Expect more pressure on EBITDA margins in FY17: CEAT

Huge advertisement expenses and a price cut in rubber caused company's operating margins to dip by 130 basis points in the fourth quarter of FY16, said Manoj Jaiswal, CFO of Ceat. Jaiswal expects more pressure on EBITDA margins in FY17. The company saw a volume growth of 7 percent in FY16, and Jaiswal added company would double its capacity to about 14-14.5 percent. The company is well stocked up on raw materials for the next couple of months and Jaiswal maintained that it would not take a hit on raw material prices assuming they move up.He also added that the Indian rubber segment may not see any further price cuts. Below is the transcript of Manoj Jaiswal’s interview with Sonia Shenoy and Latha Venkatesh on CNBC-TV18. Sonia: What the street is disappointed with is the way your margins have fallen about 130 basis points quarter-on-quarter to 13.3 percent. And the fear is now, with rubber prices once again surging, the margins could get constricted some more. Would you expect some more pressure there? A: There would be some pressure in the near-term. So just to explain first about the contraction in operating margins for Q4. We have seen some level of price reduction that happened in the beginning of the quarter. That resulted in some realisation drop which was mitigated by raw material cost reduction. Further to that, being a quarter full of cricket series, the Aussie series as well as the Asia Cup plus the World Cup, we have incurred a good amount of ad expenses which was around more than a percentage on advertisement cost which has resulted in contraction that you see in Q4 versus Q3. So, it was more of a discretionary expenses that went up. Otherwise, excluding that, the margin was more or less flattish from a Q3 to Q4 perspective. Now coming to increased rubber prices, and impact of that on profitability, there will be some near-term blip that will be there in terms of profitability. However, from our stand point, there are a few things we are doing which we believe should be able to mitigate a significant portion of this impact. So, if you look at our business mix, the increase has been largely in the passenger segment and our new capacity which is in the two-wheeler as well as the passenger and utility vehicle, that again is on a higher margin. And, in both these products, the mix of natural rubber is relatively lower than a commercial vehicle mix. So, therefore, the impact of rubber prices on these products is also low. So, there are two fold things that are happening. One is the product mix is increasing. The raw material price in terms of natural rubber on these products specifically, where our product mix is improving is lower. Consequently, over a period of time, we believe this impact of commodity should be mitigated. Second is on original equipment manufacturer (OEM) pricing, mostly the rubber prices are indexed. So, most of these increases to the OEM will be passed through. Latha: What kind of an earnings before interest, taxes, depreciation and amortisation (EBITDA) can you expect in FY17? A: We do not guide numbers as such. In terms of specific numbers increase, but we are also looking at a significant volume increase this year. When I say significant, I say better than the previous year gone by which saw a volume increase of 7 percent. This year we are expecting a better than 7 percent and we are expecting our capacities ramping up over the period of next 12-15 months. And we do hope most of our capacity would be taken up into our topline as and when we ramp up. Sonia: When we spoke to you last quarter, you had guided for 14.5 percent margins for the first half of FY17. Would you stick to that guidance or given the fact that you have taken price cuts, that rubber prices are moving higher, you would have to scale down that expectation? A: I do not think we have guided a number of 14.5 percent, but we do not have a process of guiding future numbers. Sonia: When we spoke to Anant the last quarter, he had indicated that in the first half of the fiscal, the margins will be similar to Q3 which was around 14-14.5 percent, so that is why I wanted your view. A: There are two ways of looking at it. I would restrict myself from guiding a specific number, but just to give you a perspective, from a raw material price perspective, or a cost perspective, we are significantly covered for the next 1.5 month, we would be covered. And therefore, the impact of this for Q1, we should not be experiencing a significant impact on the raw material price movement. Latha: Will you be forced to take more price cuts given the Chinese competition? A: We have seen a price cut that has happened in the beginning of April, specifically in two-wheelers. But other than that, we are not seeing a price cut that we would do. We do not see it at the moment, it is an industry call. But at the moment, we are not seeing a price cut that we are experiencing. And from a Chinese competition perspective, the truck and bus radials (TBR) segment is relatively small for us. We do not see a price pressure because of Chinese markets. Latha: What about volumes? Is it looking like there are green shoots of growth, therefore the revenues apart, volumes will go up? And if they do, how much, is it a double digit growth? A: Again, difficult to guide a number, but we do expect a better volume growth versus last year – last year was 7 percent. So, given that number, and our capacity increase, you can estimate the number but yes, it should be somewhere significantly better. As far as green shoots is concerned, we do see a lot of uptick in volume. We have seen a lot of OEM traction and a lot of new sign up OEMs that is taking a good amount of volumes. In addition to that, if you look at export which was a driver of a degrowth of volumes as well as the value last year, 17 percent degrowth in export for us, that has is being plateaued out, so therefore, that degrowth has been arrested and now the growth will be reflected more because of the replacement and the OEM market growing and export market now going up marginally from where it is at the moment. So, volume should certainly look up from where it is.