CEAT : Earnings Call Transcript Q1 FY23

"CEAT Limited Q1 FY23 Earnings Conference Call"

July 21, 2022

MANAGEMENT: MR. ANANT GOENKA - MANAGING DIRECTOR, CEAT MR. KUMAR SUBBIAH - CHIEF FINANCIAL OFFICER,

CEAT

MODERATOR: MR. JAY KALE - ELARA SECURITIES PRIVATE LIMITED

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	CEAT Limited
	July 21, 2022
Moderator:	Ladies and gentlemen, good day and welcome to the CEAT Q1 FY23 Earnings Conference
	Call hosted by Elara Securities Private 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 this conference call, please signal an operator by pressing '*' then '0' on your touchtone
	phone. Please note that this conference is being recorded.
	I now hand the conference over to Mr. Jay Kale from Elara Securities Private Limited. Thank
	you. And over to you, sir.
Jay Kale:	Thank you. Good evening, everyone. On behalf of Elara Securities Limited, I welcome you to
	the Q1FY23 Results Conference Call of CEAT Limited. From the management side, we have
	Mr. Anant Goenka - Managing Director and Mr. Kumar Subbiah - Chief Financial Officer of
	CEAT Limited.
	I would now like to hand over the call to Mr. Anant for his opening remarks. Over to you, sir.
Anant Goenka:	Thank you, Jay, and good afternoon, everyone. A very warm welcome to CEAT's Q1FY23
	earnings call and thank you everyone for your interest in CEAT.
	I am Anant Goenka, and we have our CFO, Kumar Subbiah with us on the call.
	As usual, we will start with brief remarks from me, and Kumar, and post which we will be happy
	to take questions and answers.
	For Q1FY23 on financial performance, the quarter saw strong demand in the auto segment as
	some of the supply constraints eased out. As a result, we saw some strong demand uptick in the
	OEM segment.
	In the replacement segments too, we saw some good demand uptick with some improvement in
	the macroeconomic situation. Replacement volumes for CEAT recovered largely led by
	passenger segment.
	Most of the surface mobility trends remained above pre-COVID levels in the quarter. Tractor
	demand saw strong growth versus last quarter, while truck and bus was flattish on a relatively
	higher base.
	Overall, replacement volumes grew at about 8% quarter-on-quarter.
	OEM demand remains strong across segments and volumes grew by about 16% on a quarter-on-
	quarter basis.

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CEAT Limited

July 21, 2022

Tractor segment here too saw the highest increase, a part of which were seasonal followed by last mile and passenger car segment.

Export volumes were flattish because largely on a higher base. Our focus geographies of Europe and North America continued to show strong growth. Overall, our volumes grew at a healthy 7.5% on a quarter-on-quarter and more than 30% versus Quarter 1 last year which was a COVID impacted quarter.

Current demand environment remains positive with normalcy returning across most segments. Monsoon also has been satisfactory so far which we hope will boost rural sentiments, which has been under a little bit of pressure. Inflation has however continued to hurt our bottom line.

Our raw material basket cost further increased by about 4% on a quarter-on-quarter basis which was towards the higher end of our guidance, primarily led by crude derivatives and a little bit price increase of rubber as well. Crude has shown some signs of stability since the last few weeks.

However, we will see some inflation spilling over to Quarter 2 as oil prices remained well over $110 per barrel throughout Quarter 1. We expect a further increase of about 2 to 3% in our raw material basket in Quarter 2. Due to inflation, lowering effective price increases as well as some adverse market mix with higher OEM contribution, our gross margin contracted by about 1.6% over Quarter 4 level.

We continue to maintain tight controls on our operating expenses. Marketing costs went up a little bit because majority of IPL matches were held in the quarter and CEAT remained associated as a Strategic Timeout Partner.

We also got associated with the Women's T20 Challenge as the Strategic Timeout Partner, which we signed in the last Quarter 2.

EBITDA margin for the quarter stood at about 5.9%, partially aided by higher volumes. We ended the quarter with standalone PAT of about Rs. 2.5 crores versus Rs.13 crores in Quarter 4 of last year.

On CAPEX, we are monitoring our cash flows closely. Given uptick in volumes, we maintain our growth guidance, our growth CAPEX guidance at about 750 crores for FY23. Priority will be given to the more profitable OHT segment, some amount of debottlenecking that is under plan and profit improvement projects.

Our OHT segment is ramping up as per plans. We are currently operating at about 67 tons per day which will go up to 80 tons per day by October in our Ambernath plant, which premix primarily manufactures radials for off-highway tyre.

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CEAT Limited

July 21, 2022

On the OEM business, our associations with OEMs continue to improve. We have started supplying to the Ola EV scooter. We also had our first EV launch in the LCV category with Tata Ace. We are working closely with all major EV OEMs and expect to benefit from higher volume growth in the segment, especially two-wheeler EV due to our early mover advantage.

Our operations in Sri Lanka showed commendable resilience during the quarter amidst a highly challenging environment. Volumes have declined as expected. However, our factory continues to operate profitably.

We got some notable recognition during the quarter. Maruti awarded CEAT for overall performance as tyre supplier in the last year. We were ranked 27th by Great Place to Work in India for the last year which is an improvement of three places from 30th rank last year. We also got the Jamnalal Bajaj award for Fair Business Practices for the year in the manufacturing category.

We launched our new passenger platform for Europe called Winter Drive Sport, which is specifically designed to deliver high-speed and control in snow conditions. We now have a complete range of winter tyres for EV.

We also commissioned 70 Megawatts of solar capacity at Bhandup, Ambernath and Nagpur plants. Four of our plants have got enabled for biofuel for boiler operation and we are implementing this initiative at other plants as well. This substantially increases our commitment towards sustainability and a large share of our power is now coming in from renewable sources.

The automotive sector is showing green shoots of recovery after a few challenging years due to multiple headwinds on demand as well as the supply side.

On the raw material side also, we have seen stabilization of raw material prices over the next few months along with price hikes in Q2 and some reduction in raw material prices that we expect in Quarter 3. We feel this may be the end of the worst in terms of margins for the tyre industry.

With this, I will hand over the call to Kumar.

Kumar Subbiah:Thank you, Anant. Good afternoon, ladies and gentlemen, and thank you for joining us in a Q1FY23 Earnings Call.

I'll share some further financial data points with you all, post which we can enter a Q&A session.

First, on revenue, our consolidated revenue for the quarter stood at Rs2,818 crores, a sequential growth of 9% and 48% year-on-year and the growth was mix of both volume and price in both the cases.

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CEAT Limited

July 21, 2022

Quarter 1 of last year was also impacted by COVID wave two, and hence the numbers are not fully comparable.

Now, coming to gross margin and the pricing hike, the momentum in the raw material inflation continued in Quarter 1 impacting our gross margins, which stood at 31.7%.

Our blended raw material cost went up around 4% versus Quarter 4 of previous year. We could take a blended price increase of about 2% during the course of the quarter and the price increases were largely effected in commercial and passenger categories, passenger car categories. There were some price increases in exports and OEM as well neutralizing the impact of raw material costs in those categories.

However, the increases are not sufficient to cover RM inflation. So, our gross margin declined quarter-on-quarter.

The quarter saw crude oil prices largely hovering around $110 to $120 and mostly on the higher end of the range impacting the prices of crude derivatives.

The natural rubber prices remained range bound both in the international as well as in the local market. There has been some correction in crude oil prices in the last two weeks. It's currently hovering around $105 per barrel and the impact of that could be more felt in the next quarter as there is always a lag of about two to three months in terms of raw material prices reflecting the movement and feed stock prices.

The rupee depreciation from around Rs. 76 to a dollar to around Rs. 80 a dollar in the last 2 to 3 months will have some adverse impact on raw material cost but a favorable impact on export realization.

As per our current estimate, we expect our blended raw material cost to go up in the range of 2 to 3% in Quarter 2 versus Quarter 1. We would still need to take more price increases in the coming quarter and hope for some correction in the input prices.

Now, coming to debt, CAPEX and working capital, we continue to optimize on our working capital. Our working capital came down by about Rs. 130 crores during the quarter and we incurred total CAPEX of about Rs. 250 crores including the routine which we largely funded through internal accruals which is a combination of reduction in working capital and cash profit made during the quarter.

Our gross debt stood at Rs. 2,139 crores more or less similar level as it was as of 31st March 2012. Our project CAPEX outlook remains at Rs. 750 crores for the year. In addition to that, we will have a normal routine CAPEX to the tune of about Rs. 200 crores.

We are keeping a close watch on our debt levels, which are still within our internal thresholds.

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