Arnab Banerjee, ED, Ceat in an interview with CNBC-TV18 said that the company experienced a margin squeeze last year because of significant increase in raw material prices primarily, rubber.
"So, the margin squeeze which we had experienced last year continues into this fiscal at least first couple of months. We have now considered this as a given trend. We don’t see this trend reversing in the near future," he added.
Banerjee sees rubber prices to be range bound. The company continues to invest in value added area of passenger vehicles, two wheeler tyres and in truck and bus radial tyre.
The company expects the overall production mix to improve significantly towards higher margin, higher value added products. The overall volume growth is expected to be substantial in this financial year.
Below is the verbatim transcript of Banerjee's interview with Latha Venkatesh and Anuj Singhal of CNBC-TV18. Also watch the accompanying video.
Q: FY11 was quite bad for the industry and also you were not insulated from that. How has FY12 began and going forward do you think that you will be able to pass on some of the high rubber prices and you will be able to report these in profit going forward?
A: Last year there was a margin squeeze because of significant increase in raw material primarily rubber but, also significant inflation in crude derivatives. For example, synthetic rubber went up by 60%, natural rubber went up by about 40%, that trend continues.
So, the margin squeeze which we had experienced last year continues into this fiscal at least first couple of months. We have now considered this as a given trend. We don’t see this trend reversing in the near future.
Hence, at Ceat all strategies primarily based on moving aggressively towards acquiring market share in more value added product mix both in domestic market as well as in export market where the Ceat brand commands a premium. Last year we bought over the global rights for the brand from Pirelli for the same purpose.
Our strategy is primarily going to be based on the assumption that the raw material situation is going to continue. As there is a fundamental issue in the market there is a shortage of about 150,000 tonne of rubber in the domestic market per annum.
Q: The point is taken that there will be pressure on margins but compared to all your peers the impact was a little greater on your company. Your fourth quarter was a loss of about Rs 11 crore does that get corrected in the first quarter or the next?
A: Yes. That is not only going to get corrected but, there will be a significant improvement in the whole product mix that Ceat is engaged in selling. We make right from scooter tyres to Off The Road (OTR) tyres.
We are going to select certain segments and we are going to move up aggressively our presence in those segments which are far higher value added than perusing the entire product mix and having weighted average return which is low as in the past.
We cannot base our strategy based on the raw material situation which is going to be range bound. You will us increasingly increase our exports, increase our presence in the passenger segment in the domestic market which is much more value added play than the product mix that we have experienced in the past at Ceat.
Q: How much would margins improve by given this strategy and that has happened in this quarter itself?
A: A complete change over our product mix does not happen in one or two months. It takes some amount of time. Because we have to overhaul the production mix, we have to overhaul the selling strategy which started last year itself. We expect to see significant gains through the year.
Q: You drive quite a bit of your revenues from commercial vehicles and FY11 was a good year for commercial vehicles but now we are beginning to see some sort of slow down for commercial vehicles themselves as we start FY12 – going forward is that a concern that the revenue rate may not sustain especially from the commercial vehicle side?
A: The revenue growth of Ceat in the commercial vehicle side is significantly based on the replacement market play rather than OEM market play. There is a slowdown that we are seeing in the OEM segment but the replacement market is still bullish.
We are going through a good season in the summer. The market will definitely show a single digit volume growth but, nevertheless that is a good volume growth that we can expect in the commercial segment. So I don’t see any short term hassles in the commercial segment.
Q: What will you assume by way of rubber price average for the current year? What should an investor assume and secondly you have some capex plans so how much will your total tyre volume expand in FY12?
A: As I said we see the rubber prices being range bound. We do not expect very sharp decline or very sharp inflation from hereon. So that is a given from our perspective and our strategy is based on that assumption.
Our investment continues in the value added area of passenger vehicles. We are also investing with outsourced partners in value added area of two wheeler tyres.
We are also investing in truck and bus radial tyre. So, overall production mix will improve significantly towards higher margin, higher value added products. If you ask for an overall volume growth it will be substantial in this financial year.
Q: Will you be doing anything to rejig your debt or equity because cost has been going up Rs 23 crore a quarter in the last reported quarter?
A: Yes. It is going up so there is no immediate short term plan to look at the financial structure of the debt equity ratio.
Ceat stock price
On November 27, 2015, Ceat closed at Rs 1017.10, down Rs 16.85, or 1.63 percent. The 52-week high of the share was Rs 1318.30 and the 52-week low was Rs 596.70.
The company's trailing 12-month (TTM) EPS was at Rs 99.57 per share as per the quarter ended September 2015. The stock's price-to-earnings (P/E) ratio was 10.21. The latest book value of the company is Rs 395.19 per share. At current value, the price-to-book value of the company is 2.57.
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