What's The Road Ahead Like For CEAT?
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00:00We're speaking now with Arnab Banerjee, Managing Director and CEO at SEAD.
00:04Mr. Banerjee, thank you so much for joining us this morning on NDTV Profit.
00:09Absolute pleasure to have you here.
00:12Yeah, and we're speaking at an interesting time for the industry and especially tyre
00:16companies in focus because of the price hikes that have been taken.
00:21Let's start with that bit.
00:24The hikes, I believe, in radial tyre prices, raw material prices are also up.
00:29How do you see this situation evolving?
00:33Yeah, post quarter 4 last year, we have had sharp price hike in raw material.
00:39Quarter 1 and quarter 4, the raw material hike was about 5%.
00:43Then quarter 2 and quarter 1 again, about 4-5% raw material price hike has happened.
00:48So the finished good price hike has not been commensurate with the raw material price hike.
00:53You saw our margins contracting in quarter 1 to 12%.
00:58And the same trend continues.
01:00So margins will be under pressure in quarter 2 and we expect the raw material basket to
01:05even out in quarter 3 and may moderate a little quarter 3, quarter 4 onwards.
01:11The quantum of price hikes that have been taken, Mr. Banerjee?
01:15Yeah, it's different for different categories.
01:18The radial and passenger has been more aggressive from our side, about 4% plus,
01:25but not so in some of the other categories.
01:27OEM price hikes come with a lag of a quarter because most of it is indexed.
01:32So that's also inadequate.
01:34So overall, if you take the basket of price hike, another 2-3% price hike is required.
01:41And we may take about half of that in the month of September.
01:46So you've got about a 1-1.5% increase in price hike,
01:50or increase in price for tyre companies expected as early as this month.
01:54Mr. Banerjee, hi, it's also Samina joining in.
01:57While I do understand that the key raw material for a tyre company like yourself is rubber,
02:04and rubber prices have been extremely volatile and there's been constant conversation and talk about
02:09how rubber prices are only going to increase from year on,
02:12do you feel like this price hike that you're going to undertake in September could negate
02:17the increased rubber prices on one hand?
02:20And on the other hand, you've got lower crude prices,
02:23which generally garner wealth for a tyre company in terms of synthetic tyres at least.
02:27How do both of those pros and cons play out in terms of margin impact?
02:34Yes, so India is rubber deficient.
02:37So hardly 60% of the requirement of natural rubber is produced inside the country.
02:42There is always a price mitrage between domestic rubber prices and international prices.
02:48However, this year, this difference has gone on to be too high.
02:52About 30-40% higher is domestic rubber, which is seldom seen.
02:57It is at a 15-year high.
03:00Availability of rubber has also been patchy.
03:03Now it's kind of evening out.
03:06So this kind of volatility is not seen regularly.
03:11If the prices are flat, albeit at a high level,
03:14we can manage the margins through appropriate pricing measures.
03:18Coming to crude, yes, crude is trending down.
03:21However, the crude intermediates, which lead to other raw material baskets like
03:26synthetic rubber, like fabric, etc., are yet to moderate.
03:30So if crude stays at these kinds of levels,
03:33a significant part of the R&D basket will trend downwards in Q3.
03:38Banerjee, that's fantastic to know because we've always
03:42tried to understand the connection between the two and going beyond a stock market reaction.
03:47Possible to quantify for me if crude stays at these levels,
03:50like you said, it could significantly reduce your raw material costs.
03:54Give me a broad range of how much of an impact would that have on margins for you?
03:59And that's what I'm guessing will be from the next quarter.
04:02Yeah, yeah.
04:02So this quarter, already we have seen a raw material basket going up by 4-5% over Q1.
04:09So this quarter is almost coming to an end.
04:12Next quarter, it depends on how natural rubber will behave,
04:16because as you rightly said, there are two aspects.
04:19One is the natural rubber and the other is the crude derivative.
04:23So if the interplay cancels them out, then we will be at a flat kind of trajectory.
04:30If natural rubber comes down significantly,
04:33only then the raw material basket will be affected positively in totality.
04:38So we have to wait and see which way
04:41these two different components of the raw material baskets behave in quarter three.
04:46I want to talk to you about premiumization,
04:48because that was the big focus for the company in the last few quarters.
04:53And I believe it's playing out quite well for SEAT as we see it, at least in this quarter.
04:58Looking ahead, how much would you like premium products to contribute to your top line?
05:05Would it be a fair assumption for me to make
05:08that the premium segment obviously garners better margins?
05:12So if you sell more premium tires, it's not just going to improve your top line,
05:16but bottom line as well significantly in the next few quarters?
05:20Yes, if you look at the passenger tire market,
05:24the market trends are helping us because 50% of the new car sales today is SUVs.
05:30People are buying bigger cars and traveling longer distances.
05:34We are moving the brand from a commuter space to an explorer space,
05:40a long distance traveler space.
05:41The Crafted for the Curious campaign, which we have started recently in quarter one,
05:46is going to see significant investments in various forms and formats
05:51across various media channels.
05:53That's one.
05:54We are launching significantly different platforms like CrossDrive,
06:00which will help us go on the highway as well as mild off-roading,
06:05like SportDrive, which is meant for the luxury cars and luxury.
06:08And India is doing phenomenally well in terms of new product launches and sales.
06:15So new product development and continuous channel and Salesforce education.
06:20So we are going to invest significant amounts of monies in R&D as well as marketing
06:26to change the mix.
06:28As you rightly said, these are margin accretive,
06:31and it will take the brand from a commuter space to a premium space
06:37where the customer is willing to pay a lot more than a commuter tire.
06:43Mr. Banerjee, I just want to get your sense on the thought,
06:47and a lot of analysts are saying this about SEAT as well,
06:50about how you're trying to de-link profitability from raw material swings.
06:56And tell us about the structural changes there that are being put into place.
07:03Right.
07:03So if you compare the industry five years back or 10 years back,
07:08even five years back,
07:09I think some amount of pricing independence has come into the industry structurally.
07:15If you take the passenger car tire market,
07:18there are about seven or eight fierce competitors.
07:21The market leader has less than 20% market share.
07:25So in such a competitive market,
07:27the pricing independence has emerged as a positive.
07:31And not just for SEAT, for many of the other players,
07:34we can price significantly up or down
07:37depending on our brand strategy and channel strategy.
07:40If you take the two-wheeler or the truck-bus radial market,
07:44it's a consolidated market.
07:46In the sense, top two, three players have significant share of the market.
07:50There, the independence is still emerging,
07:54and it is lower than what is there in the passenger car tire market.
07:58But overall, as a basket in replacement,
08:00I think we are moving towards more pricing independence in terms of competition.
08:06Mr. Banerjee, just changing track a bit,
08:09I want to understand how you are seeing the demand scenario.
08:12And there are, I mean, there's no clear picture there
08:16as far as the whole industry is concerned.
08:18Passenger vehicles is a different story.
08:20Looking a little troublesome, perhaps.
08:22Two-wheeler, slightly better.
08:24Of course, two-wheelers, you are the leader in market share, etc.
08:28But how are you seeing the demand scenario play out?
08:31And is there cause for concern
08:32as we see inventory levels also build up at dealerships?
08:36I think when you are talking about demand scenario,
08:40just now as you spoke,
08:43you are looking at the OEM figures, the CM figures, right?
08:46So that is where the growth has been flat in passenger.
08:50The growth has been flat in MHCV segment,
08:54and it has been very good double-digit kind of growth in two-wheeler
08:57as they are trying to match up the pre-COVID levels.
09:02So it went through a trough and now it's coming up.
09:04However, in the replacements segment,
09:07it is a completely different scenario.
09:09We expect strong single-digit growth in both MHCV
09:13as well as in passenger car tires.
09:16We expect close to double-digit growth
09:18in two-wheeler tires in the replacement segment.
09:22The rural market is coming back.
09:24In fact, so far, the rural market growth in two-wheelers
09:27has been superior to the urban market growth.
09:30There is significant amount of sales for SEAT
09:33in international markets.
09:34About 20% of our sales comes from international markets.
09:38There, the order book is pretty robust from various geographies.
09:44We are dearest in international business.
09:46It has performed in strong double-digit already.
09:50So overall, if you take all these segments,
09:52including the slowdown in OEM segments,
09:55we are still gunning for a double-digit growth
09:57for the entire financial year.
09:59Banerjee, talking about exports,
10:01and I know this was last quarter,
10:03bring me up to speed if you've already started,
10:06entered the one selling to PVs
10:09and truck-bus radial market in the US.
10:12I know it was expected to be launched
10:14in the first quarter of this fiscal.
10:16And how much is exports contributing to your top line?
10:20And because it's a lower base, I'm assuming right now,
10:22the potential to grow would be so much more.
10:26Yeah, so as I mentioned,
10:27export contributes to 20% of our top line
10:30and it is margin accretive at the EBITDA level.
10:33So the more we export,
10:34the better it is for the margin overall.
10:37And there are three categories which we-
10:39Exporting to a significant number of countries,
10:42which geographies are you currently exporting to?
10:46Yeah, our focus markets are three,
10:48which is Europe, Western Europe to be specific,
10:52US and the LATAM,
10:54and Brazil being the largest country in the LATAM.
10:56So three focus geographies and three focus categories,
10:59which is agriculture radial,
11:01truck-bus radial and passenger radial.
11:03So it's a three-by-three kind of focus area,
11:06and which is what will give the bulk of growth in export.
11:10And we want to take this saliency up from 20% to 25%
11:14in about three years' time.
11:16So given our entire growth plans,
11:18this means almost doubling exports in three years' time.
11:23Mr. Banerjee, good morning.
11:25Just one question here.
11:26What is the scope of exports looking okay
11:30in a world which is slowing down?
11:32Parallel to that question is also the China impact
11:35because all manufacturing,
11:37because China is not investing in infra,
11:39the belief is that they are investing in all things,
11:41manufacturing, dumping,
11:43and reducing end product prices in global markets.
11:46Any thoughts there?
11:49Yes, of course.
11:51China is a very serious competitor in all these markets,
11:55and so is the top five brand globally.
12:00So we fight competition in a wide spectrum,
12:04and in an economy which is slowing down,
12:06let's say in Europe,
12:08there is a perceptible shift from premium to value brands.
12:12And that's where we come in as SEAD.
12:15We have got about close to one and a half percent share
12:18of the total market in Italy.
12:21We have got a good legacy brand equity in Italy.
12:27Likewise, now we are trying to have good market access
12:31in the other European countries like France, Germany, UK, Spain.
12:36And this shift to value brand and our small base,
12:43I don't think is a constraint
12:45for significant percentage growth in exports in Europe,
12:49and likewise in US, likewise in Brazil also.
12:52You know, keeping in mind that you're working
12:55with rising demand, as you believe,
12:58are you at optimum capacity utilization right now?
13:01And also, if you are,
13:03are you investing in CAPEX to sort of up
13:06from that for future demand?
13:09Yeah, we have indicated
13:11that we will be investing about 1000 crores this year,
13:16out of which about 750 crores is growth CAPEX,
13:18250 is maintenance CAPEX.
13:21We won't have a CAPEX cycle as such,
13:23that is a management decision.
13:25We would like to invest a similar amount every year.
13:29So around 1100, 900, last year was 860,
13:33this year is 1000.
13:34Going forward, we will be keeping
13:36on investing regularly in CAPEX
13:39so that our capacities keep growing.
13:42Right now, we are good for 15,000 crores as we speak.
13:46Barring truck-bus radials,
13:48we have headroom for growth in two-wheeler,
13:50in passenger, and also investments in bike size
13:55are going on in two-wheeler and four-wheeler as well.
13:58Our Chennai plant for TBR is coming up for production,
14:03probably in this month itself.
14:05So that's where we have capacity utilization at the fullest,
14:08but we have enough headroom to grow otherwise.
14:11You know, how do you consider funding these expansion plans?
14:14I mean, is it internal accruals?
14:18Is it debt?
14:19Are you looking to raise funds?
14:20Because of course, expansion always comes at a price.
14:23And also, when you're doing this,
14:25would you even consider inorganic expansion?
14:27Would you consider buying out the smaller players
14:29with an increased focus on the export market?
14:32It may not be such a bad idea to go out shopping
14:34and pick up some of those international smaller players
14:36who are maybe currently struggling.
14:40Yeah, to answer the first part of your question,
14:43we have enough internal accruals to fund the expansion.
14:47Our debt position is comfortable.
14:50So when you don't have a huge capex cycle
14:53and instead you do bite-size capex every year
14:56and you maintain a profitability in a tight band,
15:00I don't think funding will be an issue going forward.
15:02It's not an issue right now as well.
15:05Coming to the inorganic growth question,
15:08we don't have anything on the plate at this point of time.
15:11But are we open to looking at it?
15:13Yes, we are.
15:15All right.
15:16Thank you so much, Mr. Banerjee.
15:18That was Arnab Banerjee there,
15:19Managing Director and CEO of SEAT.
15:23Says that, you know, the replacement part of the business
15:27still seems very, very robust.
15:29Remember, that's over 50% of the revenues
15:31coming from replacement as well.