, which
	approximately translates to about 20% of our profits, and this is subject to approval by
	shareholders in the upcoming Annual General Meeting.
	With this, we can now open the floor for Q&A.
Moderator:	First question is from the line of Arjun Khanna from Kotak Mahindra Asset Management.
Arjun Khanna:	The first question is on the extended producer responsibility part of it. Sir, if you could help us
	understand why was it just taken this quarter given that it came or was notified since 2022,
	November? The second part of the question is, are we registered as a manufacturer and recycler
	or what registrations have you taken? And in terms of the recycling, is the way of doing it
	ourselves and reducing this cost base of 1.4%?
Kumar Subbiah:	You see this notification was issued in the year 2022, as you mentioned, around that period. For
	producers of tires to implement the recommendations of that particular notification. Some other
	conditions included having a portal registered dealer for recycling tires. So that infrastructure
	did not exist in '22-'23. In fact, even the first 9 months of the current year, '23-'24 also, the
	infrastructure was not fully in place. It is because of accounting prudence and to ensure that we
	follow the principles of conservatism, okay, we have made this provision. The company as well
	as the industry body has taken up with the government already to explore options or requested
	government to make it defective prospectively and also with some changes in modalities.
	So it's in the absence of clarity with respect to establishing the impact of it and also inadequate
	infrastructure, okay. It was decided in the previous year, not to provide for the same thing. And
	even in the current year also only towards the end of the year, and the government started
	insisting on fulfilling obligations. It was felt that it is better to reflect it in our financial books.
	In our books, we started providing from the beginning of the year based on our own internal
	estimates. When we came to a some kind of certainty with respect to the amount, we decided to
	provide in quarter 4, whatever was unprovided and also relating to the earlier year.
	The next question, we are not recyclers. So therefore, how we would like to fulfill the obligation
	is to buy certificates from recyclers who will buy those tires from the market and then recycle
	them and convert them into an another useful product, and we will buy those certificates from
	them. And the cost that we have shown in our financial statement is the cost of certificates that
	we would have to buy from these cycles. And we have not registered ourselves as a registered
	recyclers. Those who are in the business of recycling have registered themselves in the portal as
	the registered recyclers.
Arjun Khanna:	Sure. That's very helpful. So just as a supplementary question on this. In terms of EPR certified
	costs, have you seen an increasing trend? And are they available to the quantum that's required
	at this point in time?
Kumar Subbiah:	No, it is not available. It all depends on what is the extent of obligation. And as we said, it is
	because of accounting prudence, we have made all the provisions, it is not available. It started
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	some quantities started being available in the portal from quarter 4 of the last financial year,
	more in the later part of it. If someone were to theoretically arrive at the total obligations for this
	period of previous 2 years and what is required in the current year, a fraction of it is what is
	available at this point in time.
	And in terms of pricing plan, I think it's too early to say anything. It's just starting. I think we
	need more time to understand whether the prices will remain at current market level or will it
	increase or go down. So I think we need more time.
Arjun Khanna:	So just to understand the number that we have utilized for this quarter is essentially the current
	pricing in the market. Is that the right understanding?
Kumar Subbiah:	No, we have not utilized. We didn't buy anything in the previous quarter.
Arjun Khanna:	No, no. I'm saying the quantum. Yes. So the quantum for the accounting provision is the current
	price of the EPR certificate may not be available in that volume, but we have used that price into
	the quantity of recycling that we are supposed to that 35%, 70%, etc.
Kumar Subbiah:	No. We have considered the current prices. We also made some understanding because the
	quantum involved is large. So we made certain assumptions with respect to what is likely to be
	the pricing. And accordingly, we have estimated the liability.
Moderator:	Next question is from the line of Siddhartha Bera from Nomura.
Siddhartha Bera:	Sir, again, just to clarify this point, we have provided INR40 crores in the current quarter. And
	the remaining INR30 crores has been provided in the first 3 quarters. Is it the right way to
	understand this?
Kumar Subbiah:	Yes.
Siddhartha Bera:	Okay. And second is, when you say that the quantum provision for the next year will be
	somewhere about 1.2% to 1.4% of domestic sales. Again, this can vary depending upon the
	pricing in the market? Or do you think this is largely decided and it won't change basically if
	you look at the full year?
Kumar Subbiah:	No, it's an estimate, and it will change because the cost of certificate is what we are taking it as
	a cost. If the certificate cost comes down or goes up, it will have some variation. It is more an
	indicative number for somebody to understand the implications of it. So needless to say, any
	movement in the prices will have some impact on the current estimate.
Siddhartha Bera:	Got it, sir. And sir, my second question is volume...
Moderator:	Could you please return to the question for a follow-up question. Next question is from the line
	of Amarkant Gaur from Axis Capital.
Amarkant Gaur:	My question was regarding the RM escalations that we have seen in the recent past. The natural
	rubber prices are up significantly when the crude may not be. So in your estimate, how much
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price increases will we have to undertake to mitigate those kind of impacts on RM? And how much have we taken? And any clarity you can give on the price that you have taken yet.

Arnab Banerjee:Yes. So coming to the price hike, we did mention that we took a very moderate/ very little price hike in quarter 4 itself in farm and PCR not across the category. In the month of April, by April end this year, in this quarter, we have taken a price hike of around 1.5% in replacement and we are in the process of converting our orders to the new pricing in international business that also will be around 1.5% to 2% as it settles down. OEM is indexed as you know. So OEM pricing is will know the index and calculate the pricing end of quarter 1. So that is the pricing situation. So the price hike is -- the raw material hike is 3% to 4%, then you need about 1.5%, 2% at least to mitigate. So with the lag, I think we will be able to mitigate as to the price hike requirement.

Amarkant Gaur:All right. I have follow-up questions, but I'll fall back in the queue.

Moderator:Next question is from the line of Raghunandhan N. L.: from Nuvama Research. .

Raghunandhan N. L.: My question was again on EPR. Sir, can you please explain the computation because -- when I look at your last 2-3 years, 2 years of calculation, it comes to 1.5% of domestic sales in FY '23 for 35% 2 years ago and 1.4% for FY '24and for '25, you've given a range of 1.2% to 1.4%. One of your peer who also reported results today for them, the math works out to something like 0.8% to 0.9%. So as per the ETR document, it was showing that the calculation is based on weight into conversion factor into quantity. So how do we try and arrive at this number? How is the competition done?

Kumar Subbiah:Okay. See, this is applicable when you produce and sell tires within India, okay. So from that point of view, when you apply as a percentage on our total turnover, it may not be comparable with any other organization unless otherwise, the exports and domestic turnover percentage is in the same range or it's at similar levels, one.

Number 2, I clarified the estimate of cost could vary from 1 organization to another organization. To my knowledge, still 31st of March, nobody would have incurred any cost of significance, okay. So everything that is getting reported is on an estimated basis. So only when you actually incur that cost, you will get to know the real cost and this liability people will discharge over a period of time.

So from our point of view, when Arnab had indicated in his speech in terms of this number, he indicated as a percentage of domestic sales. If you were to convert the expected liability, what would that be based on that percentage. So you should at this point in time, take more as an indicator and the number of percentage to marginally differ from one organization to another organization, while we don't have understanding how somebody else has done.

I think it is on domestic sales. So on domestic sales, since it's not 100% at a certain percentage of our total sales, that is the way it would work out to. And it is also the note, it is around production, not on sales. Okay. If there's any difference between production and sales, that will also have some implications. What you have produced, if you have not sold, okay, you may provide based on production. But it may not exactly match with as a percentage of sales.

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	CEAT Limited
	May 03, 2024
Raghunandhan N. L.:	Just supplementing on EPR, would you need to use more recycled inputs as raw materials? Will
	this lead to increase in RM cost?
Kumar Subbiah:	See, we already use some small percentage of recycled materials. And the product needs to be
	recycled, okay. It doesn't have to be incorporated in the tire manufacturer once again. Our
	endeavor is always as a responsible corporate, an endeavor is to see how to use greener material
	out to use a recycled material so that it has put less load on the ecosystem. So from that point of
	view, if there's an opportunity for us to use more, we will certainly use subject to our R&D and
	recipe permitting that. Okay.
	But however, our endeavor is to see how to create that ecosystem that will develop in terms of
	capability to recycle these tires. I think that is the direction in which industry as well as our site
	will work towards.
Raghunandhan N. L.:	Got it, sir. I'll fall back in the queue.
Moderator:	Next question is from the line of Basudeb Banerjee from ICICI Securities. .
Basudeb Banerjee:	Just wanted to understand like with this year with strong margin and good business, working
	capital also supportive good free cash flow generation, debt reduction. So what is the utilization
	segment wise? And what is the planned CapEx for FY '25, including maintenance, growth
	CapEx as such?
Arnab Banerjee:	So plant utilization is around 80% in most cases, barring TBR where utilization is very high. We
	have almost fully utilised our capacity and we are expecting fresh production from our Chennai
	expansion project of TBR in quarter 2, scaling up in quarter 3 and quarter 4. So TBR is an
	exception. Otherwise, it's closing to 80% in all cases. CapEx is around INR1,000 crores with
	about INR250 crores of maintenance CapEx and about INR750 crores of growth CapEx,
	primarily in Chennai TBR project, then our Ambernath expansion of agriculture radial project
	and also in Chennai PCR projects. These are the 3 main projects for the growth CapEx will be
	deployed.
Moderator:	The next question is from the line of Rishi Vora from Kotak Securities.
Rishi Vora:	This quarter, our volumes grew by 5% and replacement segment also grew in that range. And
	you guided for a high single-digit, low double-digit growth in the coming quarters. So what are
	the key drivers for volume trajectory to improve from here on? Can you just highlight some of
	those that you are seeing on ground? .
Arnab Banerjee:	Yes. So quarter 1 is a positive season for all kinds of tires because of the summer heat when tires
	are replaced where it is also high. So we expect strong volumes in TBR radials in replacement
	market that is. We expect strong volumes in passenger radials, which is also aided by the election
	season. And the rural and small towns are showing signs of recovery. We have had very strong
	growth in replacement in motorcycle and scooter in the past 3-4 months, we expect to continue
	in summer with a gaining market share in both passenger categories.

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