CEAT Earnings Call Transcript Q2 FY22

"CEAT Limited Q2 FY22 Results Conference Call"

October 26, 2021

MANAGEMENT: MR. ANANT GOENKA - MANAGING DIRECTOR, CEAT

LIMITED

MR. KUMAR SUBBIAH - CFO, CEAT LIMITED

MODERATOR: MR. NITINN AGGARWALA- JM FINANCIAL

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	CEAT Limited
	October 26, 2021
Moderator:	Ladies and gentleman, good day and welcome to the CEAT Ltd. Q2 FY22 Results Conference
	Call hosted by JM Financial. 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 '*' then '0'
	on your touchtone phone. Please note that this conference is being recorded. I now hand the
	conference over to Mr. Nitinn Aggarwala from JM Financial. Thank you and over to you sir.
Nitinn Aggarwala:	Thank you Faizan. Good afternoon, everyone on behalf of JM Financial I would like to welcome
	you to 2Q FY22 Post results call of CEAT Ltd. We have with us the senior management team
	from the company, represented by Mr. Anant Goenka - Managing Director and Mr. Kumar
	Subbiah - Chief Financial Officer. I would like to thank the management for taking time out for
	this call. I would now like to handover the call to Mr. Anant Goenka for his initial remarks. Over
	to you Anant.
Anant Goenka:	Thank you Nitinn. Good afternoon, everyone and a very warm welcome to CEAT's quarterly
	earning call and thank you all for your time in joining us today. I am Anant Goenka and I have
	with me our CFO - Mr. Kumar Subbiah on call with us.
	I hope all of you are all well and as usual we will start with a few brief remarks from me and
	Kumar, post which we would be happy to take questions.
	The quarter started on a relatively positive note on the demand side, as market started opening
	up post COVID wave 2. In the replacement market recovery was strong in the passenger
	segments with demand going back to normal levels. Commercial segments CV as well as the
	farm segment were relatively week. Overall, for us replacement volumes grew at about 23%
	sequentially, with a marginal decline of about 3% on a year-on-year basis. OEM volumes grew
	at about 35% sequentially and 17% year on year, largely because of a lower base. Semiconductor
	shortages continue to impact recovery in the passenger OEM segment. Exports have continued
	to do well for us with a sequential volume growth of about 10% and a year-on-year growth of
	almost 50%. Overall, we saw a sequential volume growth of about 23% and year on year growth
	of 9% during the quarter. The demand situation looks positive. On the other hand, costs have
	continued to rise. Our raw material basket went up by about 6.5% sequentially, on account of
	higher crude prices and logistical challenges resulting in higher freight rates. The increase was
	higher than our estimate of 5% at the beginning of the quarter. We took staggered price increases
	during the quarter to offset the impact, however these were not commensurate with the raw
	material inflation and hence our gross margin contracted by about 1.8% over quarter 1 levels.
	Higher volumes helped in better absorption of fixed costs, as a result our standalone EBITDA
	margin stood at 8.9% slightly higher than quarter 1. We ended our quarter with a standalone
	PAT of Rs. 36 crore.
	Our OEM strategy is playing out well and we continue to strengthen this aspect of our business,
	we continue to do well on the passenger side as well as continue to be a preferred partner in 2
	wheelers and 3 wheelers in the e-mobility space. We have also revamped our CEAT shoppes

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CEAT Limited

October 26, 2021

with a modern look and several customer friendly features, the new design has been rolled out in select cities from August onwards.

We continue to invest in marketing, we launched two major marketing campaigns this quarter, the Secura Drive for passenger car and UV Tyres featuring our brand ambassador Aamir Khan and CEAT Grip X3 for Two-Wheeler Tyers. Both campaigns are focused on reinforcing CEAT's safer mobility brand appeal.

IPL 2021 also resumed this quarter and we continue to remain associated with the event as strategic timeout partners.

On the Digital side our website was recognized as the best website of the year by CMO Asia. We continue to invest in digital as well as on ESG- Environment Social and Governance. On the sustainability part we have taken many internal initiatives on improving our sustainability and carbon footprint across the company.

On our diversity and inclusion journey, about 30% of our new recruits are women. We have also had our first batch of 7 transgender associates joining CEAT this quarter. With this I end our highlights and I will be happy to handover the call to Kumar.

Kumar Subbiah:Thank you Anant. Good afternoon, ladies and gentlemen and thanks for joining our Q2 earnings call. I will share some key financial data points with you all, post which we can enter the Q&A session.

First one is on revenue, our consolidated net revenue for the quarter stood at Rs. 2,452 crore in rupee terms, the sequential growth of 29% and year on year growth of about 24%. The revenue growth was driven by volume and favorable product and category mix. On gross margin, our raw material cost continues to raise and impact our gross margins which stood at 37%, a sequential decline of about 203 basis points. Our blended raw material cost went up by about 6.5% in quarter 2 versus quarter 1. We took price hikes to the tune of anywhere between 4 and 5% during the quarter, across most categories and segments. The price increases taken so far are not sufficient to cover unprecedented commodity inflation we have seen in this financial year and there is a need for further increases in the coming months to absorb the cost increases. Raw material scenario still remains challenging. As per our current market understanding, we expect our blended raw material costs to go up by another 4% in quarter 3 versus quarter 2.

I will come to debt, CAPEX and working capital. Our debt during the quarter increased by about Rs. 219 crore on a sequential basis, largely driven by CAPEX, payment of our annual dividend and increase in the inventory levels and deters. We incurred a total CAPEX of Rs. 226 crore during the quarter, which includes approximately about Rs. 150 crore towards our capacity expansion projects and our project CAPEX outlook for the current year still remains at around Rs. 1000 crore.

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CEAT Limited

October 26, 2021

Our operating working capital increased by about little over Rs. 100 crore in the last quarter, largely due to higher inventory levels, both in raw material as well as finished goods and also increase in receivables arising out of higher scale of operations. We are taking steps to reduce both finished goods and raw material inventory in quarter 3. Operational expenses during the quarter as a percentage of turnover was lower compared to quarter 1 largely on account of higher scale of operations. Our advertisement costs returned to normal levels, increasing by about 70% over the previous quarter due to full scale resumption of our marketing efforts and as well as IPL event that happened in quarter 3. Employee cost declined by 3% sequentially which is largely driven by reduction in some of the COVID norms related expenses. We continued our effort to optimize our operating cost, along with some scale benefit we are able to manage our EBITDA margin at quarter 1 levels. Our consolidated EBITDA stood at Rs. 225 crore in terms

	of percentage, about 9.2%.
	Coming to depreciation and interest cost during the quarter we recognized right of use assets
	under IndAS 116, aggregating about Rs. 61 crore on the rental arrangements, with CFAs, DCs
	and OEM godowns. The same is accounted with effect from April 2021 with necessary
	accounting being done in the current quarter. While this does not have any impact on our profit
	before tax, it has led to higher depreciation to the extent of Rs. 20.45 crore during the quarter,
	as it includes the depreciation for quarter 1 and the approximate impact on a quarterly basis
	about Rs. 10 crore and other expenses has come down equivalent to the same number. Due to
	the above, our overall depreciation for the quarter moved up from about Rs. 96 crore to Rs. 121
	crore. Since our debt has increased during the quarter, the finance cost has also gone up from
	about Rs. 46 crore in quarter 1 to around Rs. 50 crore during the quarter.
	During the quarter in the month of September on approval of by the shareholders of our
	organization, we disbursed dividend to the tune 180% of our share capital, amounting to Rs. 73
	crore. Our consolidated profit for the quarter stood at Rs. 42.28 crore and our effective tax rate
	for the quarter stood at 27%. And we would also like to update you on the credit rating, in the
	month of September. Our annual credit assessment was carried out by India Ratings and we were
	affirmed credit rating of AA for long term and A1+ for short term with stable outlook.
	With this now, let us open the floor for Q&A. Thank you.
Moderator:	Thank you very much. The first question is from the line of Jinesh Gandhi from Motilal Oswal.
	Please go ahead.
Jinesh Gandhi:	My first question pertains to the demand outlook, so do we expect the momentum which we
	have seen in the replacement market to continue in the second half, given that passenger vehicle
	demand continues to be strong, particularly in the replacement side? And any trends which you
	have seen on CVs and farm side?
Anant Goenka:	Yes, Hi Jinesh. We are seeing an increased, a good demand on the passenger side, this is in the
	replacement segment both two-wheeler and passenger car are looking good. Commercial vehicle

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CEAT Limited

October 26, 2021

has been slow still and will take some time to pick up. Particularly for us on the truck-bias side we are seeing a slowdown, whereas radial we are seeing an uptake in terms of demand. Farm has also been under little bit of pressure, last year's base was very high, farm demand both between OEM and replacement was kind of highest ever levels, so maybe on a higher base there is some relative year on year pressure on the farm side as well. On the OEM side we are finding commercial vehicles picking up much better than last year, whereas there is some pressure on the passenger car and on the two-wheeler side because of the chip shortage issue and overall, two-wheeler demand is slowing down. So, I think this is the overall outlook. Exports has generally have been very strong all through the year, however container availability, freight rate increase is a challenge but we are managing to show good growth despite these challenges.

Jinesh Gandhi:And with respect to the price hikes, you indicated 4-5 % price hikes taken in second quarter, I am presuming average would be lower considering the timing differences and expecting, so have we taken any further increases in October?

Anant Goenka:Yes, we have taken about 2.5% in two-wheeler tyres and couple of percentage points in passenger car as well and about 3% in farm. Some of this has been taken in the middle of October and some of it will be taken in end of October, so 29th to the 1st of November will be on passenger car and farm, whereas 2-wheeler 2.5% has already been taken.

Jinesh Gandhi:Okay and after this price increase, another 2-3% under recovery on account of commodity cost inflation or it would higher than that?

Anant Goenka:So, we expect about 3.5-4% increase in raw material in quarter 3, that requires approximately about a slightly under 3% price increase to equate that, so yes maybe another couple of percentage points are needed because TBV or truck radial is not included in what has been taken, so we do need at least a percentage and a half to 2% price increase between November 1st and December to equate that.

Jinesh Gandhi:Okay understood and thirdly, clarification on the depreciation part, so Kumar you indicated it is about Rs. 10 crore the difference because of accounting issue, I mean Rs. 10 crore moving out of Other Expenses and coming to depreciation, is that right?

Kumar Subbiah:Yes, on a quarterly that is the impact but in the current quarter we have done it effective 1st of April, so current quarter has Rs. 20 crore in it but going forward it will be about Rs. 10 crore per quarter.

Jinesh Gandhi:Okay and any sense on what would be our normalized run rate of depreciation, maybe say for FY23, give that by then we will be having a large part of our capacities fully operational?

Kumar Subbiah:Okay, see current quarter, first I will explain current quarter and then I will also give you a broad outlook. Current quarter our depreciation is about Rs. 120 crore and just to make sure that it is comparable, you will have to remove about Rs. 10 crore because it includes Rs. 10 crore relating

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