CEAT : Earnings Call Transcript Q2 FY23

"CEAT Limited

Q2 FY '23 Earnings Conference Call"

November 08, 2022

MANAGEMENT: MR. ANANT GOENKA - MANAGING DIRECTOR - CEAT

LIMITED

MR. KUMAR SUBBIAH - CHIEF FINANCIAL OFFICER -

CEAT LIMITED

MODERATOR: MR. ANNAMALAI JAYARAJ - BATLIVALA & KARANI SECURITIES LIMITED

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CEAT Limited

November 08, 2022

Moderator:Ladies and gentlemen, good day, and welcome to the Q2 FY '23 Earnings Conference Call of CEAT Limited, hosted by Batlivala & Karani Securities India Private Limited. As a reminder, all participant lines will be in 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. Annamalai Jayaraj from Batlivala & Karani Securities India Private Limited. Thank you, and over to you.

Annamalai Jayaraj: Thank you, Yashashree. Good afternoon, everyone. On behalf of B&K Securities, welcome to Q2 FY '23 post results conference call of CEAT Limited. I also take this opportunity to welcome the senior management team of CEAT Limited. We have with us today, Mr. Anant Goenka, Managing Director, and Mr. Kumar Subbiah, Chief Financial Officer. I will now invite Mr. Anant Goenka for his opening remarks. Also may I remind you of the Safe Harbor. The company may be making some forward-looking statements that has to be understood in conjunction with the uncertainty and the risk that the company takes. Over to you, sir.

Anant Goenka:Thank you, Mr. Jayaraj. Good afternoon, everyone, and a very warm welcome to CEAT's Q2 FY '23 earnings call. I'm Anant Goenka and I have with me our CFO, Mr. Kumar Subbiah on the call with us. I hope you all had a wonderful Diwali and a well rest during the festive season. As usual we start off with some brief remarks from me and Kumar, post which we can take up question and answers.

With respect to our sales performance, the demand environment has remained healthy carrying the momentum seen in quarter four FY '22 onwards. We were able to maintain our volumes achieved in quarter 1. On the replacement side, two-wheelers saw a moderate growth over quarter 1, PC/UV remained flat. Commercial volumes were seasonally a little bit weak, which was the same for tractor tyres as well.

On the OEM side, the two-wheelers continued to see some growth, while passenger car and commercial volumes were flattish. And on the export side, volumes were impacted by macro headwinds, especially in our traditional geographies. We were able to sustain momentum in Europe and US, driven by some new launches and channel addition. However, overall international business volume saw some minor dip over the previous quarter. Overall, volumes for quarter 2 were lower by about 1.5% on a quarter-on-quarter basis and grew by 7% on a year- on-year basis.

Going forward, in terms of outlook, domestic demand situation looks steady. As reflected by two-wheeler, vehicle demand and other consumption data, there is a pickup in rural sentiment. Abnormal rain may impact the Kharif output. The Rabi season is expected to be promising with improved water availability. Agri output prices have been on the higher side, so hopefully rural cash flows should improve further over the next few quarters.

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CEAT Limited

November 08, 2022

Export demand may stay volatile for a few more quarters given the geopolitical uncertainties and weakening macroeconomic situation around inflation and recession fears across geographies. From a near-term perspective, quarter 3 would be the fourth normal quarter vis-a- vis COVID-related disruptions. So we are expecting routine seasonality to play out more prominently from now on.

On the cost front, we witnessed a commodity basket inflation of about 4% over quarter 1, marginally higher than our guidance. We were able to take adequate price increases, which covered for the raw material inflation during the quarter, and therefore expanded gross margin by about 80 basis points.

On the back of slightly higher revenues and similar operating costs, our standalone EBITDA margin expanded by 127 basis points over quarter 1 to reach 7.1%. Prices of base commodities like crude and natural rubber has been softening over the last few months that the benefit of which should start creeping in from the second half of quarter 3. We expect raw material basket for quarter 3 to decline by about 2.5% to 3% over quarter 2.

As indicated previously, we are tightly monitoring our capex and cash flows. Barring off- highway tyre segment, we believe we have sufficient capacities across product categories. The guidance for FY '23 project capex remains at INR750 crores, which we will review during Q3. Our current off-highway tyre expansion remains as per plan. The off-highway radial capacity at our Ambernath plant has reached 80 tons per day, which will further increase to 105 tons per day by mid-'24. We are also converting about 18 tons per day of truck bias capacity in our Bhandup plant to off-highway tyre bias. We have taken Board approval for adding another 55 tons per day radial capacity in our Ambernath plant over the next two years, which would come at a cost of about INR 395 crores. We will trigger the same based on the demand situation. Once implemented, our total off-highway radial capacity will reach 160 tons per day. The off-highway tyre category is a strategically important category for us and we are confident of generating the desired EBITDA margin and ROCE from this capex.

We successfully launched our EV tyre platforms across product categories like EnergyDrive EV for passenger car and UV tyres, EnergyRide for two-wheelers and WinEnergy for truck and bus segments. Many of these were the first in the Indian tyre industry. These platforms will also help sharpen our position as a leader in EV tyres and expand our market share.

We also rolled out our new SecuraDrive campaign for digital and mass media with the theme, Stay Ready for Rockstars on the Road. We are present on high impact properties like Kapil Sharma Show and Indian Idol with this campaign. Our previous campaign, which was called Switch to SecuraDrive, recently won International Advertising Association India Chapter Award in the auto and auto ancillary category.

We continue to remain committed to ensuring that our tyres provide maximum energy efficiency from an environment perspective. As a step forward, with our focus on sustainability, we have started energy certification of our tyres and initial set of each product in PCUV and TBR categories have received five-star rating from the Bureau of Energy Efficiency.

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CEAT Limited

November 08, 2022

In H1 FY '23, about 22% of our local rubber requirement has been sourced via alternate transport, which has a lower carbon footprint. We plan to continue and build on this aspect of an environment-friendly supply chain. Though the tyre sector has seen unprecedented margin compression since the last seven quarters, we are beginning to see some green shoots now. We expect the commodity situation will remain a little benign and demand remains healthy in the coming months, resulting into quick and sustainable some amount of margin recovery. From a longer-term perspective, we have created multiple levers like scale, premiumization, growth in high-margin categories, a check on costs to achieve robust profitable growth.

With this, I hand over the call to our CFO, Kumar.

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

First, as regards to our revenue, our consolidated net revenue for the quarter stood at INR 2,894 crores, a sequential growth of about 3%, which were largely driven by price growth and year- on-year growth of about 18%, which has a mix of both price growth as well as volume growth. As regards to our gross margin, during the quarter, the gross margin moved up by 80 basis points and our blended raw material cost went up by approximately 4% largely neutralized by price increase taken during the course of the quarter. The inflation was largely driven by increase in crude derivatives and natural rubber prices, both of them have cooled off since last few months. Some of the crude derivatives and chemicals are still holding up under correcting with a lag. We expect our overall RM cost basket to go down by 2.5% to 3% in quarter 3 over quarter 2.

Currency movement, however, has been adverse and is diluting the benefit from cost correction, since many of our inputs are pegged to US dollars. US dollars has gone up by almost 7.5% year- to-date. Due to recession fears, commodity prices may remain subdued in the near term, but currency may still have an adverse impact should the rupee continue to depreciate. We are monitoring the situation closely and taking necessary corrective actions.

Now coming to debt, our capital expenditure and working capital, we spent INR 205 crores on capex, including projects as well as routine during the quarter. And our working capital during the quarter went up by approximately INR 170 crores, sequentially due to higher inventory values. Overall, our net debt increased by about INR 163 crores in quarter 2 compared to end of quarter 1. We are keeping a close watch on our debt situation, which is still near our internal thresholds. We expect our debt to increase further in quarter 3 and quarter 4. However, as margins and cash flows improve, reasonable portion of our capex will come from internal accruals and hence incremental debt requirement will progressively come down.

As regards to our operational expenses and EBITDA, we had been working continuously on multiple cost optimization measures since last several quarters. Some are them have started yielding results. Despite inflationary pressures across the board, we have been able to contain our operating costs as a percentage of sales in quarter 2, in line with the previous quarters. And

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November 08, 2022

that has helped in terms of margin expansion. Our consolidated EBITDA stood at INR 204 crores during the quarter with a margin of about 7% and about 96 basis points over the previous quarter.

As part of our exercise to make our older factories cost competitive, we incurred about INR 23 crores towards VRS to our employees in our older factories. Our depreciation was similar to the last quarter. Our interest cost went up by about 11% during the quarter due to higher debt and also due to increase in the interest rates.

As part of our annual review of credit rating, our credit rating agency India Ratings affirmed the

1. with stable outlook for long term and A1-Plus for short-term. We're also happy to share with you that Government of Madhya Pradesh awarded the best GST compliance company award to CEAT for the year 2021-2022. The Honorable Chief Minister handed the certificate and cash award of INR 12 lakhs to our taxation team last Friday.

With that, I conclude. We can now open the floor for Q&A.

Moderator:[Operator Instructions]. We have our first question from the line of Ashutosh Tiwari from Equirus Securities.

Ashutosh Tiwari:Firstly, you mentioned that obviously in the second quarter, truck demand was sluggish quarter- on-quarter, but that was seasonality. But how are things looking up in October month and all, is the truck improving Y-o-Y now?

Anant Goenka:Yes, truck demand looks to be okay. I'd say that there were some challenges in international business on trucks. We did see some slowdown. In Indonesia market quota continues to be a challenge, also in some areas around the subcontinent and that has caused a larger impact on truck demand for us, more than domestic. Domestically, demand seems to be relatively okay, on the truck side.

Ashutosh Tiwari:Is demand growing Y-o-Y? Like say, October month in truck particularly?

Anant Goenka:Yes. October was relatively a soft month because of festive activities. We are back to normal from beginning of November onwards.

Ashutosh Tiwari:Okay. And in exports you mentioned Indonesia, you've got the markets like Europe and all which

are build over last few years. Are they still growing for us Y-o-Y?

Anant Goenka:So currently we are seeing some recessionary pressure. Year-on-year, I think we are seeing positive growth, but quarter-on-quarter there is a slowdown with respect to European markets.

Ashutosh Tiwari:And on the RM side, you mentioned 2.5% to 3% decline would happen in this quarter. But in terms of price increases, how much we will take in last quarter and then I think some of the price increases were not effective over the full quarter, that impact also should come through in this quarter, right?

Anant Goenka:We've taken a effective price increase of about 4% in the quarter and we expect to take maybe another 1% or so between October, November of quarter 3 on an average across the board.

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