The government recently hiked the customs duty on imported natural rubber from Rs 20/kg or 20 percent (whichever being lower) to Rs 30/kg or 30 percent (lower of the two).
The move was prompted by a shortfall in domestic rubber production and cheap international rubber prices that led to increased rubber imports by tyre companies.
A Subba Rao, CFO, CEAT, spoke with CNBC-TV18 to discuss the development. He also commented on the company’s current business operations and expected earnings.
Also read: Ceat Q2 net at Rs 77 cr; to invest Rs 650 cr on Halol plant
Below is the transcript of the interview.
Q: I wanted your view on the revision of the customs duty structure on rubber. How does it impact the industry as well as a company like Ceat?
A: It is unfortunate but it is not a significant increase: about Rs 10 per kilo. Rubber prices were anyway expected around Rs 160 levels. Since rubber prices haven’t gone up significantly, it’s not going to impact the industry. It also boils down to demand. The auto industry has not been doing very well, we are seeing mostly replacement demand.
So in the tyre-cost structure, natural rubber has about 30 percent cost component. An increase of Rs 10 would translate into about Rs 2-2.5 cost increase so it is not significant.
Q: Some companies have told us they will not be impacted at all because they have a zero-duty structure because it is hedged against exports, is that correct?
A: It depends on where you are buying. If you are buying in the local market, import rubber is hedged only to the extent you have advance licensing. Beyond that, if you are paying the full duty it will have some impact -- not as much as the full impact.
Q: How would margins pan out in the second half this being a marginal factor anyway? How are margins; 13.5 percent is what you did, will you stick to that?
A: I would not be able to comment on margins for the third quarter. It would roughly be in the region of about 11 to 13 percent if not 13 percent.
13 percent is a very good margin for the industry and for us too and it would be very difficult to sustain that kind of margin because in the second quarter, we had couple of seasonal items as well: a dividend that occurs from our Sri Lanka joint venture (JV) and technology fees which pushed margins higher.
Though we may not have such things in the third quarter, margins would be slightly lower and recurring. For the whole year, we would be able to manage anything beyond 11-12 percent kind of margins.
Q: For the second half of the year, how will the original equipment manufacturer (OEM) segment pan out because in the quarter gone by, you had good growth from the OEM segment and you built new partnerships with Royal Enfield, etc which has been doing quite well. In the second half what could the ballpark growth be?
A: We have been focusing on increasing OEM presence in our business. Due to this strategy, in the last three years, we doubled our OEM presence from 10 percent to 20 percent. But going forward, given the current market scenario, we will not be able to increase this. However, we will sustain this and as and when the market goes up because of the turnaround in the auto industry, we will be able to have additional growth.
Q: So, you are saying 15 percent growth is what you are expecting because you did about 12.5 percent quarter-on-quarter (QoQ) in the last quarter in the OEM segment?
A: We will be able to maintain similar growth.
Q: What about capex plans therefore?
A: We have been trying to create capacities ahead of demand. We suffered losses because of stock-out situations in the past which we are trying to correct. We have drawn up the plans to invest in additional capacities.
In our Halol radial plant, we are increasing capacity by another 120 tonnes per day. In Bangladesh, we are setting up a capacity with about 60 tonnes per day. By way of a joint venture, we are setting up a two-wheeler capacity, which is again about 60 tonnes per day.
So, these three aggregate capex -- directly and through a joint venture – would come up in the next 18 months and cost about Rs 1,500 crore.
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