Despite severe competition from Chinese tyre imports, CEAT grew volumes 13 percent year-on-year. China tyre inflows have increased for truck radial and commercial vehicle segments and the company has requested the government for anti-dumping duty on tyres, said Anant Goenka, MD of the company.CEAT posted a revenue growth of 3.9 percent on the back of healthy original equipment manufacturer (OEM) sector performance, he told CNBC-TV18.The company has passed on price cut of 8-9 percent to its consumers, and has increased ad expenditure 70 -80 percent year-on-year. This is what has impacted CEAT's margins, Goenka added.He believes rubber prices will cool down during October-December and benefits of product mix will be seen in future. However, if raw material prices increase, the company may look at hiking prices, Goenka said. He also expects a slight drop in margin in later part of the year.
Below is the verbatim transcript of Anant Goenka's interview to Latha Venkatesh & Anuj Singhal.
Anuj: Margins taking a bit of hit this quarter. Is that the entire impact of rubber prices playing up and will we have similar impact in the future quarters as well?
A: Largely for two reasons we are finding a bit of a drop in margins. One, we have been passing on the price drop of raw material that has been happening to the consumers, so that resulted in a drop in realisation to a certain extent. Not the impact of raw material price increase that has hit us this quarter although rubber prices went up in April. We expect some of that impact coming in by the latter half of this year. Second, being the Indian Premier League (IPL) season we had a fair amount of increased advertising spends and that went up by 70-80 percent on a year-on-year (YoY) basis and that caused some increased expenditure which is a bit more unique to this quarter.
Latha: Let's talk topline first; revenue is up by about 4 percent. Did you have to take price cuts? Is this a volume story that the revenue is tepid?
A: Revenues have largely gone up because of overall good growth that we have seen in the original equipment manufacturers (OEMs) sector, some amount in the rural sector with expected good rainfalls coming in. We saw good growth in farm tyre sales, in our two-wheelers sale and we have been focusing a lot more on the passenger segment which includes passenger car and sports utility vehicle (SUV) segment. We have seen growth of over 20 percent in all these categories.
In volume terms overall, we saw growth of 13 percent. As I said we have taken some price cuts of about 8-9 percent over the course of the last 12 months and therefore value growth has been 4 percent.
Anuj: For longest, for type companies the revenues are not growing. It's all been the margin story and that is propelling the net profit story for at least last two-three years. When do you see significant double digit revenue growth taking place both at industry level and at your levels?
A: We are already finding a good uptick on revenue growth, so on YoY basis we have seen 13 percent growth in volume terms. There has been a deflationary pressure because of the price drops that have happened. Price drops have been to the extent of 8-9 percent. So to that extent our value growth has not been high but I do not see any more prices drops going on because raw material prices have started going up, in fact we will be looking at some price increases also going forward depending on how raw materials move.
However, in that kind of a situation once the base effect goes away, we expect to see double digit growth even in value terms. It would take six-nine months for that to happen.
Latha: Coming back to the raw material and margin trends, after two years, up until last year of lower rubber prices, now you are faced with Rs 133 kilo and that was the kind of high that rubber saw. What is your in-house intelligence telling you about the trend in rubber prices and therefore what might margins look like for full year?
A: Rubber saw a sharp increase from about Rs 100 per kilo to about Rs 130-140 per kg in April. This is largely because of severe drought conditions in India. There was very low tapping and output that was happening and that caused a large increase, sharp shoot in rubber increase. Also what happens is that during this period, the monsoon season tapping is low. We expect post monsoon, by September onwards rubber prices to cool down again.
Fundamentally, globally, there has been no major change in terms of global demand for rubber. China continues to be a slightly challenging position; there is no great story there. Being a global commodity I see rubber prices continuing to be between Rs 120 and Rs 135 kind of range going forward from September onwards. October-November-December are anyways peak tapping season, output is good. So at that time rubber prices should further cool down.
Latha: So this 12.5-12.6 percent margins that you have done in this quarter, it troughs out there - that will be maintainable even improvable?
A: There are two parts to it. Towards the latter half of the year there could be some pressure because we have used up a large part of the inventory of lower cost rubber. We will be expecting some high cost rubber coming in. On the other hand we have some new plant coming in. We have been looking at growing on the two-wheeler side as well as on the passenger car side. We expect good growth here; profitability is higher in these categories, so some amount of benefit of the product mix will come in whereas some impact of the raw material price impact will be adverse. So net-net we hope to maintain similar kind of margins but towards the latter half there can be a slight drop.
Latha: This expansion won't mean more debt for you. Your debt is healthy, it's just 0.3 times your equity, but as you expand, will that change?
A: Not really because our income over the rest of the year is expected to be good. We have spent already a large part of our money, so we have a little bit of investment coming in over the course of the next few quarters. Debt equity should remain at current levels maybe a marginal increase but nothing much.
Latha: The Chinese threat, is it abating in anyway, any government help?
A: Not yet. There is large inflow of Chinese tyres coming in, particularly in the radial segment or commercial vehicle segment and this is something which has been going up quarter-on-quarter. Over last year it has grown by about 50 percent. Their market share in the truck segment would be about 30-35 percent plus kind of levels. So there is a fair amount of pressure. We have applied for antidumping duty. It is still difficult to say when that will happen or whether it will happen. So we are just waiting for government action on that.
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