There is strong demand from truck companies and this could improve in the coming months as economic recovery gathers pace, says Subba Rao Amarthaluru, group CFO, RPG Group.
In an interview to CNBC-TV18’s Latha Venkatesh and Sonia Shenoy, he says overall sentiment in the sector is positive, thanks to weak rubber prices, and now easing crude prices.
Huge imports are keeping domestic rubber prices soft and lower cost of raw materials is helping boost CEAT’s operating profit margins, Subba Rao says.
He sees rubber prices rising 8-10 percent over the next few months, but expects the company’s operating expenses to remain stable. He sees current year revenues rising 8-10 percent, driven by strong growth in the December and March quarters, which are typically strong quarters for the company.
Below is a verbatim transcript of the interview Sonia: Last month, when we spoke to you, the stock was at Rs 500 and now it is at Rs 830 or so. Do you think that this fall in raw material prices that everyone is talking about, both rubber and crude, justifies the rally in the stock?A: I don’t think that is the only reason. We don’t know what determines the market sentiment but the rubber prices have fallen by about Rs 10, which cannot cause this kind of upside in the stock price. Maybe the market is thinking that these kinds of slide will continue to be there in the raw material prices and crude prices have not gone up despite the Middle East conflict. So that could be another factor. Also, (there is) the expected demand upsurge in the truck segment. These are the possible factors (that could play in) the second half of the current financial year. As far as truck capacity is concerned, most industry has idle capacity. Once the stock is picking up, that comes as a huge upside surge as one time surge. So that could be another factor. So multiple factors might be contributing to this kind of rerating of the sector.Latha: Let us get to the numbers. Your operating margins were close to 9.5 percent for Q1. A little lower than the near 12 percent that you did previous year. Are you going to see a major improvement, just give us the building blocks? How much does rubber form as a percentage of your total cost as well because of the fall in crude prices, how much the synthetic rubber constitute, how much can margins improve for the full year?A: The rubber prices cost about 35-40 percent of the total product cost.Latha: That includes synthetic rubber?A: Synthetic rubber is additional another 5-10 percent. So total about 45 percent is the total cost of all kinds of rubber.This can improve the margins so this brings down the cost by about Rs 15. Per kilogram, the cost could be about Rs 10 lower over a period of time not immediately because the old stock has to be consumed and the new stock has to come into play. So progressively there could be reduction to the extent of about Rs 8-10 kind of price in the raw material cost per kg. So that would significantly boost up the margins definitely.Latha: That is what we want from you. Do you think it is sustainable? Is this just this Thailand impact or the crude price is not a Thailand impact.A: No, the domestic arrivals haven’t been coming in the rubber space and import quantities are huge both last month, as well as current month. So that has dipped the prices but whether there is a huge upward movement in the next few months that looks highly unlikely. It can go up by another Rs 8-10, which means it can operate between Rs 132 and Rs 135 space against Rs 125 currently. Even the imported rubber prices - if you exclude the duty element, it is about Rs 97. It is a global commodity. So domestic price also will be in parity with the global prices.Sonia: So this Rs 130-135 is even though it will be higher from here, on an average compared to last couple of quarters, it is much lower. So where do you see your margin stand at by the end of FY15?A: I don’t want to give a call on this because margins -- it is a function of several other factors but we would definitely be in the double digit space. The industry also will gain on this but who gains how much and how much we gain as a result of this is a function of several factors. I will not be able to put in a number on to it.
Latha: Then revenues can you give us an idea?A: Revenues I think we can go anywhere between 10 percent and 12 percent in the current year.Sonia: You did mention that an expected demand upsurge in the drug segment might be driving the stocks higher. What is the exact situation on the ground, are things picking up, has the truck segment bottomed out?A: Truck segment has definitely bottomed out and industry capacity I guess is about 50 percent utilisation level as of now and once the economy keeps improving. The second quarter if the gross domestic product (GDP) grows and the third quarter if the GDP continues to grow, I think definitely there would be movement in the truck demand and that would be great lead indicator for the economic revival.Latha: Normally which is your best quarter?A: Third and fourth.Sonia: You just recently took a board approval to raise about Rs 500 crore. I want to understand for your capex plans, both in Bangladesh and in Halol, how much is needed currently, how much will you have to pump in, how much more debt would you need etc?A: Both Halol as well as Bangladesh about Rs 1,000 crore capex. So equity requirement is about Rs 300 crore and Bangladesh we have already put in last year itself. It is only Halol that we need, which is about Rs 210 crore equity requirement. But you never know. Suddenly, there could be plans to expand the capacity and there could be something on the drawing board, which we are not disclosed to anyone. So these kind of things we need to take into account. We need to continuously expand the capacity to be in the market place in a competitive manner. So the growth was stunted in the last decade, now we have to revive that growth. We have to keep expanding the capacities so that is our price focus.Sonia: So more fund raising on the cards?A: I don’t want to give this kind of things. We are going to take the shareholders’ approval during the current month.Latha: You are taking approval for how much?A: Up to Rs 500 crore. Ceat has not raised the money for a long time in the market. There was no growth in the past. Now if you want to expand the capacities, yes, internal accruals are there but if you want to rapidly grow, you need to have an additional purse.Latha: Your topline you said will grow by 10-12 percent. Could you say as much about your bottomline or will it be even better primarily because you are saying margins should be in double digits?A: I will not take a call on that. I can give you topline growth but if I give you the bottomline growth, that would be amounting to give forward information which I am not entitled to give.Latha: You are giving it at the public space, that is permitted.A: We don’t give guidance. If I start giving guidance once then I have to perpetually give the guidance.Sonia: Last quarter, the margins were hit because of higher employee cost and higher ad spends?A: Many costs came together in one bunch.Sonia: Tell us about the runrate employee cost, how much will it fall compare to last quarter ad spends will they fall?A: No, it doesn’t fall but your volumes pick up. That is what would drive the margins and bottomline.Latha: Employee cost will remain at Rs 85 crore?A: Yes.Sonia: And other expenditure about Rs 300 crore?A: I don’t think there would be any great revision in the expenditure because whatever it is, for the year, it will be stable.
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