Ceat seeks asset light model to cut debt
Concerned about its high debt of Rs 1,400 crore, tyre maker Ceat plans to outsource more production to cut capital expenditure, group CFO Manish Dugar says. The RPG-Group company is also focusing on exports and will strengthen presence in other Asian markets to boost profits, at a time domestic sales are sluggish.
September 26, 2012 / 16:28 IST
Nachiket Kelkar
moneycontrol.com
Concerned about its high debt of Rs 1,400 crore, tyre maker Ceat plans to outsource more production to cut capital expenditure, group CFO Manish Dugar says. The RPG-Group company is also focusing on exports and will strengthen presence in other Asian markets to boost profits, at a time domestic sales are sluggish."We are looking at making asset light model. Leverage of balance sheet is a key concern for us...Obviously we would like to grow. We would like to have larger amount of tyres being sold. We would like to be more profitable. But in doing that we don't want to increase our capex investments in proportion. So we have invested significantly in building outsourced networks...Ceat will give raw materials, give technology, manage R&D, the partner will run the factory and invest in the factory," Dugar told moneycontrol.com.Already 25% of what Ceat sells presently is manufactured by partners.Apart from outsourcing, Ceat is also focused on measures like negotiating better terms with vendors in terms of payment schedule and trying to get channel financing done (get into an arrangement with bankers so that the payment made by original equipment makers wears off its balance sheet on a non-recourse basis). Already in the last three months, its debt portfolio has reduced by Rs 39 crore, he said.In the first quarter, Ceat reported a net profit of Rs 29 crore, compared with a profit of Rs 49 crore in Jan-March and Rs 41 crore loss in the year ago quarter. Its net revenue rose 10% year-on-year, but fell 3% sequentially to Rs 1,225 crore.Dugar said that a decline in rubber prices was one of the reason for the company's better year-on-year performance. However, a slowdown in domestic demand is hurting sequentially. While passenger car sales growth in India has seen a sharp slowdown over the last one year due to expensive loans and high fuel prices, medium and heavy truck sales have also been sluggish and that has impacted tyre makers as well."July and August are traditionally weak. But this July and August have been weaker than normal. So while we are expecting September to be better, it will probably not be the same when we look at this year, this quarter versus last year, last quarter. That reduction has had an impact on volumes, so that obviously means capacity utilisation at plants are challenged and that has its impact on cost of conversion and hence the profitability. So what I feel is that the September quarter will be softer then the last quarter (Q1)," he said.Ceat has production plants at Mumbai (Bhandup) and Nashik in Maharashtra and Halol in Gujarat. Its Halol plant is running at full capacity, but there have one-two day closures at its Bhandup and Nashik plants. These two plants mainly manufacture bias (cross-ply) tyres, which have witnessed slower off-take.There are likely to be similar one-two day shutdowns at the two plants in the next two months given the softness in demand for bias tyres, Dugar said.It is focusing on increasing its footprint in the export market. Ceat already exports to 55 countries, and has identified five countries in Asia where it aims to be a dominant player."We have already established (strong) presence in Sri Lanka; we have a 40% market share there. Bangladesh is the second market. Other than these two, we will adopt three more countries. In those three countries, whether we will set up our own manufacturing facilities or we will source it from outside is a call we need to take. But there will be heavy investment in growing three markets for sure. Myanmar, Thailand, Indonesia are among identified locations."In Bangladesh, Ceat has completed a feasibility and market study, it has identified product portfolio, and is investing in creating a distribution network and seed marketing to build the brand. It is close to finalising the land for a production plant, which it expects to be up and running in mid-2014. Ceat has pegged an investment of Rs 250-550 crore in the Bangladesh plant.Ceat shares were trading up 1.5% at Rs 114.50 on NSE in morning trade on Wednesday. The stock has gained near 27% so far this financial year.nachiket.kelkar@network18online.com Discover the latest Business News, Sensex, and Nifty updates. Obtain Personal Finance insights, tax queries, and expert opinions on Moneycontrol or download the Moneycontrol App to stay updated!
