CEAT : Earnings Call Transcript Q3 FY23

CEAT Limited

Q3 FY '23 Earnings Conference Call

January 25, 2023

Management: Mr. Anant Goenka - Managing Director - CEAT Limited,

Mr. Kumar Subbiah - Chief Financial Officer - CEAT Limited

Host: Mr. Ashutosh Tiwari - Equirus Securities (P) Limited

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Moderator: Ladies and gentlemen, good day and welcome to CEAT Limited 3Q FY23 earnings conference call hosted by Equirus 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 the conference call, please signal the operator by pressing star (*) then zero on your [unclear] phone. Please note that this conference is being recorded. I now hand the conference over Mr. Ashutosh Tiwari from Equirus Securities. Thank you and over to you, sir.

Ashutosh Tiwari: Thanks, Aman. Good evening everyone. On behalf of Equirus Securities, I would like to welcome you all on the CEAT Limited Third Quarter FY23 conference call. From the management side, we have Mr. Anant Goenka, Managing Director, CFO Mr. Kumar Subbiah and members of IR team. First of all, I would like to thank the management for giving us the opportunity to host this call. Without further ado, I would like to hand the call to Mr. Goenka for opening remarks.

Anant Goenka: Thank you, Ashutosh. Good evening everyone, and a very warm welcome to CEAT Quarter 3 FY 23 Earnings Call. I'm Anant Goenka and I have with me our CFO Kumar Subbiah on the call with us. We wish you a very happy, healthy, and prosperous 23. And as usual, we will start with brief remarks from myself and Kumar post which we will take up Q & A.

Quarter 3 is generally a seasonally weak quarter for us particularly in passenger segments. On the domestic side we saw a similar trend this time as well. Volumes for Quarter 3 were lower by about 6.5% on a Quarter-on-Quarter basis. October being a festive month was particularly low. November onwards, volumes have been improving and demand should gain some more momentum as we progress into Quarter 4. On a Year-on-Year basis OEM has been the fastest growing segment coming from a low base. Exports have been adversely impacted by macroeconomic headwinds across geographies. However, we believe demand will improve going forward. Some of our recent launches have seen a good response. The Forex situation is also stabilizing in many of our export destinations and channel destocking has played out, and the order book is improving, going forward. We are confident in the medium to long-term potential of our international business and continue to invest disproportionately on product as well as market expansion. As the macro headwinds subside, we are hopeful of achieving sustained growth in this vertical.

In terms of demand outlook, the domestic situation seems to be steady. Inflation has moderated. Key high frequency indicators are stable. Government spending is expected to increase on the back of buoyant tax collections. Rural sentiments are also expected to improve

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with better rabi output. Growth may moderate, but we do not see any major downside risk in the near term. On the export side apart from the ongoing geopolitical situation, recession may also play out in major economies. However, given our positioning in international markets and target segments like agriculture, the impact should be limited.

With respect to margin performance and cost outlook, the raw material situation has been benign as expected. Crude inched up during the quarter, but is hovering around $80 to $90 per barrel. Rubber softened a bit further. However, domestic availability was a challenge as producers were holding inventory. Our commodity basket cost reduced by about 4% versus Quarter 2, slightly better than what we had guided. As a result of beneficial RM and lag effect of earlier price increases, our gross margin expanded by 219 basis. Some of this gain was offset by lower volumes and increase in employee cost due to increments. Hence, our standalone EBITDA margin expanded by about 160 basis points over Quarter 2 to reach 8.7%. Basis our current purchases in pipeline, we expect raw material basket to further decline by about 2 to 3% in Quarter 4. We are monitoring the situation closely. Near term global economic outlook will keep a check on commodity prices however, China coming back post COVID impact will be a key variable to watch out for.

With respect to CapEx, we are sticking to the FY 23 CapEx guidance, of about Rs. 750 crore plus maintenance CapEx. Since we have largely completed all our announced CapEx in PCR, TBR, two-wheeler our CapEx requirement for FY 24 will reduce. We are fine-tuning our workings. However, as per initial estimates, we'll be spending about Rs. 500-550 crore as growth CapEx in FY 24. Major part of this will be towards the Off-highway expansion that we had announced last quarter and some balanced portion of Chennai PCR. We will get back with a refined number in our Quarter 4 call. The Off-highway CapEx of about Rs. 395 crores is expected to be completed by December 2024, and we are hopeful of global macroeconomic situation stabilizing by then. We would've also expanded our reach and product range, which will further help achieve optimal utilization in a reasonable timeframe.

We launched our SUV platform, Cross Drive AT, with an aggressive all terrain pattern. We are also proud to be front-runners on energy efficiency. So far, 38 (note: please read it corrected as 25, which got inadvertently mentioned as 38 during the call. You may also refer to page no 9 and 13 of the CEAT - Investor Presentation Q3 FY23) of our products have received BEE 5 star ratings and to supplement that we launched a media campaign along with our brand ambassador Amir Khan to spread awareness about the energy efficiency of our tires.

From the manufacturing side, we are proud to be the first tire company in the world to get Lighthouse Certification from the World Economic

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Forum for our Halol Plant. This certificate is given to a select group of companies around the world who have seen substantial efficiency or quality improvement using industry 4.0 technologies such as IOT, sustainable production, artificial intelligence, data sciences, etc. We have been on this journey since the last few years and undertook multiple digital transformation projects, and we have started reaping various benefits such as higher productivity, lower wastage, lower energy consumption, and higher use of green materials in our Halol Plant. We will be implementing this in other plants as well.

On ESG, we continue to make remarkable progress. Apart from the 5 star ratings I mentioned earlier we have also reduced our water consumption per ton of production by about 25% Year-on-Year. Other initiatives like alternate transport, renewable power, tire weight, rolling resistance, continue to make good headway.

Overall, as the quarter saw further margin recovery we expect this to continue into Quarter 4 as well. As gross margin normalizes, we will be able to demonstrate meaningful gains from operating leverage, premiumization, digitalisation, and cost optimisation initiatives going forward. Lower CapEx and hopefully better margins will further strengthen our balance sheet, cash flows, and return profile in the coming year. With this, I hand over the call to Kumar.

Kumar Subbiah: Thank you Anant. Good evening, ladies and gentlemen and thank you for joining us for our Quarter 3 FY 23 Earnings Call. I'll share some further financial data points with you post which we can enter the Q & A session. With respect to revenue, our consolidated net revenue for the quarter stood at Rs. 2,727 crores, a Year-on-Year growth of about 13% contributed by mix of both price and volumes. In the first nine months, our consolidated revenues stood at Rs. 8,440 crores, a growth of about 24.7% over the first nine months of the last year. Coming to gross margin, our gross margin for the quarter expanded by about 200 basis points over Quarter 2 largely driven by lower raw material costs, our vendor raw cost declined by around 4% over Quarter 2. The expansion of gross margin is the main contributor for the improvement in EBIDA margin to the tune of about 100 basis points in Quarter 3 versus Quarter 2. And drop in raw material cost was largely contributed as Anant mentioned due to drop in the prices of crude derivatives as well as natural rubber. Coming to our CapEx, our total CapEx outflow during the quarter at a consolidated level was about ~Rs. 218 crores. That includes both project as well as routine maintenance CapEx. Our total CapEx outflows stood at Rs. 679 crores in the first nine months of the year, which is largely in line with our full year CapEx plan of about Rs. 900 crores. Coming to Working Capital, during the quarter we took multiple initiatives to bring down our overall inventory to the tune about Rs. 290 crores. That helped in augmenting our operational cash flow, improving the quality of working capital, and also reducing the

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dependence of that debt to fund our CapEx. Our overall consolidated debt increased by about Rs. 38 crores during the quarter and our debt level at a consolidated basis stood at Rs. 2,341 crores as of end December.

Operational expenses part, our employee cost increased by about 10% Quarter-on-Quarter due to impact of annual increments and also some new wage settlement in one of our factories, while other expenses declined due to lower volumes and efficiency improvement measures. Overall, our operating expenses were lowered by about 5% Quarter- on-Quarter partly due to lower scale of operations and balanced due to tight cost control exercise during the quarter.

An update on Sri Lanka, Sri Lanka continues to see challenges. While volumes saw some improvement, due to inflation and change in income tax both for corporate and individuals from 18% to 30% effective 1st October, 2022 contributed adversely to a tune of about Rs. 6 crores in PAT.

Depreciation was at similar level for the last quarter. Our interest expenses went up by about 14% during the quarter, largely due to increase in interest rates and slightly higher level of average debt during the quarter.

I would like to give you an update ongoing case with Competition Commission of India. Earlier this year, we had received an order from Competition Commission imposing a penalty on some other Indian tire companies where the penalty on CEAT was about Rs. 252 crores. We filed an appeal against the order before NCLAT. NCLAT in its order dated 1st December has remanded the order back to Competition Commission of India for reconsideration and NCLAT has also observed errors in the CCA order leading to possibly wrong conclusions.

We are happy to inform you during the quarter credit rating agency CARE Rating carried out risk assessment, and they have reaffirmed AA long-term rating and A1+ for short-term with the outlook maintained as stable.

Overall, our standalone EBITDA stood at Rs. 237 crores with a margin of 8.73%, an expansion of 160 basis points over the previous quarter and 323 basis points improvement over the same quarter of last year.

Our consolidated profit after tax for the quarter stood at ~Rs. 41.04 crores, which compares well with Rs. 5.8 crores reported by us in Quarter 2. We can now open the floor for Q & A. Thank you.

Moderator: Thank you very much. We will now begin the question and answer session. Anyone who wishes to ask a question may press star and 1 on the touchtone telephone. If you wish to remove yourself from the question queue, you may press Star and 2. Participants are requested

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