CEAT : Earnings Call Transcript Q4 FY23

"CEAT Limited

4Q FY '23 Earnings Conference Call"

May 05, 2023

MANAGEMENT: MR. ANANT GOENKA - VICE CHAIRMAN - CEAT

LIMITED

MR. ARNAB BANERJEE - MANAGING DIRECTOR AND

CHIEF EXECUTIVE OFFICER - CEAT LIMITED

MR. KUMAR SUBBIAH - CHIEF FINANCIAL OFFICER -

CEAT LIMITED

MODERATOR: MR. RONAK MEHTA - JM FINANCIAL INSTITUTIONAL SECURITIES

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CEAT Limited

May 05, 2023

Moderator:Ladies and gentlemen, good day, and welcome to the CEAT Limited Q4 FY '23 Earnings Conference Call hosted by JM Financial Institutional Securities. 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, please signal an operator by pressing star then zero on your touchtone phone. Please note that this conference has been recorded. I now hand the conference over to Mr. Ronak Mehta from JM Financial Institutional Securities. Thank you, and over to you, Mr. Ronak.

Ronak Mehta:Yes. Hello, everyone. Very good evening to all. I hope you all and your families are keeping safe and feeling well. I would like to thank the management of CEAT for giving us this opportunity to host this call. Today, we have with us Mr. Anant Goenka, Vice Chairman; Mr. Arnab Banerjee, MD and CEO; and Mr. Kumar Subbiah, CFO. With this, I would like to hand over the call to Mr. Anant Goenka for his opening remarks. Over to you, sir.

Anant Goenka:Yes. Thank you. Good afternoon, everyone, and a warm welcome to CEAT Q4 FY '23 Earnings Call. I'm Anant Goenka, and joining on this call, we have Arnab Banerjee, MD and CEO; and Kumar Subbiah, CFO in this call with us. As you are all aware, there's been a change in CEAT management effective April 1, wherein Arnab has taken over as MD and CEO of CEAT, while I remain associated in the capacity of Vice Chairman of CEAT. It's my pleasure to introduce Arnab to this forum. Arnab has been associated with CEAT in multiple roles since 2005 and lastly, as the Chief Operating Officer.

Over the last 10 years, he has been the co-architect in CEAT's transformation journey, in establishing multiple growth engines at CEAT, reimagining the distribution network, our brand positioning and recall, strengthening the product portfolio, setting up manufacturing capacities, etcetera. I'm sure under his able leadership, we will see these engines working at their full potential, making CEAT a much stronger and highly efficient organization. I thank all of you for the support that you have extended to me over all these years and we look forward to your continued support at CEAT.

I'll now hand over the call to Arnab for his comments.

Arnab Banerjee:Thank you very much, Anant, and good afternoon, everyone. It's my pleasure to interact with all of you on this platform. I will be taking you through the business updates for the quarter. And thereafter, we'll hand over the call to Kumar for his remarks on financial performance. Post that, we shall open the floor for question and answers.

So let me start with volume performance. Q4 was a strong quarter for us in terms of overall performance. We saw a healthy quarter-on-quarter growth in volume across markets. Growth in replacement volumes was 5%. OEM volumes grew by 8% and export volumes recovered by an encouraging 15% over Q3 FY '23. Overall volume grew by 7% over Q3.

On the replacement side, commercial category has done good. Truck bus, particularly truck bus radial, saw double-digit growth over last quarter. Healthy demand momentum in farm tyres

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CEAT Limited

May 05, 2023

continued into quarter 4 as well. Demand uptick in passenger segments was relatively moderate. On the OEM side, commercial tyre, specialty farm and specialty showed higher growth quarter- on-quarter, followed by 2-wheeler.

Exports saw fairly broad-based volume recovery, though the volumes are still far from the levels we have seen a few quarters ago. On a year-on-year basis, quarter 4 volumes were up healthy 6% despite the high base.

If you look at the whole year, then we witnessed 11% volume growth over FY '22. OEM segment grew exceptionally well, coming from a low base. We've seen strong traction win both commercial and passenger segment. On the replacement side, we made good progress in passenger side in line with our medium-term vision of market leadership in the category. Growth in other categories was relatively moderate. Exports were impacted by multiple macro challenges like the war in Ukraine, currency depreciation, dollar availability in some markets and impending recession in developed markets like EU.

Now coming to demand outlook. Current domestic demand looks stable. We are keeping our fingers crossed on the sustained demand uptick going to quarter 1. There has been a sustained trust in government led infrastructure spend on the back of strong tax collections, coupled with increased visibility of private sector investments which have good demand boosters. On the other hand, inflation led stress across markets, especially rural markets, along with erratic weather patterns may have the ability to deflate demand.

2-wheelers, we expect to move in line with rural recovery. Truck and bus segment should see growth in line with growth in economy and infrastructure push, which is continuing. On the passenger side, we are hopeful of carrying our momentum into next year.

OEM volume growth should remain strong, especially in commercial and passenger segment. 2-wheeler segment maybe bit lower in OEM going forward. Growth, however, will moderate over high base of FY '23 is what we feel.

Exports may put up a stronger show and will be a key contributor for next year's growth. There has been an improvement in dollar availability in developing economies, recessionary sentiments prevailing in Europe and North America is also a reality. But for a quality value player like CEAT, it may provide an opportunity. As channel destocking gets over normal, export volumes should come. We are happy to inform that our newly launched truck bus radial tyres in Europe are seeing good traction. We are targeting to launch our passenger and truck bus radial tyres in U.S. markets as well by the end of FY '24. On the off highway side, we have continued to expand our channel and product basket. So all these initiatives, along with overall stability, will hopefully get our exports back on growth trajectory from the later part of FY '24.

Going on to margins. Our raw material basket costs reduced by approximately 8% to 9% over Q3. As a result, our EBITDA margin expanded by 422 basis points over Q3 to reach 12.9% on a stand-alone basis.

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We were largely able to hold down our prices in the market, and hence, it's helped in the recovery of margins. On the basis of current purchases and pipeline, we expect raw material basket to move in a narrow band in Q1, maybe inching up slightly by quarter end. As always, we are watching the raw material price movement closely, and we'll take corrective actions if there's a sustained run-up in any of the base materials. China demand will be the key variable, especially for natural rubber.

Coming to capex. We incurred growth capex of around INR700 crores during FY '23, and we have managed to keep the spend within these limits. We have sufficient capacities at this moment to take care of near-term growth in most of our product segments. Hence, we are reducing capex requirement for FY '24. We expect growth capex to be around INR500 crores to INR550 crores for FY '24, which is largely towards Ambernath agri radial expansion and downstream assets in Chennai and Nagpur

Coming to marketing. CEAT was proud to get associated with the first edition of Women's Premier League as strategic timeout partner. We also launched an advertising campaign for CEAT scooter tyres around the same event, featuring our brand ambassador Harmanpreet Kaur. We remain associated with IPL as strategic timeout partner in the current edition as well and have launched a new campaign on SUV tyres during this event. We have taken a lead in developing new digital channels, be it our website presence in marketplaces. As a result, D2C sales contributed roughly 6% of our replacement sales in FY '23 in passenger's category with peak levels of 8% to 9% during the year.

Electrification is a big trend, especially in 2-wheeler tyres. In 2-wheeler OEMs, we continue to hold close to 50% share of business. We have significantly expanded our presence in electric vehicles in passenger segment as well, 4 premium electric vehicle models such as XUV400 by Mahindra, Citroen EV, MG ZS EV and MG Comet were launched with CEAT tyres (note: please read the statement corrected as - CEAT tyres got approved for 4 premium electric vehicle models such as XUV400 by Mahindra, Citroen E-C3, MG ZS EV and MG Comet), and we are waiting for more nominations. We are also the first tyre company in India to get OEM approval for EV specific range of tyres for commercial vehicles.

A few awards and recognitions. We are proud to receive 3 important recognitions from our OEM partners for FY '23 performance. We got the award for overall performance from Maruti Suzuki, Annual Supplier Excellence Award from Mahindra, Best Performance Award from Renault Nissan. CEAT Chennai and Ambarnath plants have received 5-star in occupational, health and safety audit by the British Safety Council. CEAT also featured amongst the top 25 in India's best workplaces in manufacturing by great places to work for 2023.

On sustainability, we continue our progress towards our sustainability vision for 2030. We achieved approximately 10% kind of reduction in overall carbon emissions per metric ton of production in FY '23 over FY '22. Currently, 33% of our plant power requirements are through renewable sources, vis-a-vis 26% in the previous year. We plan to increase this contribution further to 37% by the end of current fiscal. 12 additional products have received BEE 5-star rating for energy efficiency during quarter 4. As of now, 37 of our products are 5-star rated.

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During the year, we also achieved 17% reduction in water consumption per metric ton, which is on top of a 29% reduction achieved in FY '22. About 24% of our natural rubber requirement was transported through alternate methods with lower carbon footprint.

So margins are inching back to normalcy after a long and difficult phase on the back of inflated commodity prices. There has been a sustained reversal in RM cost over the last few months, which gives us confidence on the margins remaining in a comfortable range in the near term. We have made remarkable progress on multiple fronts with product premiumization, stabilizing new capacities, Industry 4.0 practices, process improvements amongst others. As RM stability prevails, we will be able to demonstrate the effects of these initiatives in coming quarters in terms of margins as well as our return ratio. Our focus continues to be on improving the product profile in line with customer expectations, deepening impact in focused markets and bringing out efficiencies in operations on a sustainable basis aimed at making us resilient and stronger.

Now I would like to hand over the call to Kumar for his remarks.

Kumar Subbiah:Thank you, Arnab. Good afternoon, ladies and gentlemen, and thank you for joining our quarter 4 earnings call. I'll share some financial data points with you all, post which we can enter Q&A session.

First on revenue. Our consolidated revenue for the quarter stood at INR 2,875 crores, a quarter- on-quarter growth of about 5.4% driven by volumes and year-on-year growth of about 10.9%, which has both price growth as well as volume growth. FY '23 was the third successive year of healthy double-digit growth revenue growth this year. During the year, we crossed an important milestone of INR10,000 crores and ended the year with a consolidated net revenue of INR11,315 crores, growing by about 20.8% in FY '23 over FY '22. We are happy to share with you that we have scaled up our revenue by 1.7 times pre-COVID levels that is helping us to utilize the additional capacities that we have added in the last 3 years.

Coming to gross margins, raw material scenario remained supportive during the quarter, yielding about 8% to 9% reduction in RM basket cost versus quarter 3. As a result of lower raw material prices and maintaining of our final product prices, we have reached our desirable gross margin range of about 40%. RM prices have been operating in a brand since the last couple of months. There has been some increase in the domestic natural rubber prices and some of the petrochemical derivatives that may have some impact on the RM prices towards the later part of quarter 1.

Having said that, the global macro remain volatile with multiple variables at play, expectations of a global economic slow down is keeping a check on inflation for now. But geopolitical situation can take unexpected turns, creating short-term supply challenges and price spurts like was seen in case of crude recently. We are not seeing any clear direction in China on demand. So we will continue to keep a close watch and RM situation and see how it evolves over the next few months and quarters.

Now coming to our capex. We spent about INR210 crores of total capex during the quarter. That includes about INR128 crores of project capex. Our capex for the year, overall capex for the

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